I remember everyone having a FOMO of Cryptocurrency, primarily during 2015-2018, when, whatever crypto currency one invested, it would usually grow multi-fold in just a couple of days. Back then, people had no idea what a distributed-ledger or a blockchain was. At its peak in 2017, when Bitcoin started wavering from $1000 to $19000, everyone jumped the gun putting all their investments in the crypto asset. Everyone knew jargon terms like pump & dump, HODL, whale, to the moon, etc but such a staggering 19 times growth in a year??? No one knew why… and frankly, no one cared.
But, a twist came in early 2018 when all crypto started crashing and no one knew why, and this time, everyone was worried. It turned out some had even taken loans to invest in crypto.
So let’s start with understanding what Cryptocurrency is:
Crypto or Cryptocurrency is a digital currency built on top of blockchain using cryptographic methods. Blockchain is a decentralized ledger where transactions committed in a certain period are verified and records maintained in blocks.
Why did it start?
The concept of cryptocurrency started in the 1980s when it was called cyber currencies, where they wanted to make a digital currency not controlled by any government. For apparent reason, the creators of such cryptocurrencies used to be anonymous.
However, it started gaining popularity after 2008 with the introduction of Bitcoin by an anonymous person/group named “Satoshi Nakamoto.” Satoshi published a whitepaper outlining a system for creating a digital currency that didn’t require trust in any third party. Right after he launched the Bitcoin protocol, he open-sourced it for general contribution.
Why is it popular?
Cryptocurrency has become a popular investment in recent years and for a good reason. The potential for high returns is undoubtedly attractive, and the underlying technology, blockchain, has the potential to revolutionize many industries. The wealth amassed there can’t be confiscated by any authority. Identity of the transaction is protected with blockchain technology.
Some of the popular ones include:
- Bitcoin (BTC): market cap $435 billion
- Ethereum (ETH): market cap $190 billion
- Binance Coin (BNB): market cap $47 billion
- Tether (USDT): Market cap $67 billion
- Cardano (ADA): Market cap $12 billion
Types of Cryptocurrency
There are multiple types of cryptocurrencies based on their use, formulation, code, application, and use case. Some commonly used categorizations include utility, exchange, payment, security, stablecoins, DeFi tokens, NFTs, and asset-backed tokens.
What are the risks associated?
Crypto is an extremely risky investment primarily because of its volatility. The price of Bitcoin, over the past five years, has fluctuated between $1K to $20K. Such volatility makes it difficult to predict how much a cryptocurrency investment will be worth.
Security is another critical risk associated with Cryptocurrency. Although the blockchain technology that underlies cryptocurrency is very secure, there have been some high-profile hacks of cryptocurrency exchanges. This means that there is a risk that your investment could be lost if an exchange is hacked.
Another important risk is lack of knowledge. Nobody knows how the price goes up and down apart from pump and dumb. It is even more significant that the value that accounts for the indicated price is unknown. Making it unpredictable.
Most importantly, it is not regulated, and instead banned in many countries. The usage of it is a subject of controversy in various fields, particularly in matters of money laundering, financial sanctions evasion, embezzlement, and terrorism funding, which makes it highly hazardous.
Conclusion
No doubt Crypto is an extremely high-risk instrument. However, there are some potential benefits to investing in cryptocurrency, such as generating attractive returns, decentralization, and secure financial transactions because of blockchain.
If you are considering investing in cryptocurrency, it is important to research and understand the risks involved.
Comparison to other Forms of Alternative Investments
There are several other forms of alternative investments that investors can consider. Some of these include:
Stock market: If you are in for a long-term investment of say at least 5 years, invest in any 10 stocks, and chances are it will give you a prolific return. Some claim to have doubled their investments, while others say it could give you a CAGR of at least 11-12%.
P2P lending: P2P lending in India has also shown a proven record over the last 8-10 years. Most of them claim to be giving an annual return of up to 12% p.a. for a minimum investment of about 10K and a max of up to 50L. A benefit of this instrument is you are not liable for any income tax, or TDS, until your income is realized. Further, the segment is regulated by the RBI, which makes it credible, unlike crypto.
Dipesh Karki
Dipesh is the Co-founder & CTO of LenDenClub. He is responsible for developing tech and product strategies that make the company's vision a reality. He has used his technological expertise to mentor a team of young professionals to build the entire technological framework, which currently caters to millions of stakeholders.