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Dubai: Cryptocurrencies have been dubbed the “future of money” by some. A statement that financial industry executives have yet to verify but is fuelling several activities, news, and policies across the world. There are about 4,000 cryptocurrencies around us, and not a week goes by without them dominating the headlines and our conversations.
Most of us wonder if we should invest in them or not and whether the investment will be a success or a failure. While many have begun allotting enormous sums of money in the belief that this new gold represents the future, others continue to view it as a prescription for catastrophe and nothing more than a gamble. Irrespectively, there is a rise in the number of individuals seeking to capitalise on the buzz and invest in cryptocurrencies without a thorough knowledge of their functioning.
Against this background, this article casts light on the critical factors that need to be considered while making this financial decision. Among these considerations are the cryptocurrencies’ supply structure, price volatility, lack of pattern, industry dynamics, and susceptibility to risks.
Market availability a crucial factor
To begin with, cryptocurrencies vary when it comes to their availability in the market. For instance, Bitcoin is intrinsically deflationary by nature and is by far the world’s largest cryptocurrency by market value, owing to its finite supply of 21 million coins only.
Why is Bitcoin deflationary?
As the adaption of Bitcoin spreads, demand drives the price up. Each Bitcoin therefore affords the owner more purchasing power. A Bitcoin purchased for Dh400 could purchase 20 meals at Dh20 each. Later, if that Bitcoin is worth Dh1300 and can purchase 65 meals at Dh20 each.
The fact that Bitcoin has a finite supply (21 million) assures that your purchasing power increases as long as demand is stable or expanding. US dollar and all fiat currencies (government-issued currency that is not backed by a commodity) purchasing power is eroded by the continual creation of new dollars by governments.
Whereas other cryptocurrencies like Ethereum are with a constant flow, and Litecoin has a cap of 84 million coins, of which 75 percent is in circulation. Nonetheless, and despite the varying options and availability, for years, Bitcoin has remained the go-to option for investors due to its increased demand and value.
Cryptocurrencies are extremely volatile because of how unexpectedly their value can fluctuate. The good news is that as volatility increases, the potential to earn money rapidly also raises. The bad news is that increased volatility implies increased risk. Invariably, financial analysts consider the volatility an unsurprising feature of the cryptocurrencies, especially given that cryptocurrencies are still a relatively young market.
The innovative nature of the crypto industry considerably contributes to its volatility, with individuals frequently developing new cryptocurrencies and applications to progress the industry, thus affecting their pace of acceptance, or in other words, these currencies’ rate of adoption.
One clear example is Bitcoin’s price, which was reported that fluctuates daily on average by about 2.67 per cent. Bitcoin had dropped as much as 9.2 per cent to $31,667 (Dh116,316) on Sunday last week.
Volatility makes firms hesitant
Price volatility, in particular, is the reason for many corporations not opting to invest in cryptocurrencies, since they avoid reflecting volatile assets on their balance sheets, thus avoiding any fluctuations in the reported results. However, if investors want to make long-term commitments to cryptocurrencies, price volatility should not be an issue since these investments will be unaffected by price fluctuations.
Due to the volatile nature of the cryptocurrencies, its market exhibits an ambiguous pattern; in other words, no discernible trend can be observed. Certain cryptocurrencies are pushed up and down by irrational causes, such as a tweet from Elon Musk.
The majority of us are aware of Musk’s ability to move currencies such as Dogecoin and Bitcoin with a single tweet. One of these posts wiped $365.85 billion (Dh1.34 trillion) off the entire cryptocurrency market. Nonetheless, one peculiar pattern that everyone may agree on is that cryptocurrency collapses often occur on weekends.
Regulatory interventions are pervasive
The volatile character of the cryptocurrencies corresponds to the dynamic external variables, which influence their flow, adoption, and status as money or a commodity. It is no secret that regulatory interventions are pervasive in this industry.
Whereat one end of the spectrum, a number of countries have enacted a series of protectionist policies in order to restrict the flow of these currencies, preserving their authority over their financial markets. On the other end of the spectrum are those who have explicitly allowed their use and trade.
A few weeks ago, China has banned financial institutions and payment firms from offering cryptocurrency transaction services and cautioned investors against speculative cryptocurrency trading, including registration, trading, clearing, and settlement. This affected Bitcoin values, causing them to plummet significantly. Beijing’s actions were hardly its first against the digital currency.
China closed its domestic cryptocurrency exchanges in 2017, suffocating a speculative sector that accounted for 90 per cent of global Bitcoin trade. On the contrary, El Salvador became the first nation to formally recognize Bitcoin as legal tender in the country, allowing it to be used for any eligible transaction.
Prone to cyber threats
Additionally, being in the digital realm exposes the crypto industry to a slew of risks, most notably cyber-attacks, making it very vulnerable to security breaches. According to Group IB, a Russia-based cybersecurity firm, the industry incurred a total loss of $882 million (Dh3.23 billion) in 2017 and the first three quarters of 2018 as a result of cyber-attacks directed at it. To date, there has been no particular strategy for dealing with or potentially preventing cryptocurrency-related crimes.
When making a crypto investment decision, one may wish to consider alternatives to the soring cryptocurrencies, particularly in light of the aforementioned factors. Beginning the investment process with a currency that is inexpensive yet popular with a large circulating supply may be a wise choice.
Dogecoin still in infancy stage of growth
For example, Dogecoin has been around for seven years, and since it is still in its infancy, it has a lot of potential to grow owing to its rising popularity, which will ultimately result in a rise in its value.
Finally, investment in cryptocurrencies is a subjective one. Therefore, investing in them may be approached similarly to any other investment, which means thoroughly researching them and not putting all of one’s eggs in one basket. In other words, portfolio diversification and expenditure across different investment alternatives could also be considered.
In a nutshell, cryptocurrencies have taken over the headlines and our conversations, motivating many to invest a vast amount of money in the belief that this new gold represents the future without a thorough understanding of how they work and the critical factors that must be considered prior to making this decision.
Among these factors are cryptocurrencies’ supply structure, price volatility, industry dynamics, lack of pattern, and susceptibility to risks. Notwithstanding these considerations, investing in cryptocurrencies is a subjective choice that should be handled similarly to any other financial decision.