Whether you like it or not, cryptocurrency is now everywhere. In the past, cryptocurrency was seen as an investment for traders only. But now many corporate companies and hedge funds are now investing in cryptocurrency especially Bitcoin. Many companies like Square, Paypal, are now integrating cryptocurrency in their platform for payment services.
Why Cryptocurrency is Created
After the financial crash in 2008, Bitcoin, the first cryptocurrency, was created. The dream is to remove fiat money supply across the world and sidestep the financial institutions that govern the movement of it.
Since the creation of Bitcoin, the cryptocurrencies have multiplied. There are several bitcoins in circulation now like Ethereum, Libra, Litecoin, etc.,.
More than 10 years after its creation, still the dream is not achieved but slowly made some progress with gaining popularity among the investors.
However, this dream may not even be achieved at all as several countries clamp down cryptocurrencies with a ban.
How Cryptocurrency is Created
Cryptocurrency is created digitally with the mining process. In other words, cryptocurrencies are nothing but software code.
Every function of the cryptocurrency right from record of transaction to how its data is stored is dictated by a code.
It uses blockchain technology, a type of database to store the transactions. Cryptocurrency are not hosted on a centralised server. Instead, it is hosted on people’s computers.
To create a new coin, it requires software on a computer to solve complex mathematical problems and add the transaction to blockchain. This whole process of mining consumes a lot of energy.
25 Bitcoin is created every 10 minutes and the creator of Bitcoin, set the upper limit as 21 million. The last bitcoin is expected to be created in 2140.
Future Outlook for Cryptocurrency
The future of cryptocurrency such as Bitcoin is much of a debate. Some experts say it is a Ponzi scheme while others say the rise of it is inevitable.
Although there is a steady increase in the number of businesses accepting merchant transactions and some companies like Tesla investing in Bitcoin, they are still a minority.
It needs to be broadly accepted among consumers to consider it as currency. It is becoming a part of the mainstream financial system and is too ambitious.
Mainly due to the issues it creates on the other side of the world such as money laundering, weapons purchase, smuggling, etc.,.
However, it is indeed a digital gold. The price of Bitcoin rocketed to $60000 in April 2021. From an investment returns point of view, Bitcoin can provide good returns but not without the risk.
Risk in Cryptocurrency Investments
Soon after Bitcoin reaches $60000, it plunges to lose half of its price. Volatility of bitcoin is a huge risk for investors.
It is always thrilling to get a high return with a low investment but it is a wild ride, not many people would want to be on.
Apart from volatility, there is a big risk of losing all your money due to hacking. Companies like Gemini and Coinbase do not offer the high level of security and stability that traditional companies such as Vanguard and Fidelity have.
Unlike stocks, crypto has no intrinsic value. Experts call it a fool theory that requires a greater fool to buy the cryptocurrency than the price you paid.
Should You Invest in Cryptocurrency for the future
Considering the risk it possesses, why would one invest in cryptocurrency like Bitcoin? Of Course for the high returns it can provide to the investor.
However, diversification is another reason investors claim to add crypto to their portfolio. The below table shows crypto has a low correlation with traditional assets such as oil and gold and as well stocks and bonds markets.
You can add crypto to protect your portfolio from the equity crashes. However, do not ignore the volatility risk of Bitcoin.
Although Bitcoin has potential to gain massively (as well as lose massively), you should invest in it only if your stomach can handle that kind of volatility of cryptocurrencies.
In other words, Cryptocurrencies like Bitcoin are more of a risky asset and even a speculative asset.
For an index fund or passive investor who always wants to avoid active buying and selling of the assets, Bitcoin is not an investment to add in your portfolio.
Cryptocurrencies to become part of the mainstream financial system is too aspirational. This may or may not happen. The possibility of it can increase when more and more companies and consumers adopt cryptocurrency like Bitcoin.
This does not mean you will have to invest in it to avoid the fear of missing out. Companies like Tesla which is part of S&P 500 adding Bitcoin to their balance sheet means you will indirectly own it whether you like or hate it.
If you want to directly own it for diversification or the returns or just for fun, start with a small investment which you can afford to lose.