“Crypto will not be broken, it will be bypassed”
A cryptocurrency is a medium of exchange that is digital, encrypted and decentralised. Unlike the US dollar, euro or ringgit, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.”
That cryptographic proof comes in the form of transactions that are verified and recorded in a form of program called a blockchain.
With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision.
According to CNBC, global adoption of cryptocurrency has taken off in the last year, by 881 per cent and 154 countries have adopted cryptocurrency usage. But still, many of us are understandably skeptical about the very idea of cryptocurrencies.
How can there be any kind of currency that isn’t backed up by Bank Negara?
Well, there is, and it’s valuable enough to shake up financial markets. The pioneer cryptocurrency, Bitcoin, which traded at just US$0.0008 in 2010, commanded a market price of just under US$65,000 this April.
Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched US$2.5 trillion this May. Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
Now, whether you like it or not, cryptocurrency is going to be a part of an asset class near future. I’m not a big fan of cryptocurrencies, but as an investor, understandings their advantages and disadvantages will be good for knowledge and to break our confirmation bias.
Fast and inexpensive
Most cryptocurrencies take only few minutes to transact any amount of money, regardless of the amount and location. Transferring your money to another part of the world through your bank can be extremely expensive. When done in Bitcoins, the cost is none. For an example, Bitcoins can be sent to any country on the planet (has no geographical limitation), like e-mail or WhatsApp.
Protection from currency devaluation
Currency devaluation means downward adjustment to a country’s value of money relative to a foreign currency or standard. Many countries have seen their money become worthless on international exchange during hyperinflation, example: Germany (after World War 1), Bolivia, Zimbabwe, Nigeria, Greece and many more. Cryptocurrencies can protect from currency devaluation. Since, cryptocurrencies value is determined by supply and demand by participants in crypto market, devaluation is impossible.
Decentralisation
Cryptocurrencies cannot be regulated or valued by any government or central bank. It cannot be created or distributed by any government and central bank. The currency is decentralised because it is created by the people, removing the power that fiat money has through government and central banks. There is no third-party interference, no one has the authority to freeze and charge fee. They can’t be stolen, and the government can’t seize them in any conditions. They use two keys, public and private key.
Strong security
Security has been a major concern for cryptocurrencies. The blockchain ledger is based on different mathematical puzzles, which are hard to decode and tamper with proof. This makes cryptocurrencies more secure than ordinary digital money. Cryptocurrencies use pseudonyms that are unconnected to any user, account and stored data that could be linked to crypto asset.
High volatility
Although some cryptocurrencies have outperformed stocks over long term, the cryptocurrency market moves on speculation. Investors hope the price would go up or down to make profits. These speculative bets cause a sudden influx of money and sudden cash out, leading to high volatility. Making high profit is entirely possible in a volatile environment, but it also means you can face huge losses too.
Poor acceptances
Cryptocurrencies are now accepted as a payment solution but their number of places where we can exchange cryptocurrencies for real goods and services is very limited. Since, cryptocurrencies are so volatile the revenue will vary wildly when converted back into a currency in which the merchant usually conducts business. If a lot of people pay using cryptocurrency, this may result in a large mismatch with the merchant’s cost structure.
Unregulated
Cryptocurrencies are construct of the private sector with no official oversight or regulation. This means cryptocurrencies are wide open to being exploited by criminals as a means to scam unwary investors. Many gray and unregulated online transaction are denominated, for instance, illegal drug, terrorism financing, money laundering and investment scams.
Weak asset recovery
To gain access to a digital asset, username and password are required. You may forget these or after your demise, your next of kin does not know to recover them.
Once you take your cryptocurrency off a trading platform and into your own control, you are the sole person responsible for it.
Especially, if you lose your private keys, the coins are gone for good. Although, some new cryptocurrencies attempt to address this significant weakness, solution remain unproven.
Investing in cryptocurrencies can increase your portfolio diversification, since some cryptocurrencies such as Bitcoin have historically shown demand and increase in value. Before getting involve in crypto investment, understanding your risk profile, the available of time for your financial goal and begin with small amount investment will be a good strategy for you. Further reading and research can give you better understanding, if buying crypto is too risky for you than ignore it.
The most important thing, resist the perception cryptocurrency as a get rich quick scheme opportunity and don’t invest more than you can afford to lose.
Understanding some behavioural finance: confirmation bias, overconfidence, herd behavior and gambler’s fallacy will keep you in right track in investment planning.
Gunaseelan Kannan, CFPCERT TM, a financial adviser representative by Bank Negara Malaysia and a licensed financial planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his PhD research on financial planning and financial technology. He also lectures on accounting, finance and business fields in Asia Pacific University of Technology and Innovation (APU). He is the Winner of Malaysian Financial Planner of the Year 2020, from Financial Planning Association of Malaysia. He can be reached at [email protected].