Cryptocurrency is a big deal in the 21st century and everyone wants some action. You can sell, buy, or trade any digital asset you control online and trade multiple cryptocurrencies to build a strong portfolio and ultimately get a return on your investment.
Introduction and History
David Chaum created the first electronic money in 1983, who coined the term “ecash.” which later developed into Digicash in 1995, a concept that resulted in the creation of payments using Wei Dai’s cryptographic system. In response to the financial crisis of 2008, Bitcoin, developed by Satoshi Nakamoto, became the first widely accepted cryptocurrency in the world.
Nakamoto recognized that the massive impact of crises on millions of people worldwide and sought to create decentralized payments that could be used anywhere in the world. For sure, such an unconventional financing method led to a range of skepticism from some areas of society but soon evaporated when the success of cryptocurrency investment became clear. Many companies use cryptocurrencies today because of their confidence in the system that ensures that the financial decision to invest in cryptocurrencies is wise.
As society moves further into the twenty-first century, cryptocurrencies are becoming an increasingly important part of daily life and financial transactions in particular. There are now more cryptos to choose from than just Bitcoin, with new ones being created on a regular basis. With the emergence of newer cryptocurrencies each consumer now has a plethora of options for making the best investment decisions, allowing you to invest your money wisely. Furthermore, technology such as Blockchain has been added and is being used by some cryptocurrencies.
Advantages of Crypto
The S&P 500 index of large-cap US equities has compounded at an annualized growth rate of 14.5 percent (in USD, net dividends reinvested) over the five years to 31 December 2020; over the same time period, the price of bitcoin in USD has compounded at an annualized growth rate of 131.5 percent.
The maximum number of coins that can be created or “mined” is 21 million. At the moment, approximately 18.5 million bitcoins have been mined, leaving less than three million to be created. A related feature is that the rate of bitcoin production slows over time through a process known as halving. In 2009, each block mined was worth 50 bitcoins; now, each block is worth 6.25 bitcoins.
In a portfolio context, some have suggested that cryptocurrencies could serve as an alternative hedging instrument to gold. For example, the S&P 500 fell in 17 of the 60 months leading up to December 2020, while the price of bitcoin rose in seven. In the five years to the end of 2020, a portfolio consisting of 10% bitcoin and 90% S&P 500 would have generated compound annual returns of 26.8 percent.
Disadvantages of Crypto
The yearly volatility of the monthly percentage change in Bitcoin dollars in the last five years is around 90%. This is comparable to the annualized volatility of monthly change in S&P 500 and the gold price of 15.3% and 13.4%. Consider the range of returns in order to give you an idea what this volatility could mean for an investor: the maximum monthly Bitcoin return in 60 months to December 2020 was 76.1 and the minimum return was -37.6 percent. The timing of investments in Bitcoin or other cryptocurrencies will have a major impact on returns.
Potentially Unlimited Supply
Although the figure is set to be limited to 21 million bitcoins and many other cryptocurrencies that have limited supplies included in their protocols, there is nothing to stop a growing number of new cryptocurrencies. There are therefore potentially limitless cryptocurrency supplies. It should also be noted that several central banks are exploring the potential to launch their own digital currencies, something that could shine off private versions.
While the number of places where one is able to exchange cryptocurrencies for real commodities or services is now very small in Bitcoin and certain other Cryptocurrencies across an increasing number of payment platforms. The volatility inherent in cryptocurrencies makes them an impaired value for similar reasons, as the value of crypto even on an intraday basis swings wildly when it is converted back to the individual basis currency.
Cryptocurrencies are a private sector building without any official supervision or regulation. This means that cryptocurrencies are widely used as a way to scorn unwary investors by criminals. A 2019 academic study found that 25% of Bitcoin users are involved in illegal activities and 46% have illegal activity in Bitcoin transactions.