Since the price of Bitcoin broke the $ 7000 price level, the trading world has continued to be attracted to it. While Bitcoin may be the first cryptocurrency, it’s not the only one available. With over 1,000 types of cryptocurrencies available, what exactly is cryptocurrency and how can traders take advantage of it?
Cryptocurrency is a form of digital money that exists only in the realm of the internet. The difference with digital money that you use every day (cards and online national currency transfers) is that this type of currency is not issued by a bank or government.
Bitcoin and a large number of currencies, such as litecoin and ethereum, are created through a process called “mining”, while other currencies such as ripple and neo, are offered directly to the market. This currency is called pre-mine.
1. Privacy of transactions: Cryptocurrencies offer the possibility of privacy of transactions, which is the quintessence of economic liberalism, notes Mr. Filippas and explains that the Nobel Laureate (1976) Milton Friedman , a well-known exponent of liberalism several years ago, (1999) an “online currency” that will ensure complete anonymity and privacy. Also in the late 1970s, Nobel laureate Hayekadvocated for private currencies that could replace government-issued currencies (Hayek, 1976, The Denationalization of Money). Of course, blockchain technology and Bitcoin did not exist in the late 1970s, and even personal computers did not exist!
2. Expanding the means of trade: Cryptocurrencies are the “representation” of the digital age in which we now live, notes Mr. Filippas. “Once the right institutional framework is created and their extremely high volatility is reduced, digital currencies will be established as an alternative medium of exchange,” he added. How many of them will be retained will depend on the innovation and benefits they offer to consumers. Importantly, Bitcoin bridges the gap between people who do not have access to any formal form of financial system, giving them access to the global financial inclusion.
3. Cost reduction: In addition, the “competition” between cryptocurrencies, such as Bitcoin , Litecoin , Ripple , Ethereum etc. and the technological innovations they incorporate, such as Blockchain, are expected to work well for consumers, as the formal financial system will have to adapt by reducing the costs of traditional payment methods and commissions to pave the way for a new world. cashless economy.
4. High returns: The high risk of an investment is not necessarily bad, says Mr. Filippas and explains that, if there is awareness and proper information, an investor may decide to place a very small part of his investment portfolio (e.g. .x. 1%) in cryptocurrencies with the possibility of making high profits taking, of course, the corresponding – extremely high – risk.
5. The real value of Bitcoin is greater than the current one: At regular intervals, the developers who control the production of a cryptocurrency decide to change the mining process due to a technological upgrade or other reason. This results in the “fork” of the cryptocurrency (fork), which, however, has a different mechanics than that of the stock split. In the case of fork, cryptocurrency holders also get a new version of the cryptocurrency, so the real value of Bitcoin for example is higher than the current one, as those who have Bitcoin in their portfolio also have Bitcoin Cash and Bitcoin Gold , depending on when bought the cryptocurrency (Philip).
1. High volatility: Digital currencies are extremely volatile, as evidenced by the recent 46% dip in Bitcoin over the past two weeks, from $ 17,135 on January 6 to $ 11,697 on January 28 . This means that they can not, at the moment, function as a reliable trading medium, as its sharp fluctuation “scares” the trading parties and creates insecurity in the market.
2. Lack of institutional framework: One of the main disadvantages of cryptocurrencies, for a large portion of users, is that both their issuance (extraction) and their circulation are surrounded by a “mystery”, which is largely due to the lack of institutional framework . Institutions and heads of investment giants have, however, expressed the view that central banks should somehow regulate cryptocurrency transactions, which could also happen by controlling transactions at special exchanges.
3. Use in illegal activities: One of the biggest fears expressed by “crypto-skeptics” is that digital currencies are widely used for criminal activities, as with the use of appropriate techniques the “traces” of transactions disappear, such as the financing of terrorism. . This issue must be taken very seriously by the cryptocurrency community, points out Mr. Filippas.
4. Reduced reliability: Another weakness of cryptocurrencies is the lack of credibility, as they are not “normal” currencies issued by a central bank based on specific rules. In addition, they are not backed by an institution that can act as an emergency lender, such as a central bank. In any case, however, notes Mr. Filippas, credibility is something that is built over time and this is also true in the case of Bitcoin.
5. Lack of valuation : In order for an investment or even the use of cryptocurrencies to be secure, it is important that they be valued and valued, as is the case with stocks and bonds, for example. “The issue of valuation is important, as no one can currently know their exact (fair) price,” said Mr. Filippas. As he notes, there are still no cryptocurrency valuation models and the noise and ignorance that surrounds them cause confusion and disorient the investment and consumer public.