Why cryptocurrencies are the new trending investment?
Financial crises arguably gave impetus to cryptocurrencies. After all, it was shortly after the collapse of Lehman Brothers in 2008 that the enigmatic Satoshi Nakamoto published a paper on a cryptography mailing list describing a new digital currency. Soon after, the initial digital currency software known to us all as Bitcoin was released. The implications of this development were unprecedented in the financial world and set in motion a chain of events that have ushered in a new era of investing.
Cryptocurrency is created by generating computer code and assigning ownership and value to it. Bitcoin for instance, which was the first major cryptocurrency, was created by a series of highly complex mathematical formulae run on computers with considerable processing power. By addressing problems such as double spending which had previously stifled attempts at establishing a functional digital currency, Bitcoin quickly gained legitimacy.
Cryptographic processes and sequences make it impossible to duplicate a unit of cryptocurrency once created. In addition, many cryptocurrencies have a limited number of units that can be created, and there is no single trusted third party in a cryptocurrency network. The decentralized system of verification, coding transaction recording and ledger keeping is dependent on the consensus of huge numbers of cryptocurrency miners and coders which makes it almost incorruptible.
The crypto mechanism
A cryptocurrency relies on a core component called a blockchain which is the underlying protocol that ensures an impenetrable transaction verification system which prevents fraud. Blockchains consist of the key parts:
- Block — transactions listed in a ledger including amount, time period, and number of transactions.
- Chain — every block has a hash of the previous block chained to the previous one and this hash computed by a node mathematically links the blocks together.
- Hash — cryptographic hashing creates a unique mathematical signature from data in a preceding block.
- Network — the network is comprised of full nodes which functions as a mechanism running an algorithm that makes the network secure.
Blockchain is distributed across all the nodes in the system which means a cryptocurrency’s blockchain database doesn’t exist in one central location and does not fall under a single authority. Cryptocurrency in essence is simply a digital file which lists various accounts and values as is the case with most ledgers. Copies of this file exist on every node in the network. People maintain ledgers for sending and receiving sums and also for helping maintain the system for which they are compensated through the mining protocols.
All functions of a cryptocurrency system are carried out by the network of users with creation, distribution, and acquisition performed within the basic rules of that particular cryptocurrency. Users then work to ensure that the network functions properly.
Cryptocurrency as an investment opportunity
Cryptocurrencies have become a force to be reckoned with and the trend seems to be heading in an upward trajectory at least for the foreseeable future. The virtual currencies aim to reduce transaction costs and improve processes in the digital domain by introducing solutions which eliminate decades-long challenges associated with dated economic models based on brokerage, borders, and even customs that impede growth in the global economy.
This new dynamic is set to disrupt the status quo in which we currently have most financial assets including stocks, deposits, funds, and derivatives only existing as digital records held by central or private financial institutions. Cryptocurrencies have by far become the hottest investment product as they are seen as immutable and exchangeable cryptographic token promises that will revolutionize the world of money and currencies.
There are a number of ways of building a cryptocurrency portfolio. Some of these include:
- Making purchases on exchanges such as Coinbase and storing the crypto using online wallets or hardware wallets.
- Mining currencies by participating in the blockchain networks for the desired cryptocurrencies.
- Growing digital currency portfolios through staking which is the Proof of Stake version of mining.
- Arbitraging which involves buying and selling cryptocurrencies by taking advantage of price movements and or differences in rates on different exchanges.
- Selling goods and services and accepting cryptocurrencies as methods of payment.
Why Invest in blockchain businesses?
Cryptocurrencies have definitely asserted themselves as the next big investment technology. They are quickly emerging from the depths of algorithmic mystery and gaining prominence and wider acceptance by the day. They represent a new form of asset acquisition and distribution and several blockchain-based businesses including NapoleonX are already creating new and unique ways of managing assets digitally.
Since the cryptocurrency market is still in the early growth stages, many speculators are convinced there is sizeable room for making good returns through investing in crypto by either buying or holding in hopes of token value increases as the currencies start having proven use cases or by taking part in ICOs. An Initial Coin Offering is a way for crypto startups to fund the development of their product or platform by selling their underlying crypto tokens in exchange for cash or other cryptocurrencies in a crowdsale. The ICO coins received are digital tokens that can be used within the product or platform being developed or sold on crypto exchanges.
If you are considering investing in cryptocurrencies, you should treat your investment activities with the same caution that you would exercise when engaged in any other highly speculative venture. As much as there are rewards in cryptocurrency investing, there are also considerable risks which should never be ignored.
Cryptocurrencies can be susceptible to huge price swings which makes them high risk investments in general. Many investors view investing in crypto as a way to hedge their net-worth against the fall of the world reserve currencies such as the US dollar which many people predict to be facing an impending collapse.
How to Invest in cryptocurrencies
The cryptocurrency market never sleeps. It’s ongoing 24/7, and that is why some people have opted for automating their investing strategy using limit orders, stops, or trading bots. NapoleonX for example, is focused on tokenization of real-world assets and is creating the first crypto-fund whose investment strategy shall be governed by trading bots.
Acquiring cryptocurrencies is mainly done through exchanges. There are essentially three main types of cryptocurrency exchanges you can access:
- Direct Trades — people meet and trade directly through various means;
- Trade Platforms — buyers and sellers connect on websites where the host charges a fee per transaction; and
- Brokerages — interested parties buy crypto at set prices.
Once you have acquired your cryptocurrency, many experts advise storing them off the exchange in a hardware wallet for example. But should you choose to use an exchange to store your coins and for trading, it’s best to ensure that you know who the owners of the exchange are, how long they have been operational, what their credentials are, their reputation based on reviews about their practices, so many other factors which need to be considered in order to minimize risk.
This piece simply explores the scope of cryptocurrency as a new investment phenomenon and should not be taken as investment advice.