Risks and Rewards of Cryptocurrency

Cryptocurrencies have many distinct advantages of traditional currency. Some of these include independence from third parties, accessibility, transparency, and offer the potential for a huge return on investment. However, the disadvantages can heavily outweigh the good. Issues such as volatility, security issues, scams, regulatory fears, and how highly technical the field is can discourage people from even trying to invest.

Advantages

Let’s take a quick look at some of the advantages that cryptocurrencies offer.

Independence

All cryptocurrencies are not controlled by a single entity, such as a bank or a government. This allows the people that own the currencies to minimize or even eliminate fees that would normally be attached to a transaction. For example, a credit card has a transaction fee and moving currency from one bank to another might have a fee tied to it. Cryptocurrencies have no such fees with some minor exceptions.

Accessibility

When we say accessibility, we mean the level of openness these currencies have. For example, a bank operates within set hours which prevents buying or trading until the following day when they reopen. Cryptocurrency markets are open every hour, every day, anywhere in the world, and will allow transactions whenever the user likes. You can trade at 3 AM if you want to!

An added form of accessibility is that transactions with cryptocurrencies can happen in a matter of seconds (at least) or a few hours (at most, during peak traffic). A traditional bank may have a longer waiting period (potentially a certain number of business days) before a transaction is completed.

Transparency

Because these currencies are built on blockchain technology, all users have access to a complete list of every transaction that’s occurred and can audit them at any time. There’s minimal risk on fake transactions being inserted into the blockchain due to the cryptographic encryption being used.

Return on Investment

Due to the nature of cryptocurrencies, there’s a chance that your investment could result in a very large return. This is caused by the unstable nature of the crypto market. While the chance is there to strike it big; there’s also a chance that you could lose everything invested.

Disadvantages

Here’s a quick overview of a few of the disadvantages that cryptocurrencies have.

Volatility

As mentioned before, the volatility of cryptocurrencies can result in large returns on your investment. However, there’s an equally significant chance that you could lose your entire investment. The price changes very quickly and can be difficult to predict, unlike more traditional investment methods like the stock market.  While the stock market is also uncertain, the level of extreme fluctuations seen in cryptocurrencies less likely with stocks.

Security Issues/Scam Potential

While the blockchain is one of the most secure parts of cryptocurrency, the trading platforms that sell them could be malicious. Other users that are offering to sell crypto could be trying to scam you out of your money as well. There’s no protection or insurance associated with lost or stolen cryptocurrencies – so if they end up missing, you’re out of your investment.

Regulatory Fears

There are few regulations on cryptocurrencies right now, but that could change in the future and dramatically alter the value of these currencies. They could affect how cryptocurrencies are accessed or used, which could undermine the decentralized nature these currencies were founded on.

Highly Technical

Cryptocurrency is an extremely complex topic that can deter users from even learning about it. If you opt to store your crypto privately and something catastrophic happens, such as a virus corrupting your crypto wallet, your hard drive crashing, or losing your private key, your funds could be permanently lost and unrecoverable.

Conclusion

Cryptocurrencies are a very new technology and are very attractive to those looking to experiment with investing. It’s very important to be aware of the advantages they offer, including the ability to be independent of third-party control, be accessible at any time and any part of the world, be transparent to the user, and offer a high return on investment. As powerful as the advantages are, being aware of the disadvantages is just as important. The volatile nature of crypto can lead to large losses, the potential risk of scams and security issues from trading websites, the constant fear of regulation in the future, and the highly technical nature of crypto can discourage the average person.

Always thoroughly research the cryptocurrency you’re interested in committing to an investment!

Written by: Mike Klase