The arrival of cryptocurrencies and blockchain technology into our lives may be more disruptive than we think and what we will see in our entire lives. Both currencies and the technology that make them possible can alter the way we invest, pay for goods and services, and transfer money to others.
It is for this reason that many people look for cryptocurrencies to invest, exchanging their fiat money for tokens that tomorrow may be worth much more. However, it is necessary to know some details before jumping to buy as if there were no tomorrow, and also, not everything is as simple as it seems.
#1 DIGITAL CURRENCIES ARE EXTREMELY VOLATILE
The first thing we must understand before buying and staying glued to the computer looking at the price graph is that they are very volatile. This implies that the value can change enormously from day to day, even in a matter of seconds. The reason for this is that we are still before a very young currency, which does not have the stability of the dollar or the euro, and for this reason, any event can increase or decrease its price sharply.
For example, in 2017, the price of Bitcoin began trading below $1,000, and by the end of the year, it had reached $20,000, that’s a 2,000% growth. On the other hand, in 2018, Bitcoin fell close to the $3,000 zone. If you do not have a stomach for these ups and downs in the market, it is better to stay away.
#2 THEY DO NOT HAVE BACKUP
This aspect can be taken both positively and negatively, it all depends on the vision of the person. Unlike the dollar or used in your country, Bitcoin and a lot of cryptocurrencies are not backed by anything or anyone, neither central banks nor governments.
This is negative for some people who think that the market in this way can be a victim of manipulations. But in my opinion, it is a very positive aspect since not having a government that issues currency at will, we do not see all the problems that entail, such as inflation.
In addition, cryptocurrencies are intangible, which makes it practically impossible to value them. On the one hand, we have the price, which is what people are willing to pay to buy or accept to sell them, but there is no inherent value in them. For example, a share of a company has a certain value with respect to the profits that it produces, it is also the participation of it, which implies that there are certain physical assets linked to the stock.
#3 THERE ARE MORE THAN 2,000 CRYPTOCURRENCIES
What people think when cryptocurrencies are named is in Bitcoin, it is the most popular and the one that almost all generalist media usually cover, but it is not the only one. Bitcoin enjoys that status for being the first in the market and for increasing its price enormously since it was created. It is responsible for more than 50% of the entire market capitalization.
However, this is just one of many that exist to buy. We can find more than 2,000 listed on sites like CoinMarketCap, and this number increases all the time. This aspect is important since many of them even compete for the same objectives that Bitcoin pursues.
#4 BLOCKCHAIN IS WHAT MATTERS
The value is not found in the currencies that people usually buy and sell every day, but in the technology that makes them possible, and that is called blockchain or chain of blocks.
Blockchain technology is the network that allows us to send and receive cryptocurrencies. It is a digital ledger that is distributed on computers around the world, which gives the network the property of being distributed. This allows transactions to be recorded securely but at the same time another type of information that can be useful for different industries.
#5 MINERS ARE IMPORTANT
Not all blockchains work the same, this is due to the consensus algorithm, which allows miners to determine which transactions are valid and which are not. There is a wide variety of these, but the most used is proof of work and proof of stake. The first is the one that uses Bitcoin and allows people to mine using their computer or specific hardware.
These people are the ones who are known as miners, and they play a fundamental role in giving life to the blockchain. These allow the validation of blocks that contain user transactions and that are added to the rest.
Mining requires very powerful computer hardware for the task, which solves complex mathematical problems in a competitive environment. Miners are rewarded with coins, such as BTC, for each block they manage to validate. The problem is that there can only be one at a time, making the first one to solve it get the cryptos.
Mining as such consumes a large amount of electrical energy to keep the blockchain operational, in addition to other resources. This is why new industries are generated that provide everything necessary for miners to perform the task efficiently and allow cryptocurrencies to work.
See also: Countries that mine the most BTC.
#6 THE HEART OF CRYPTOCURRENCIES IS DECENTRALIZATION
One aspect that makes blockchain so interesting is the idea that it is actually a decentralized technology. This implies that there is no single point of failure where information is stored, and there is no central server that can be attacked by criminals to take control of the network.
Instead of using a single server as is the case with most websites, blockchain is supported by a group of them, a decentralized network of computers that store and facilitate information globally. Herein lies the reason why many companies will set their eyes on technology for particular implementations.
#7 BLOCKCHAIN HAS OTHER BENEFITS
In addition to the decentralization we already talked about, blockchain has other advantages. Miners work 24 hours a day to verify transactions, which means that the service is available all the time, unlike banks, for example. These close during the weekend and only work during certain hours, in addition, they usually keep the funds of the clients for a few days at least.
Another benefit is that, in the absence of intermediaries such as banks or financial institutions, transaction fees are usually much cheaper.
On the other hand, the blockchain offers its users great transparency and control of their funds. Instead of allowing third parties to manage the future of cryptocurrencies, it is the user and the community that votes and decides which direction the network should take.
#8 BLOCKCHAIN IS NOT PERFECT
Although so far everything seems perfect, the reality is that blockchain-type platforms have some limitations. An example of this is that most technologies continue to be developed, causing us not to have a wide variety of products out there ready to be used by a mass audience.
Issues such as scalability greatly affect the user experience, making transactions slow and expensive. This is critical for most users, especially those who base their business around them.
#9 BLOCKCHAIN TECHNOLOGY IS BEING TESTED BY MANY COMPANIES
It still has a very long way to go before it becomes a technology that everyone uses on a daily basis. Even if the developers manage to achieve the goals for the project, many speculate that its impact could be exaggerated.
But like everything in life, things cannot be taken to the extreme. While it will not create a completely new society, there are major changes that will improve our lives radically. That is why large companies are starting to do tests related to it to obtain greater efficiency in their operations. Some of which have been associated with small enterprises.
An example of this is the 200 organizations that have signed an alliance with Ethereum to test the blockchain. Big brands around the world have joined the initiative, where we can see names like Microsoft or MasterCard. Ripple and IOTA also have large partnerships to make their projects flourish.
#10 BARRIERS TO ENTRY ARE RELATIVELY LOW
Something that people leave aside when analyzing projects when investing in them is that for companies to use blockchain does not require a great effort, that is, the barriers to entry to this industry are low. The amount of resources, whether time or money, and the knowledge needed to launch a cryptocurrency or decentralized application is getting lower every day. This is why we have seen an explosion in the number of ICOs that have emerged in recent times.
This has great implications for the most important cryptocurrencies such as Bitcoin or Ethereum because competitors can emerge that make things better. This puts in check the supremacy that until now they enjoy, making the investment in them can be risky.
#11 RETAIL INVESTORS HAVE REMAINED CAUTIOUS SO FAR
People often invest in stocks or bonds because they are instruments on which the value of the underlying asset can be estimated. On the other hand, with cryptocurrencies, the lack of metrics and the abundance of intangible factors make their purchase practically speculation. This has kept many investors away for the first few years.
Regulations are often one of the reasons why people are also often hesitant to enter the market, but this can change as these aspects evolve in different parts of the world. The last year we have seen a big change at this point, with thousands of investors jumping into the market without knowing the retail ones. This leads to emotional decision-making, short-term investments, and large losses.
#12 NOT EVERYONE BELIEVES IN CRYPTOCURRENCIES
This surely you already know, that not everyone is in favor of cryptocurrencies, or at least they do not consider them to be as important as many of us think. Warren Buffett is one of them, saying in 2014, during an interview with CNBC, that Bitcoin was just a mirage and a bubble that would soon collapse.
There are many more who followed this line and raised their voices against Bitcoin. One of them is Jamie Dimon, the current CEO of J.P. Morgan, who described it as a fraud and that it was worse than the tulip bubble. He further added that investing in crypto will not end well for individuals and financial institutions.
#13 SOME COUNTRIES HAVE BANNED THEM
Even though many people have trusted them by investing their money, it is still necessary for the governments to accept them. Many of these view them with distrust because of their very nature, due to how little adjustable they are and the decentralization that they present as a threat to states. This has led some politicians to ban its use with the excuse that they seek to protect people’s safety.
Among the countries that have taken this position are Bolivia, Bangladesh, Nepal, Morocco, Ecuador, and China. Surely this number will end up increasing over time, but there is also a current to integrate them into their economies, opening the doors to different projects that work with them.
#14 INVESTORS OVERESTIMATE THE ADOPTION OF A NEW TECHNOLOGY
Another thing that is important to mention is that retail investors are often too optimistic about the adoption of cryptocurrencies, especially when they are new to the market. This can be seen, for example, in recent times with other industries such as the internet, 3D printer, and genome decoding.
For these companies, it is not difficult to attract the attention of investors, which ultimately leads to a bubble. It does not imply that they will fail from a commercial point of view, but it will be difficult for them to meet the expectations that investors have created.
The cryptocurrency market grew tremendously in 2017 and subsequently fell when it was unable to deliver to investors the growth rate they had already discounted. This does not imply that cryptocurrencies will disappear, only that the expectations they have about them must be adjusted.
#15 MOST PEOPLE STILL DON’T KNOW WHAT CRYPTOCURRENCIES ARE
It is easy to find in our inner circle people who know about technology, in the end, we end up getting together with people with similar tastes. However, the reality is that the vast majority don’t know much about them.
A 2017 survey by LendEDU found that 80% of students in the United States did not know it was Bitcoin. Another survey yielded the data that only 30% of people know about Ethereum, which is the second most important cryptocurrency according to market capitalization. Finally, 74% of people have never heard of initial coin offerings, which in 2017 have had an impressive growth.
This may have changed in 2018, but there are still many people who are unaware of the fundamental aspects of cryptocurrencies. Depending on whether they reach greater adoption, their popularity needs to increase, and that is only achieved over time.
#16 GOVERNMENTS WANT TO TAX CRYPTOCURRENCIES
While its regulation is complicated, this does not imply that investors in the future will keep 100% of the profits. Politicians always demand that we pay taxes on profits, and cryptocurrencies are no exception.
In November 2017, the U.S. collection agency filed a lawsuit against Coinbase, one of the most important cryptocurrency exchanges in the world. In it, he urged that the platform will deliver the information of more than 14,300 users who have invested more than $ 20,000 during the period between 2013 and 2015.
Of these, only 7% had reported their earnings, indicating that the vast majority were hiding their profits.
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