In recent times, there has been enormous interest in investing in cryptocurrencies such as Bitcoin, Bitcoin Cash, Bitcoin Gold, Ethereum, Ethereum Classic, Litecoin, Ripple, Dash, Iota, Monero, Neo, … Its high volatility, attempts to regulation, they generate great doubts about the future of these instruments but what is certain is that they also represent an opportunity to obtain benefits that makes the cryptocurrency market today on everyone’s lips.
In this article we are going to analyze in depth how this market works, what are the main risks of how to invest cryptocurrency, how we can keep them under control, what are the best options available to us to invest in these instruments, and the advantages and disadvantages of each of these options.
How to invest in cryptocurrencies
Another aspect that makes cryptocurrencies attractive is their scarcity. Without going any further, in the case of Bitcoin, a total of 21 million will be put into circulation. Once this monetary mass is on the market, it will no longer be possible to create more Bitcoins, which would for example be equivalent to having mined all the gold that exists on the planet.
Being a scarce asset, the market gives it value, it is the same principle that applies to gold and precious metals. In reality, Bitcoin has been compared to gold for a number of reasons. Among others we can mention:
- Is scarce
- It is immune to inflation
- Acts as an active refuge
- It is a store of value (it is a currency, digital but a currency after all)
- Even Germany in 2013 equated it to the yellow metal and it is known as gold 2.0.
Do these reasons justify its volatile ups and downs? The truth is that the psychology of investors, acting as a great mass and speculative positions also have a lot to do with this.
What can we say, financial markets work like this? When a market has attractive characteristics (or potential for appreciation) all investors jump in the end masse. This has happened with cryptocurrencies and will happen again in the future with other instruments. But, as a saying goes in the world of trading and investments:
In short, what goes up must come down and what goes down afterward must go up. Everything is a cycle of ups and downs. Long and short. Financial markets are almost always driven by expectations rather than facts.
What was the purpose of cryptocurrencies?
The first to see the light, of these assets that have become more popular, was Bitcoin in 2009. The objective of this creation was neither more nor less than to design a payment system outside the traditional (banking). Before the financial crisis lost confidence in the payment system and monetary authorities, to which they were harshly criticized for creating a bubble in the system.
Through Blockchain technology (chain of blocks), on which all cryptocurrency transactions are based, a mechanism was made possible to transfer funds without the need for a bank involved. Something unthinkable until the birth of this technology.
The puzzle was assembled, only one piece was missing; an asset beyond the control of governments. A currency that is not under the supervision of any central bank. In this way, independence was total. We are talking about a parallel system in which monetary decisions have no relevance. The market is the only one that dictates the rules.
Bitcoin, like the rest of this type of cryptocurrency, is nothing more than accounting entries in a digital book. Yes, the chain of blocks (Blockchain) is nothing more than a digital ledger that can only be altered when the participants of the chain give their approval.
How the blockchain works: Blockchain and Bitcoin?
The digital ledger is not susceptible to manipulation, the accounting entries that give rise to the transactions cannot be made unilaterally. Sounds good right? It could be thought (it is even thought) that this will be the payment method of the future. Thus replacing the exchange of currencies (euros, dollars, pounds, yen, etc.) as these currencies replaced gold. But the question is not so simple, the invention has not worked, so far, as well as expected.
What happened? In reality, cryptocurrencies also have their risks, some inherent to the technology they use and other risks that affect when investing in cryptocurrencies. This is the topic that concerns us today. As Sun Tzu says: “We must know the enemy in order to face him.” Go for it.
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