Cryptocurrency is a digital asset that can be used for online purchases and as a financial instrument for investing. You can exchange real currency like euros or dollar (also called fiat currencies) into tokens or coins of a given cryptocurrency to make a payment. Today we have almost 3000 different kinds of cryptocurrencies. By far, the most famous one is Bitcoin (BTC). Ethereum (ETH), Ripple (XRP), EOS, Bitcoin Cash (BCH), Litecoin (LTC), and Cardano (ADA) are also very widely used.
Introduced back in 2008, Bitcoin was the first cryptocurrency. During this period its price has been very volatile. In 2013, it reached $100 mark for the first time. Later in the same year, it has also passed $1000 level. Then it modestly declined, and it maintained the level below $1000 till 2017. In that year the price made a huge swing rising from $900 to almost $20000 in a very short time. By the end of the next year, we noted a huge drop to $3200. Since that moment, the price has been raging between $4000 and $14000 levels. We can see that it has been very volatile over the past three years. So, is it a good investment?
Bitcoin and Altcoins
Bitcoin is the most widely used cryptocurrency. It is decentralized: that means the currency does not have a central bank or any administrator. Its price is formed by the market, by its supply and demand. Its transactions do not require any intermediaries like banks or other financial institutions. They perform on the peer-to-peer bitcoin network. Network nodes verify all transactions using cryptography and record them in a blockchain, a publicly distributed ledger. There are still lots of unknowns about bitcoin. Nobody knows for sure who the founder is. A person or group of people who invented it is using the name Satoshi Nakamoto. Only a small percentage of the people understand the Bitcoin system from a technical perspective and exactly how it works.
Due to bitcoin’s large market cap, all other cryptocurrencies are called altcoins or bitcoin alternatives. As I have already mentioned, there are almost 3000 different altcoins; here, I will present just the biggest ones.
The Ethereum platform generates Ether – the second most widely used cryptocurrency. Owned by a private company Ripple is the third most used one. Bitcoin Cash was originally a fork of bitcoin. Fork meant creation by the modification of the bitcoin algorithm. However, now it is a separate cryptocurrency with some architectural improvements, which resulted in lower fees and faster transactions. Litecoin is also a fork of bitcoin which uses a different proof-of-work algorithm. There is a Monero – cryptocurrency that was designed to be a private, secure, and anonymous.
Be aware! For fraudulent activities, scammers use both bitcoin and altcoins. Since you can make a transaction and remain anonymous without being tracked, it makes crypto ideal for money laundering and other criminal activities.
Trading cryptocurrencies is gambling from a fundamental perspective. The reason is the absence of patterns that lead to rise and fall, as well as no regulatory standards in peer to peer exchange. You cannot calculate returns or predict changes like stocks or mutual funds. So, the trading is based purely on technical analysis and its rules.
Advantages of long-term investing in cryptocurrencies
Since the cryptocurrency market is still young, it has significant upside potential. Many investors see bitcoin prices at today’s levels as a good investment opportunity with a high-risk reward ratio. The most optimistic notable investors suggest that in the future, bitcoin price can rise to $600k.
Although the “bubblish” surge in 2017, the long-term and the medium-term trends are still bullish. All price levels that are lower than the high can be a good time for long-term entries.
According to Elliot wave theory, all financial instruments behave in 8 wave pattern where the first five waves are rising waves while following 3 represent a correction. Since its introduction, the current price can be considered as Elliot wave number 2. Waves three and five may rocket the price into much higher price levels.
We have witnessed high volatility levels in recent years. Well, from the speculative perspective (short-term), it is a good market to act. So, if you correctly determine the time to enter and the time to exit the market, you can achieve a significant gain.
In recent years we have also seen the boom of new coins and ICOs (Initial Coin Offering). As a positive thing for the market, it proves that the demand for cryptocurrencies is still on the rise and that there is room for new coins and tokens.
In the USA, the EU, and in many other countries, cryptocurrency is legal and regulated. As the investment, it is taxed as an investment property. Well, it means that governments accept it since you can report crypto as a capital gain.
Despite all the risks, cryptocurrencies have been the most exciting financial instrument of the 21st century. As a decentralized digital currency that works on innovative blockchain technology, it is a good opportunity for less conservative traders.
Disadvantages of long-term investing in cryptocurrencies
The cryptocurrency prices tend to change rapidly. Normally, that price moves for hundreds of dollars up and down every day. If we consider the rise in 2017 up to $20000 as a school book example of a bubble, it is hard to believe that the price will reach the same levels again. So, in that case, investing in bitcoin and other altcoins at the current levels is very risky.
May be cryptocurrency is a good investment on a long-term basis. But it is still unknown whether bitcoin or any other of top altcoins will be in the spotlight in a few years. Since there are so many different altcoins and still new ones are issued over ICOs, who knows maybe one of those new ones will overcome the bitcoin’s dominion.
With low-risk tolerance and impatience to wait, this might not be the best investment. Since the price had peaked in bubble style manner a few years ago, in many cases, it can pass many more years for an asset to reach the same or higher levels again.
Regulators in countries like the USA, Russia, and China can have a big impact on cryptocurrencies. In 2013, a Bitcoin price reached $100 for the first time. After that, the USA government has shut down Silk Road, an online black market that carried a significant volume of bitcoin transactions. It caused the price of bitcoin has fallen, which led to four years of price recovery for BTC. Also, in 2017 China started talks about forbidding ICOs. Keep in mind that some governments’ actions can hugely influence cryptocurrency price. Also, any news and rumors about the regulations can cause a huge movement in a day.
So many ICOs introduce low-quality coins into the market, and these coins can result in bad experiences for their investors. Such activity, in many cases, draws attention from regulatory bodies. Well, cryptocurrencies are legal for now, but chaos and uncertainty can quickly turn the things around.
The bottom line
So, cryptocurrencies, digital assets for online purchases are still a good investment. Today we have almost 3000 different kinds of cryptocurrencies, and the bitcoin is the most popular one. Since its introduction in 2008, it has been a very volatile financial instrument. Its price reached the top in 2017, rising to $20000. After that, the price has been ranging between $4000 and $14000 levels. Such volatile nature opens huge opportunities for speculative trading. Some analysts predict that price can rise to $600k, so it an investment with a good risk-reward ratio.
On the other hand, actions from governments and regulatory bodies can hugely affect cryptocurrency price. Its huge rise in 2017 is putting off some investors since it was fairly interpreted as a bubble. ICOs were becoming popular in recent years and thought it is a sign of huge demand. It is also the entrance for many low-quality coins that are putting away the investors from digital assets.