What are the pros and cons of investing into cryptocurrency?
The capitalization of major cryptocurrencies has certainly grown over the last year. All the more incentive for investors looking to multiply their funds by obtaining bitcoin or the most promising altcoins (all the other cryptocurrencies aside from bitcoin). Some prefer bitcoin as the most highly capitalized and stable currency that has grown for 300% in the last year, while others consider investing into other coins as more profitable. Namely those with the highest potential but still reliable. For example ETH or DASH, that have multiplied by 8 and 12 times. Another portion of investors combine their act by taking both BTC and alternative currencies into their investment package.
At the first glance, it’s highly tempting to invest all the money into altcoin that has grown 10 times only over the last year and get 10 times richer over the next year. It’s not that simple through. The growth of alternative cryptocurrencies is much more “tenuous”. It often can be heated by the efforts of speculators and promotional campaigns to a greater extent than any real advantages of their technology. In these cases the growth may end up with stagnation and even plummeting. Plus, don’t forget the “low base effect” that we define below. Which is to say that bitcoin will remain a very serious alternative to investment into altcoins.
Many seasoned investors suggest that even the most successful altcoins to date, will slow down their growth at the very least, and stagnate or even lose exponential part of their value in the worst case scenario. Basically, investments into cryptocurrency that is bitcoin are considered as much less risky, even though 1000% return is out of the question.
Judging by the absolute and relative capitalization of bitcoin, however, the overall situation is actually less conclusive.
Let’s take a closer look at the opportunities, perspectives and risks related to investments into cryptocurrency. We’ll start this manual off with pros and cons of investments into bitcoin for beginners, as these are largely similar to investment into other cryptocurrencies; followed by the nuances of placing your funds into altcoins.
What are the pros and cons of investments into bitcoin?
Those willing to invest into bitcoin can presume the following advantages to their endeavor:
1) Bitcoin demonstrates a stable annual growth of price and it’s reasonable to suppose that this trend will persevere. The graph below that the bitcoin price has grown 4 times over the last 12 months. From 450 to 1700 U.S. dollars;
2) The community puts a lot more trust in bitcoin than any other cryptocurrency which plays a huge part in keeping bitcoin not only from crashing but also the long-run decline in price. Bitcoin had won back all drops of the past few years, outgrowing the setbacks each time. The highest capitalization and number of users are additionally fortifying its positions among other cryptocurrencies;
3) Successfully resolving the issue of scaling the bitcoin will open up a new way for the price to soar;
4) Bitcoin exhibits a lot more liquidity as compared to any other cryptocurrency. For an average user this means that one will always have a wide array of opportunities for bitcoin exchange, to buy bitcoin or sell bitcoin including getting it from a bitcoin ATM. Technical and software solutions for operating bitcoin are also quite common. For instance, Trezor, KeepKey and Ledger offer a great variety of hardware wallets to store bitcoin.
5) Financial and political turmoil both on a global scale and in particular countries can render fiat currencies too questionable to store savings. Bitcoin, on the other, will remain a solid means to store wealth alongside other stable actives like gold. If that happened, those who see to buying bitcoin today will undoubtedly hit the mother lode.
6) Right now bitcoin stay free from the pressure and overregulation that increasing annoy the owner of fiat money. The governments are trying to limit the circulation of cash and storing your money in a bank account would mean an immoderate transparency of your finances for the controlling authority, high commission fees for most banking operations and, in some cases, even negative interest for the bank deposit and incapacity to cash convert it into cash. Storing bitcoin, by contrast, is absolutely free. The transactions are unlimited by state-run and banking bureaucratic institutions. All in all, bitcoin is absolutely decentralized and relatively anonymous. Pseudo-anonymous, to be accurate.
Now, let’s get into the downsides and risks:
1) The bitcoin scaling problem is not yet resolved. In the meantime, the throughput capacity of the network has long been causing concerns. On the other hand, the growing commission fees make minor transactions unprofitable (e.g. those related to selling bitcoin gathered via bitcoin faucets). Even transactions with tolerable commission get stuck in the network all the more often too. None of the solutions to the problem can be labeled as the ultimate remedy. Neither the moderate update called “Segregated Witness” nor the drastic – Bitcoin Unlimited that didn’t get the decisive support from the community and miners. If the protocol won’t get a serious update soon, this would mean aggravated network overload and bitcoin would sag as a payment instrument.
Bitcoin should not sustain any direct losses from network overload as an investment asset. However, the loss of interest on part of those viewing bitcoin primarily as an investment asset can have a negative impact on the price. Besides, in case investor wants not to buy bitcoin but sell bitcoin saved on a local or online based wallet instead of the preferred exchange, the issues with transfer to exchange or exchanger that exchanges the bitcoin can cause major concerns.
2) The problem of excessive governmental regulation, going all the way up to bluntly prohibitive in certain countries, today stays definite. Unbalanced control is the other side of the coin when bitcoin is being legalized.
3) Over the period of January-April 2017 bitcoin rate
has grown from $1000 to $1300, and from $1300 to $1700 over the past few weeks. This calls for concerns that the rates may fall or even take the prior positions. It’s worth noting however, that bitcoin always had and now still has serious prerequisites for growth, and so this growth should not necessarily be viewed as a “bubble”.
When speaking about the high volatility of bitcoin – the issue hinders the short term operations such as to buy bitcoin to trade it for goods that can be bought per bitcoin rates. Not long term investments. Besides, there are premises to consider that volatility will drop in the future, if bitcoin enters a more stable face in its development.
What are the specifics when viewing altcoins as an investment instrument?
Some of the bitcoin advantages given above partially apply to highly capitalized top ranking cryptocurrencies. For example high stability due to considerable capitalization and option to get your finances out of the government control.
As for growth perspectives in terms of price – potentially, for many altcoins they could be even bigger than for bitcoin itself. Previously we’ve given the example of ETH and DASH that have shown an approximate 8 and 12 time growth as opposed to 4 time growth of bitcoin. As you may see on the graph below, the EHT cryptocurrency has gradually reestablished its rate after the summer drop (caused by the crash of DAO platform and not any internal issues), saving up energy for its inevitable takeoff that started in January 2017 and could be far from over.
However, the issue here is that only the most successful altcoins can show such dramatic growth and not have it followed up by a drop. Plus, most likely, they won’t be able to grow so well afterwards. This is largely caused by the “low base effect”.
A quick growth in capitalization of any successful cryptocurrency, say 5 times from the initial level, is not that hard to attain. All due to the fact that it was very low. This is the exact nature of the “the low base effect”. Investors have gladly taken the coin that they considered both promising and briefly cheap, while the speculators that went bull could boost the price, raising the interest with relative ease. With that kind of growth behind, and capitalization reaching certain sizes, another 5 time growth of price won’t be so easy to attain. In hypothesis this could be described as the following example: it’s hard to imagine DASH cryptocurrency having stable sales at 0.6 per bitcoin outside the situation where BTC goes through the hardest possible crisis, as hard as it is to imagine the price for the same cryptocurrency being worth $1000 without bitcoin reaching over $10 000.
As previously noted, within the past few years there has been evident growth of altcoin capitalization. Both relative and in terms of absolute numbers. A year ago 80% of general capitalization of all cryptocurrencies was attributed to bitcoin, with less than 20% left for altcoins. Now the latter has grown for over 2.5 times, approaching 50%. In absolute numbers we see an ever more impressive surge in altcoin capitalization – approximately 16 times (from 1.7 to 28 billion U.S. dollars., see the graph for more detail). It’s not guaranteed that this tendency will remain within the nearest half year but for the past year it was quite consistent. This means that part of reputable investors either prefer altcoins or, at the very least, use them to build up a considerable part of their investment package when investing into cryptocurrencies. This could all be due to technological advantages of certain cryptocurrencies or because of their concerns in regards to the future of bitcoin. Truly, if the problem of bitcoin scaling is not resolved in a manner agreeable for the most part of the community, many of those who now buy bitcoin are going to sell bitcoin and this will fortify the positions of the most reputable altcoins quite seriously.
The perspectives of a few successful altcoins are improved by the fact that they can ensure the work of a number of innovational software solutions. Much similar to smart-contracts with ETH or, in case of DASH, the creation of two-tier payment network. Curiously, part of altcoins can “yield percentage” rewarded simply for storage. This way the owners of DASH masternode get rewarded with partial haul of the mined coins on condition that they uninterruptedly keep it running. As for cryptocurrencies collected via POS mining, the owners get a portion of new coins simply in absence of any actions with their funds stored on a local wallet depending on the amount of their savings. The local wallet acts as a node.
Occasionally, investors have “voting rights” with ability to affect the decisions on various matters in the development of cryptocurrency. These decisions, however, can be counted meaningful only in case of huge savings in the given cryptocurrency.
The legal definition and security of Bitcoin is somewhat higher than it is for altcoins, remaining a concern for altcoin investors. In Japan for instance the Bitcoin is already fully legalized as a payment method, as opposed to, say, litecoin.
Separately from reputable altcoins with good capitalization stand the weaker currencies. Their low capitalization rates are shaken by the big traders with speculative goals, sometimes making these altcoins artificially overpriced. Sometimes heavily and at great lengths only to drop again. Therefore, these kind of altcoins are a speculative rather than an investment instrument in their nature. Only profitable for the biggest and the most cunning players (manipulators), with investors risking to stock up with overpriced currency and lose the most part of their potential profit. Even aside from irreversible falls, abrupt random price movements undoubtedly repel serious investors. A decent investment asset should not test the owner’s patience with regular nosedives a few times a month. However, altcoins like, say, ETH, had ranked among similar weak currencies in the first stages of their existence, and the high potential of their technology later allowed them to multiply by dozens and take their rightful place.
Summing up, you could say that investing into altcoins of various levels, be it the accomplished, promising or undecided, can be much more profitable than investments into cryptocurrency that is bitcoin, however at cost of higher risk to lose money due to drops or gradual decline of price.
Aside from bitcoin, you may buy cryptocurrencies called DASH and ETH that have shown some great growth over previous year at the EXMO exchange that also offers a secure storage of any cryptocurrencies that you’d want to keep at your exchange account. And should you need to convert a part of the exchange capital into fiat, this would not prove difficult via various fiat conversion methods available at the exchange. Among such are withdrawal through the debit card as well as a wide range of e-wallets, plus creation of internal currency within the exchange called EX-CODE
. EX-CODE codes are accepted by more than 20 internet-exchanges, so it would not be a challenge for you to exchange them for fiat currencies.
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