On January 3, 2009, the first bitcoins were created.
Ten years on the terms ‘bitcoin’ and ‘cryptocurrency’ are widely known. ‘How to buy bitcoin’ was the third most searched for ‘How to…’ phrase in Google in 2018. Indeed, there have certainly been miraculous stories of cryptocurrency catapulting individuals into millionaire status, however my perspective on this is that these are few and far between.
Crypto investments rarely end well.
What is Cryptocurrency?
Cryptocurrency is a virtual currency that serves as a digital medium of exchange. They do not physically exist as coins or notes, but rather, are held in digital wallets accessible only by a username and password. The term ‘cryptocurrency’ is derived from the currency’s use of cryptography to secure and verify transactions and control the creation of new units of the currency.
There are many different types of cryptocurrency, however the most popular one by far is Bitcoin. Other digital currencies include: Litecoin, Ethereum, and Ripple.
Risks with Cryptocurrencies
They are so many false claims about cryptocurrencies being a better way to transact. From the transaction speed, to the anonymity and market value of Bitcoin, there are numerous unfounded and under-researched headlines floating around.
While there are always risks involved in investing, these liabilities are intensified when it comes to the digital currency. Particularly true for those who are new to investing, the hype surrounding cryptocurrency and the expectation to ‘get rich quick’ can result in individuals getting swept away and failing to consider the real financial consequences of their actions.
The most important considerations to using cryptocurrency include:
- The price is entirely based on the sentiment and number of buyers and sellers, meaning they move around a lot. For example, while Bitcoin traded at close to US$ 20 000 in December 2017, its value dropped to as low as $3200 a year later. In May 2019 it topped $8000. Currently, it is trading around US$ 10 200.
- There are currently no Federal, State or Local police taskforces dedicated to cryptocurrency crimes against an individual, meaning if your digital wallet is stolen or hacked, you will have little chance of recovering your funds.
Should I buy cryptocurrency?
For the typical person, cryptocurrency markets are volatile, unregulated and fraught with unscrupulous players.
Purchasing cryptocurrency is akin to gambling or speculating, not investing. I see investing as buying into a business that creates products or provides services that produce, or eventually produce, a cashflow over an extended period of time.
An investment is something that has an underlying value. Digital currencies are only worth what someone else is willing to pay. Buying something in the hope that someone else will pay you more for it (the greater fool theory) is not investing.
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