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Cryptocurrencies, are they all that they are trumped up to be? Are they a scam? Can I get a Lamborghini and go to the moon?
Before we answer those questions, it is essential to understand what makes a cryptocurrency a cryptocurrency.
So here is the quick and dirty explanation.
A cryptocurrency is a decentralized digital currency, based on cryptography and is censorship resistant.
Sounds complicated? Let us break it down.
WHAT IS DIGITAL CURRENCY?
A digital currency is a currency used digitally, i.e., a currency used on the internet to pay for goods and services. It is an intangible money.
Some other features of digital currency:
- They are borderless – They do not have any Geo-political restrictions and can be sent from anywhere to another location in the world. Think of digital currencies as the money in your bank account that can be electronically transferred to a recipient. Every online or mobile banking transfer made or received, and online purchase is made using digital currency.
- They are centralized – The money in your account is regulated by a third-party such as a government and central bank, who controls where, when, and who you can send money to.
- Transactions can be manipulated – Because a central authority controls digital currencies, they can be canceled, frozen, or restricted at their discretion.
WHAT IS CRYPTOCURRENCY?
A cryptocurrency is a type of digital currency with unique features:
- It is based on cryptography (used for security), making it difficult to counterfeit, making it reliable.
- It is decentralized – Cryptocurrency transactions are stored on a decentralized distributed ledger (transparent, shared database) called a blockchain. This means that no one person or organization owns the blockchain. Instead, many persons (nodes) located all over the world support the network from tampering. Every transaction on the blockchain is permanent and can be viewed and verified by anyone, as it is public. To clear the ambiguity of a digital currency being centralized and a cryptocurrency being decentralized, compare it to a car and a truck. A car is a vehicle, so is a truck, but, both have unique characteristics that differentiate them.
- Many are censorship-resistant – Money can be sent to anyone, any part of the world without the fear of a third-party (regulatory organization such as a government or central bank) interfering with the transaction.
WHAT MAKES CRYPTOCURRENCY VALUABLE?
This is the main question new investors, speculators, and unbelievers want to be answered. Perceived value gives currency value. FIAT is backed by the value the government gives it; therefore, it can be inflated or deflated at their will.
There are several factors that make cryptocurrency valuable.
A few notable questions to consider:
- Usability or utility – Is it easy to use in the real world? Does it provide some sort of utility?
- Community – Is there a large number of persons and organizations supporting it? Is it frequently used on platforms or by businesses?
- Development Team – Does it have a robust development team supporting the infrastructure and upgrades?
- Demand and Supply – Is there a high demand for it? Is there a limited supply?
If the answer is yes to all the above questions, value is created. Many cryptocurrencies such as Bitcoin, Ethereum, Ripple, Cardano and Binance Coin (to name a few) have increased significantly in price over the years due to their perceived value to retail (me and you) and institutional (corporate organizations) investors. As perceived value increases, and supply decreases, cryptocurrencies would continue to increase in value.
IS CRYPTOCURRENCY A SCAM?
Cryptocurrency is not a scam, but cryptocurrency scams do exist. Many get scammed because they are greedy, gullible, or did not do their due diligence. Anything that seems too good to be true probably is.
Some common cryptocurrency scams to watch out for:
- Insecure, shady exchanges (Learn more about exchange safety here)
- Pump and Dumps Schemes – This occurs a lot with smaller market capitalization cryptocurrencies called altcoins (alternative coins). Think of altcoins like penny stocks.
- Pyramid and Ponzi Schemes (e.g., OneCoin, DagCoin, CashFx, Quibittech, etc.)
- Phishing Websites
N.B. Start small, and never invest more than you are willing to lose!
SHOULD YOU LEAVE YOUR JOB OR PUT YOUR LIFE’S SAVINGS IN CRYPTOCURRENCIES?
The short answer is NO! While investments can be profitable, they all carry risks. Depending on one’s risk appetite, the “gains” can be more significant than someone who is risk-averse and may not invest as much. Similarly, higher risk makes one susceptible to significant losses if proper risk management practices are not utilized.
A sound investment strategy to minimize risk and achieve an all-around portfolio is to spread your investment across different investment types, e.g., Precious Metals, Stocks, Cryptocurrencies, Other. Some investments would yield a higher return in a shorter time frame than others, cryptocurrencies being one of those. However, many do not practice proper risk management practices, allow greed to cloud their judgment, and lose their investment.
One can alleviate the fear of investing in this new technology by taking essential steps to success:
- DYOR – Do Your Own Research. Research is key to determining if the investment is a good or bad one. Never skip this step!
- Determine one’s Risk Appetite:
- Do not invest on FOMO – The Fear Of Missing Out is the root cause of many novice investors buying the top and selling lower than the purchase price when FUD (Fear, Uncertainty, and Doubt) kicks in, losing money as a result.
- Hedge – As the old saying goes, “Do not put all your eggs in one basket.”
- DCA – Dollar Cost Averaging – Putting a fixed amount of money every week or month into the asset over a period regardless of the cost.
- Patience – Determine your intended timeline for your investment and give it time to grow. It takes several years to become an overnight success.
- Take Profit and Compound – According to Albert Einstein, “Compound interest is the 8th wonder of the world. He who understands it earns it, he who doesn’t pay it.”
- Security – Get the tools required to secure your cryptocurrency, such as a ledger or trezor hardware wallet. Also, use a VPN to secure your connection.
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