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Is cryptocurrency a good investment? That's a great question. It seems the past couple of years a lot of people have become obsessed with this new concept of cryptocurrency. Even if they don't completely understand it, people will literally bet the house on it. Best of luck to that guy.
People get so wrapped up in the moment just because the value of Bitcoin or whatever hot new coin there is at the time is rising in price, they'll fail to recognize they're literally gambling.
What is cryptocurrency?
It's basically a digital or virtual currency that uses cryptography for security purposes. That's it. Nothing more.
That's literally all it is in its most basic form. It's nothing more than a virtual version of dollar bills. There's obviously more to it that I plan on writing about in another post (i.e. smart contracts, lack of transfer fees, quick remittance, etc.). But, the currency isn't backed by anything as of right now (i.e. the dollar, gold, etc.), and there's hardly any social proof or acceptance of it as real payment.
Which is really all that any form of money is when you stop and think about it. The only reason why we use green bills and coins is that we all accept it as money. If we accepted different kinds of seashells instead, then that would be the common currency. It all depends on our view of something as being an acceptable form of currency.
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How is cryptocurrency used?
For the beginner, it's very confusing because it's unlike anything you've ever seen before. You're probably better off reading a couple of beginners books on cryptocurrency and learning what a blockchain is before you even try to get involved (which I, for the record, do not advocate at all getting involved with). The original intention of it was to be a decentralized unit of currency, meaning there is no central authority overlooking it, it's run by the people who own the cryptocurrency itself.
At first glance, it seems kind of similar to a stock exchange in that you can buy a certain amount at whatever price the virtual coin is valued at, but also somewhat like Venmo when you want to transfer money to another person or entity. However, when you buy a certain amount of whatever cryptocurrency it is that you want or also if you transfer it, a specific key to that amount is created and is recorded in a consecutive string of data on what's called a blockchain.
Who is it targeted towards?
It was originally targeted towards whoever wanted to break away from regulated currency into a peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without going to a financial institution, like a bank.
Typically, ideas like this are for the early adopters who are very into new technology ideas and are open to being the first people to use it. From my experience, it seems to be the younger generation who initially accepts the new ideas and then brings it to the rest of the population. This idea of removing the middleman (i.e. the bank) arose from what happened during the financial crisis.
The only thing about cryptocurrency though, is the younger people adopting it don't seem to quite understand why people wouldn't use it. Yes, you can transfer money without a bank's permission.
But it can also lose it's value overnight. What if the money you've been saving, for a house, was in a savings account for the past five years? You then decide you don't want to deal with the bank potentially freezing your account for an uncharacteristically large sum being taken out on the day you need to make the down payment.
Instead, you decided to store all of your savings in Bitcoin so you don't have to deal with the lag time that's normally associated with a bank. You also put all of that money into Bitcoin when it was valued at $20,000.
Okay, well as of today, you'd be out of luck. That downpayment would shrink to about 40% of what it was then.
That's what these people advocating for it to be a place to store your money fail to understand.
Pros and Cons of Cryptocurrency:
- You can potentially make a lot of money if you're gambling on the value rising
- Sending payments is quick and easy
- All transfers of money are recording on the blockchain, which is essentially a digitized recording of all previous transactions
- You don't need a bank, you only need an Internet connection and a smartphone
- Your account can be hacked and you could lose all of your money, nonrefundable
- It's not necessary for developed countries, at least for now, because there are so many banks
- It's extremely volatile, you can lose your entire amount at a moment's notice
- Cryptocurrency isn't accepted as a modern form of payment in almost every place you look
Who would use cryptocurrencies?
Realistically, the only people who would use cryptocurrencies are those who are in developing countries. These countries are ones that don't have a central bank, there are no commercial banks located near their homes, and the countries government is corrupt, stealing from their own people. They misappropriate funds that should have otherwise been designated for infrastructure, citizens, etc.
As of now, there is a severe lack of banks in Africa.
With a complete lack of digital infrastructure and a lack of banks, you would think people living in Africa would have little to no resources to transfer cash around right?
Well, yes and no.
They cannot by the traditional means of opening a checking account at the nearest TD Bank. They can, however, transfer money through the means of their phones.
Enter M-Pesa, the mobile money platform. The company started from nothing, and now holds the equivalent of nearly 50% of Kenya's GDP. It's operating in Kenya, Tanzania, India, Lesotho, Republic of the Congo, Ghana, Mozambique and Egypt.
Even though the entire continent missed out on the tech boom in the '90s and early 2000s and the early laying of fiber optics, almost everyone has a cell phone. Because of this, they were able to completely skip that early phase of Internet technology development and move right on to mobile. Since there is a complete lack of banks, but cell phones with Internet service is available at a cheap price, Africa has the best chance of making cryptocurrency a real lasting idea.
In some cases, there isn't a bank around for 30 miles. In Ethiopia, there is a bank for one in 100,00 people. That's not feasible. It makes much more sense to simply use your cell phone to transfer money instead.
And for ex-pats who still have relatives in developing countries (i.e. in Africa), using Western Union and other intermediary services charge tremendous fees, sometimes equating up to half of the individual's paycheck. Using a mobile payment service through cryptocurrency for these people makes much more sense because they can save so much money avoiding the fees, sending money in a fraction of the time.
Cryptocurrency Can't Be Viewed as an Investment
It doesn't make sense to use cryptocurrency as an investment though. You can't invest in something that doesn't produce anything. It just won't work out for you, it doesn't actually produce anything that's real.
At the end of the day, these digital currencies simply are that: a digital coin. You invest in companies because they produce goods, a service, literally anything.
A cryptocurrency doesn't produce anything. It's not a service. It acts as a gambling device for the most part and people seem to either have no problem with this or don't understand the difference between investing and gambling. When the price of Bitcoin kept going up for no apparent reason other than speculation, it kept getting more air time on the news. This, in turn, caused more people to feel like they were missing out and needed to get in.
Get into what, they hardly had any idea. All they knew was more people were getting involved, Bitcoin was being shown on the news more, and the vicious cycle continued.
One of my fiancé's friends bought Bitcoin literally about three months before the high. I don't know how much she put in, it probably was hardly anything, but I never heard her mention it and needless to say, it's worth next to nothing now if she still has it.
Aside from Bitcoin or any cryptocurrency not producing anything, it's much too volatile for anyone to put a major stake of their net worth in it without being at huge risk of losing everything. One day some cryptocurrency you invest in is up 150% for some odd reason that nobody can explain, and before you know it, a year later it's down 80% because a brand new cryptocurrency has been created that's deemed faster and has more functionality than the former.
Which brings me to my next point:
We are in the early stages of a brand new technology
10 years ago, hardly anyone had ever heard of Bitcoin or the blockchain or knew what a cryptocurrency was. It was completely foreign to even the most tech-savvy people. Revolutionary technology takes a long time before it's adopted by the mainstream. There's a bubble, it pops, and then people adopt the technology years later.
In the book The Second Machine Age, they report three new technologies came onto the scene between 1870 and 1900: electricity, the internal combustion engine and indoor plumbing with running water. These new technologies were so innovative at the time that it took a full 100 years to have their main effect on society.
And more recently, the creation and development of the web and e-commerce after 1995 was more or less completed in its essence by 2005. Look at what we have today between Amazon and now the new wave of service apps that seem to pop up every year in our smartphones.
Think of how many companies beforehand were started that aren't even around today: Pets.com, Webvan (online grocery delivery), etoys.com, or most recently look up any solar company stock or 3D printing stock. The list is endless.
Now we have Uber, Lyft, Postmates, Doordash, all of these service apps that didn't seem possible back then.
The same thing is happening now.
Comparisons are being made between the tech boom and bust and boom to the current cryptocurrency boom and bust.
I'm not necessarily saying the concept of cryptocurrency will mature and become ubiquitous, but I do believe the technology behind cryptocurrency, the blockchain has tremendous potential which I can write about in another post.
Startup companies were pouring money into fiber for years during the '90s and early 2000s. Pretty much all of them either went bankrupt or were acquired. Although these original companies disappeared, all of these fiber networks created an information superhighway. The dotcom crash came soon after, but the companies were then bought out by the Googles, Verizons, Facebooks and now these fibers are still being used today by Netflix, YouTube, etc.
Considering what we've seen in the past with brand new technology like the Internet and fiber optics, I wouldn't say never to cryptocurrency and certainly to blockchain technology. I just would say never to cryptocurrency as an investment the way people view stocks and bonds as investments. The only real environments cryptocurrency will have a place of use is for developing countries that lack the resources to acquire and save money through other financial institutions.
Stick with the basics of investing in the stock market. If you don't know much about stocks, look up what an index fund is and put your money in an S&P 500 index fund until you're ready to retire. That's the safest bet with the best reward possible if you don't know what you're doing. Otherwise, go for it and start with my recommendations.
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