Crypto-currency usually referred to as “crypto”, is a digital currency that can be used to transact and buy or sell goods and services, but uses an online ledger with powerful cryptography to secure online transactions. Most of the interest in these unregulated currencies is to make a profit; usually, speculators drive the prices skyward.
What is Crypto?
Cryptocurrency is a type of payment that can be transacted online for goods and services. Several companies and firms have issued their own currencies, usually called tokens, and these can be traded for particular goods or services that the company provides. They are just like arcade tokens or casino chips. A person would need to exchange real currency for cryptocurrency to get the good or service.
Crypto-currencies function based on a technology called the blockchain. Blockchain is a decentralized technology covering many computers that manage and keeps records of transactions. The main consideration of this technology is in the security it provides.
Are there different kinds of Crypto-currencies?
More than 4000 different types of crypto-currencies, as of January 2021, are traded publicly. Crypto-currencies continue to increase rapidly, raising money via initial coin offerings, or ICOs just like IPOs in Stock Markets. The total value of all crypto-currencies on April 13, 2021, was more than $2.2 trillion, according to CoinMarketCap, and the total value of all bitcoins, which is the most popular digital currency to date, was estimated at around $1.2 trillion!
Which are the best Crypto-currencies?
Below are the 10 largest traded crypto-currencies based on market capitalization as reported by CoinMarketCap, which is a crypto-currency data and analytics provider.
|Binance Coin||$87 billion|
This data is as of 13 April 2021.
What makes them so popular?
Crypto-currencies are popular amongst traders for a variety of reasons some of which are as stated below:-
- They are believed to be the currency of the future; hence people want to buy them before they get more valuable.
- The fact that crypto-currency eliminates central banks from managing the function of money supply, and because over time banks reduce the value of money via inflation and hence it seems like a viable investment option.
- The security provided by Blockchain is also favorable as it is a decentralized processing and recording system and can be more secure than traditional payment systems.
- Crypto is also popular because they’re going up in value and some investors have no interest in the currencies’ long-term acceptance as a way to move money
So, are cryptocurrencies a good option?
Crypto-currencies may go up in value, but several investors see them as mere speculations, and not as real investments. This is because crypto-currencies create no cash flow just like real currencies, so for anyone to profit, a different person has to pay more for the currency than the first person did.
This is called “the greater fool” theory of investment. Compare that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.
“For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability.”
As NerdWallet writers have noted, cryptocurrencies such as Bitcoin may not be that safe, and some notable voices in the investment community have advised would-be investors to steer clear of them. Of particular note, legendary investor Warren Buffett compared bitcoin to paper checks: “It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”
Investors who see cryptocurrencies such as Bitcoin as the future currency should keep in mind that a currency needs stability so that merchants and consumers can determine what a fair price is for goods and services. Crypto-currencies have been anything but stable throughout much of their history. For instance, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record high levels again proving how dynamically it fluctuates.
This price volatility creates a conundrum. If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?
Where and how to buy Crypto-currencies?
Some cryptocurrencies like Bitcoin are available for purchase with national currencies like US Dollars, Yuan, Indian Rupees, Euros, etc. while others require that you pay with bitcoins or some other cryptocurrency.
To buy crypto-currencies, one would need a “wallet” which is an online app that can hold currency. Usually, one has to create an account on an exchange, and then they can transfer real money to buy cryptocurrencies such as Bitcoin or Dogecoin or Ethereum, etc.
Coinbase is one of the popular cryptocurrency trading exchanges where one can create both a wallet and buy and sell crypto-currencies. Also, apart from that, a growing number of online brokers offer crypto-currencies, such as eToro, Tradestation, and Sofi Active Investing. Robinhood offers free crypto-currency.
Are crypto-currencies legal?
Cryptocurrency exchange regulations in India have become exceedingly stringent. Though technically legal, in 2018 the Reserve Bank of India (RBI) put a ban on banks and any regulated financial institutions from “dealing with or settling virtual currencies.” On 14 Jan 2018, RBI confirmed that it had not given any licenses or authorizations to any entity or company to operate a scheme or deal but had issued warnings about dealing in virtual currencies and introduced requisites for firms to unwind or exit their present positions. It also confirmed that new prohibitory rules were being planned to be placed. The sweeping regulation stopped the trade of cryptocurrencies on domestic exchanges and gave existing exchanges until 6 July 2018, to wind down.
In 2020, a landmark decision the Supreme Court of India pronounced the ban unconstitutional, reversing the prohibition and allowing exchanges to reopen.
How can one secure oneself?
If planning on investing in an ICO, the fine print of the company’s prospectus should be checked for the following information:
- Who are the owners of the company? An identifiable and well-known owner is a positive signal towards making the trade credible…
- Presence of other major investors who are investing in it. It’s a good sign if other well-known investors are also trusting and investing in the currency.
- Find out if you will own a stake in the company or just hold currency or tokens? This difference is vital. Owning a stake would mean that the investor gets to participate in its earnings, whereas buying tokens will simply mean that the investor is entitled to use them as chips in a casino.
- Has the currency already been developed or is the firm looking to raise money to develop it? The further along with the product, the less risky it is.
It will take a lot of time and energy to go through a prospectus; the more detail it has, the better your chances are that it is legitimate. But even legitimacy does not mean the currency will succeed. That is a totally unpredictable and entirely separate question.
Beyond all of those concerns, just owning crypto-currency exposes you to the possibility of theft, as hackers try to penetrate the computer networks that maintain your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t typical risks for investing in stocks and funds on major Indian stock exchanges.
Wrapping Up: Should you invest in Crypto?
The Biggest question is, Should you invest in Crypto? Cryptocurrency is an extremely speculative and dynamic asset. Stock trading of conventionally established companies on recognized stock exchanges is generally less risky than investing in crypto-currencies.
What online brokers offer crypto-currencies?
Here is an inexhaustive list of brokers that let you buy cryptocurrency:-
|Coinbase||Access to buy and sell more than 30 crypto-currencies.|
|eToro||Trading platform with access to 15 crypto-currencies.|
|Robinhood||Seven crypto-currencies including Bitcoin, Bitcoin Cash and Ethereum.|
|SoFi Active Investing||Offers three crypto-currencies for trading: Bitcoin, Ethereum and Litecoin.|
|TradeStation||Offers trading for five crypto-currencies, including Bitcoin, Bitcoin Cash and Ethereum.|
|Webull||Offers four crypto-currencies for trading: Bitcoin, Bitcoin Cash, Ethereum and Litecoin.|