What do Snoop Dogg, Ashton Kutcher, and Jack Dorsey, the Chief Executive Officer (CEO) of Twitter, have in common? They are all cryptocurrency enthusiasts. In fact, in an interview with Vanity Fair in April 2021, Snoop Dogg commented that he believes that cryptocurrencies are here to stay.
However, some remain wary about cryptocurrencies. For example, Janet Yellen, the U.S. Treasury Secretary has expressed concerns that cryptocurrencies could be used in illicit finance, and has also warned about its extreme volatility. She is not the only one. Elizabeth Warren, a U.S. Senator is also known for her anti-crypto stance and has previously commented that cryptocurrency services are ‘spinning straw into gold’.
Despite these contrasting views, it is undeniable that cryptocurrencies are getting more popular in recent times. Therefore, this article will explain some of the basics of cryptocurrencies for whom cryptocurrencies remain an elusive mystery.
Tell Me What Exactly Are Cryptocurrencies?
Cryptocurrencies are basically digital currencies that exist as an encrypted set of transactions on a blockchain. A blockchain is a digital ledger that records all cryptocurrency transactions, and the data for every transaction is encrypted using cryptography.
So, How Is It Different from Fiat Currencies?
The main difference between cryptocurrencies and fiat currencies is the fact that cryptocurrencies are decentralized. In other words, there is no governing body such as a central bank to monitor or regulate cryptocurrency transactions. Cryptocurrencies can be sent to anyone, anywhere in the world without the need for a bank or a government.
How Many Cryptocurrencies Are There?
According to CoinMarketCap, a cryptocurrency data and analytics provider, there are more than 11,800 cryptocurrencies in the market, with a total market capitalisation of US$2.059 trillion, as of September 13, 2021. Among the more popular cryptocurrencies in the market are such as Bitcoin, Ethereum, and Cardano. At the time of writing, Bitcoin’s market capitalisation is approximately 41.1% of the total market capitalisation. Fun fact: All other cryptocurrencies other than Bitcoin are known as ‘alternative coins’ or ‘altcoins’.
Presently in Malaysia, only five cryptocurrencies have been approved by the Securities Commission Malaysia, which are Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH).
The Good, The Bad, and The Ugly Side of Cryptocurrencies
With so much debate over cryptocurrencies, it can be easy to get confused if cryptocurrencies are a good thing or otherwise! So, let’s take a look at some of the good, the bad, and the ugly side of cryptocurrencies to help you decide.
Because central banks can print fiat currencies at any time, the fiat currency is then subjected to inflation. Basically, inflation is the decline of the purchasing power of a currency over time. On the other hand, Bitcoin, the flagship cryptocurrency, is also viewed as an inflation hedge, because of its limited supply: there can only be 21 million Bitcoins in existence.
Additionally, cryptocurrencies can be a good investment class option to diversify your portfolio. However, diversification is an imperative word here. With all the hype surrounding cryptocurrencies lately, it can be easy to get carried away (on the ‘Fear of Missing Out’ or FOMO wave) and invest all of your money into cryptocurrencies.
However, that can be a fatal mistake as an old rule of thumb in investing is ‘don’t put all your eggs in one basket’. It is also important to remember that you should only begin investing in cryptocurrencies if you have a higher tolerance for riskier asset classes. If you generally have a cautious risk appetite, cryptocurrencies are not a suitable investment for you.
Governments throughout the world are also divided on how they see the value of cryptocurrencies, and this can create a sense of uncertainty in the market. China, for example, has been aggressively clamping down on cryptocurrencies as of late. Furthermore, unlike the cash in the bank, there is no protection over crypto assets.
Additionally, cryptocurrencies are also vulnerable to cyber-attacks. For example, in August 2021, more than US$600 million in Ethereum coins, Binance Smart Chain coins, and Polygon tokens, were stolen from Poly Network when hackers exploited a vulnerability in its platform. Although the hackers have since returned close to half of these funds, this incident only reflects how cryptocurrencies can be vulnerable to cyber-heists.
For me, one of the drawbacks of cryptocurrencies is volatility. For example, Bitcoin and Ethereum dipped sharply in May 2021 following negative news about cryptocurrencies. This kind of volatility may not be suitable for the (faint-hearted) and those who are uncomfortable with such dramatic movements. But this should be expected when it comes to cryptocurrencies, especially as even Bitcoin, the flagship cryptocurrency, is still considered a nascent asset class in the price discovery phase.
Despite this, there are several measures that can help to safeguard a person against these downsides of cryptocurrencies such as:
- Ensure that you have a good understanding about cryptocurrencies and how it works before investing.
- Understand your risk appetite, investment goals, and investment time horizon to decide if cryptocurrencies are suitable for you.
- Make sure that you have adequate emergency savings before you invest.
- Once you have enough stashed away in your emergency savings account, decide how much you want to set aside for cryptocurrency investment. According to experts, a suitable amount would be under 5% of your portfolio.
- It is important to choose a safe and reputable platform. For example, in Malaysia, only four digital asset exchanges are recognized by Securities Commission Malaysia which are Luno Malaysia Sdn Bhd, MX Global Sdn Bhd, SINEGY Technologies (M) Sdn Bhd, and Tokenize Technology (M) Sdn Bhd.
- As a further measure of protection, use a very secure password and a two-factor authentication system.
To Each Their Own
No two snowflakes are exactly alike, and every human is different in their own way. That is why I believe that at the end of the day, each person will have their own perspective on cryptocurrencies. It could be ‘a loud YAY’ or a ‘resounding NO’. Regardless of either, it does seem like cryptocurrencies are here to stay for a considerable time.
Hannah Becca is a content writer under Headliner by Newswav, a programme where content creators get to tell their unique stories through articles and at the same time monetize their content within the Newswav app.
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