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Highlights
- Cryptocurrencies have received major criticism due to their highly volatile nature.
- Investors have gradually warmed up to cryptos due to their ability to deliver high returns in a short span of time.
- There has largely been a polarising opinion regarding cryptocurrencies among crypto lovers and crypto critiques.
Cryptocurrencies are on their way to becoming a mainstream form of investment, luring a generation of young investors toward the intriguing concept. Initially dubbed as the currency of the illegal world, cryptocurrencies have gradually earned investors’ faith, with their popularity rising exponentially.
However, cryptocurrency markets have time and again made investors prone to highly volatile conditions, which has invited criticism for these digital assets. Cryptocurrencies have seen large falls within the small duration, urging many investors to steer clear of the market altogether. The evidently polarising take on cryptocurrencies has led to the development of two broad segments - crypto lovers and crypto critiques.
Good Read: 5 cryptos under one cent to watch in 2022
It is worth noting that investing in cryptocurrencies is neither a one-shot gateway to lucrative returns nor a surefire way to lose money. As investors slowly converge on a mutual decision regarding the regulation of cryptocurrencies, it is crucial to examine why these digital assets are the centre of major scrutiny.
Here are a few risks and opportunities that cryptocurrencies bring with them for investors.
Financial universality
- Opportunity: Imagine buying your in-game characters and tokens while playing your favourite game with a universal currency without having to check any conversion rates. Cryptocurrencies can be used anywhere by anyone across the globe without the need for any cross-country conversions. This universality only adds to the various possibilities attached to the use case of cryptocurrencies.
- Risk: Cryptocurrencies are highly volatile, which explains why many companies are still hesitant to accept payments in Bitcoin, Ethereum or Litecoin. It is this volatility that can hamper global activity together on a large scale. Suppose cryptocurrencies are globally adopted as a means of payment across nations. In that case, the unforeseen drops and rises in the currency can affect investors worldwide instead of just a selected group of investors.
Intangibility and illiquidity
- Opportunity: Cryptocurrencies have developed their presence solely through an online medium. One does not need to physically hold any crypto coin to be its owner. This intangibility allows for greater convenience and a safer environment for cryptocurrencies to thrive. Additionally, each unit of a crypto coin minted is unique from others due to the underlying blockchain technology holding information about all the transactions taking place on that coin.
- Risk: As per some reports, a huge percentage of cryptocurrencies’ circulating supply is currently illiquid. It means these cryptos have moved into wallets with no history of spending. The intangibility and illiquidity of cryptocurrencies might act as a hindrance in insurance activities. These assets face the issue of convertibility because of which the space has been unable to develop a deposit insurance “floor” that can allow its use in the insurance industry.
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Defying authoritarian systems
- Opportunity: Cryptocurrencies mark a shift in power from the government towards the public. The blockchain ledger erodes the need for any central authoritative figure to oversee all ongoing transactions. The technology has been developed to automatically keep a log of all transactions, with the possibility of an error. This could mean large-scale privatisation of cryptocurrencies and increased reliance on the far superior technological methods of financial regulation.
- Risk: The lack of regulation in the crypto space has also acted as a bane for the asset class, posing serious questions about its viability as a legitimate currency. In the case of upswings and downswings in the economy, there is no one to control the supply of these cryptocurrencies, making the scenario quite precarious.
Interesting Read: Will cryptocurrency regulations come into effect anytime soon?
Unchartered territory
- Opportunity: Cryptocurrencies are largely a new asset class and have seen immense growth in recent years. This has meant a growing share of investors in the crypto space, especially those who quickly caught onto the trend. Thus, the past few years have seen large scale profitability in the crypto space, despite the volatile nature of these assets.
- Risk: The relatively new form of investment can be confusing for many and even discourage some investors from participating in the market. Additionally, continued long-term gains of cryptocurrencies are critical in establishing a solid foundation for them. If cryptocurrencies lose investors’ interest down the lane, the market can become highly volatile.
Anonymity of users
- Opportunity: Perhaps one of the most important features of cryptocurrencies is that they keep the user’s identity secure. This property of cryptocurrencies adds an additional layer of security for the user.
- Risk: During the initial days of cryptocurrency emergence, the anonymity of transactions was a major factor that allowed many to conduct dubious crypto-related scams. Since it is hard to trace down the user behind a specific transaction, cryptocurrencies can be used for illegal activities and conduct scams.
Must Read: Crypto Catch: Scam victims get back Ethereum worth millions; FTX plans gaming unit
Bottom Line
Cryptocurrencies have various benefits and risks attached to them, as is the case with most types of investments. Young investors have taken a strong liking toward this new form of investment and continue to promote it in the financial market. However, some other investors and sceptics continue to argue in favour of regulatory action in the space.
