Advantages and disadvantages
There are lots of significant advantages and disadvantages to consider before investing in and trading in bitcoin. Let’s take a closer look at both of these points in this section, as it will clear up many of your worries.
- Potential for high Reward – There are more than 10,000 cryptocurrencies on the market today and each one has its own particular quirks. But all cryptocurrencies have a few things in common—like their tendency to experience sudden spikes (and drops) in value. Prices are driven primarily by the supply of coins from miners and the demand for them by purchasers. And these supply-demand dynamics can result in hefty returns. The price of Ethereum, for example, roughly doubled from July 2021 to December 2021—quite the payday for investors who got on board at the right time.
- Advance and more transparent financial system – By and large, our financial system revolves around third-party intermediaries who process transactions. This means that if you make a transaction, you’re placing your trust in one or more of these intermediaries—and the recession of the early 2000s made a lot of people wonder if that was a good idea. The blockchain and cryptocurrencies offer an alternative. They can be viewed by anyone, anywhere, so you can take part in the financial markets and make transactions with no intermediaries whatsoever.
- Secure through Block Chain technology – Some of the major benefits of cryptocurrencies aren’t linked to the currencies themselves, but to the infrastructure that supports them. That’s the blockchain—the decentralized data-storage ledger that tracks every transaction undertaken on it. Once you make an entry in the blockchain, it can never be erased. And with the blockchain stored decentrally across multiple computers, no hacker can access the entire chain in one go; any information stored in it is safe for good.
- Market is always Open – Another advantage that cryptocurrencies have over banks is that the crypto markets are always open. With coins being mined and transactions being recorded around the clock, you don’t have to wait for the NYSE, NASDAQ or any other exchange to start trading for the day if you want to buy, sell, or trade crypto. This has made such an impact that regular stock exchanges are looking into the option of trading stocks outside of regular banking hours as well—although that might still be some way off. So, for investors who are on the go 24/7, crypto might the best way to generate returns outside of normal working hours.
- Help investor to beat inflation – Cryptocurrencies aren’t tied to a single currency or economy, so their price reflects global demand rather than, say, national inflation. But what about inflation of cryptocurrencies themselves? As an investor you can rest easy, for the most part. The number of coins is capped, so the amount available can’t spiral out of control, thus, no inflation. Some coins (like Bitcoin) have an overall cap, others (like Ethereum) have an annual cap, but either way, this approach keeps inflation at bay.
Disadvantages of cryptocurrency
1. Stability Issue – You could be forgiven for thinking that digital currencies operate at lightning speed—and they do, up to a point. But at a certain level they run into major issues which make it difficult to roll them out on a large scale. Cryptocurrency providers themselves admit this is an issue, with the people behind Ethereum saying that the blockchain has reached “certain capacity limitations” that slow the rate at which transactions can be processed. This can be a frustrating experience for transaction participants, to say nothing of the potential financial losses it can cause.
2. Cryptocurrency takes time and effort – Cryptocurrencies can take a while to get your head around. If you’re not a digital native, the concept of cryptocurrency (let alone the blockchain) can feel anything but second nature. And trying to invest in something you don’t really understand is itself a risk. There are plenty of online resources available to help you but you’ll still need to dedicate some time to truly understand the pros and cons of investing in cryptocurrency.
- Extremely volatile investment – While the price of a cryptocurrency can spike to dizzying highs (with associated benefits for investors!) they can also crash to terrifying lows just as quickly. So if you’re looking to make stable returns, this might not be the best bet. The cryptocurrency market fundamentally thrives on speculation, and its relatively small size makes it more vulnerable to price fluctuations. That in turn can wreak havoc with the value of coins—one of the major disadvantages of cryptocurrency.
- Uncertainty in Crypto future – While cryptocurrencies have become widely known and are still gaining in popularity, it’s worth remembering that they have only been around for just over a decade. The concept only really emerged with the publication of a white paper on Bitcoin in 2008. Stock markets, in contrast, can look back on centuries of history. The London Stock Exchange, for example, was founded in 1801. Gold has been a proven custodian of value for millennia. But cryptocurrencies? Nobody really knows what will happen to cryptocurrencies in the future—and you need to be brave to enter these uncharted waters as an investor.