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Cryptocurrency

By Preukopim Salihi

The concept of a digital asset was still unfamiliar to most Americans when I first wrote about bitcoin in 2018. Some of my children’s friends were getting excited about Bitcoin trading, but I didn’t think of cryptocurrencies as a serious investment or something I would promote to others.

Cryptocurrency has become considerably more mainstream in recent years, yet it remains divisive, with both fervent advocates and detractors. On one hand, investors such as Elon Musk are outspoken about their ownership of Bitcoin and see it as the way of the future. Warren Buffett, who famously labeled cryptocurrencies as “rat poison squared,” is squarely on the other side.

What is a cryptocurrency and how does it function?

Cryptocurrency is a type of digital currency that allows you to send money to other people or businesses over the internet without having to go through a middleman like a bank. These transactions are recorded on a blockchain, a public ledger that is maintained and replicated on thousands of computers around the world. This basically implies that when you buy Bitcoin, it makes an entry in the blockchain ledger, which is publicly accessible but not modifiable. This is how the system intends to maintain a high level of accountability and transparency.

Bitcoin, Ethereum, Dogecoin, and Tether are just a few of the thousands of cryptocurrencies available today. You can buy cryptocurrencies or “coins” in a variety of ways, including paying cash for them on an exchange like Coinbase, exchanging products or services for the currency, or buying them through a Bitcoin ATM like the one you might see in a gas station or convenience shop (similar to a bank ATM). You could download a bitcoin wallet and start trading.

You may also be familiar with Initial Coin Offerings (ICOs), which entail an investor purchasing cryptocurrency coins (also known as tokens) that may subsequently be swapped for fresh cryptocurrencies after the firms develop their own “coins” to sell to investors. It’s vital to note that such offerings aren’t registered with the Securities and Exchange Commission. No one has the ability to approve or disapprove of a new coin launched by a startup.

Although cryptocurrencies may appear to be cutting-edge, digital currency has existed in some form or another for many years. Digital currency includes airline frequent flier miles, hotel points, and credit card points, among other things. The rewards you get from these programs aren’t in dollars; instead, they’re in the company’s own currency. As a result, many of us are already familiar with digital money. Cryptocurrency is just a newer—and more complicated—form of money.

Extreme price volatility should be avoided

We’ve all heard stories about people making huge sums of money using cryptocurrencies, but that’s only part of the tale. Consider the case of Bitcoin. When Bitcoin was first introduced in 2010, the cost of a single coin was $0.01. From $975 in March 2017 to $20,000 in December, it increased by more than 1,900 percent. In 2021, between January and April, Bitcoin gained over 100 percent, reaching a peak of $60,000. However, over the next two months, it plummeted 50%, wiping away all gains for anyone who hadn’t purchased it before 2021.

Bitcoin and other cryptocurrencies have no inherent value, which contributes to their extreme volatility. They’re also not backed by a government or central bank, unlike other traditional currencies. As a result, their cost is solely determined by supply and demand. As their worth rises, their success (typically fueled by social media) attracts additional investors, driving up prices. On the other hand, a single negative occurrence, such as a tweet, can quickly drive prices down.

Recognize the dangers of fraud and cybercrime

Even though cryptocurrencies are designed to be theft-proof, fraud and cybercrime are very real possibilities. Mt. Gox, the largest Bitcoin exchange at the time, experienced a security breach in June 2011 that resulted in the theft of $450 million worth of Bitcoin. In January of this year, hackers broke into the cryptocurrency exchange Coincheck Inc. and stole about $500 million.

Furthermore, bitcoin has been linked to the less savory aspects of finance, including as money laundering, the black market, and ransomware attacks, due to its inherent anonymity. The FBI was happily able to recover the majority of the stolen assets following the Russian ransomware attack on Colonial Pipeline.

On a more personal level, if you forget your cryptocurrency exchange login ID or password, or if they are taken in a hacker or phishing scam, you may lose access to your virtual wallet and your money. Unfortunately, because cryptocurrencies have no issuing or governing government or institution, there is no redress in the event of fraud or theft. If a bank or credit union collapses, your savings are usually protected by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund. Virtual money accounts, on the other hand, are not protected in the same way.

Take it slowly and carefully

As long-time readers know, I believe that everyone should tailor their investment portfolio to meet their specific needs, taking into account their objectives, time horizon, and risk tolerance. As a result, I’m not going to encourage people to stay away from Bitcoin entirely. However, for the reasons stated above, I believe Bitcoin to be a speculative asset, putting it at the extreme risk end of the risk continuum.

If you’re a seasoned investor with a well-diversified portfolio, a willingness to accept risks, and a long-term investment strategy, you might consider dedicating a modest amount of your holdings to cryptocurrencies (no more than 1%).

On the other hand, I’m raising a red flag if you’re a new investor who is enticed by cryptocurrency just because of its hype or because you want to earn a quick profit. Instead of jumping on the cryptocurrency bandwagon, I recommend taking a step back and learning more about traditional assets like equities, bonds, and cash, as well as classic investing fundamentals. Only then, and hopefully, only with money you can afford to lose, should you try trading bitcoin.

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