Crypto trading makes for a very polarizing topic. There are those who praise digital currencies for being an innovative and revolutionary form of money, and they have all the reasons to do so. Cryptocurrencies provide decentralization, safety, transparency, transactional freedom, and a variety of other advantages that people from all parts of the world can enjoy. On the other hand, we’ve got the crypto skeptics who warn about the risks and hazards associated with crypto use. They point out that these assets are extremely volatile and unpredictable, and some go as far as comparing crypto trading with gambling. The crypto market thrives on speculation, and that makes trading and investing feel like walking on quicksand. The Bitcoin price can change from one day to another, prompting losses or gains.
The reason there’s no consensus on this subject yet is that both parties are right. As much as we’d like digital currencies to be an ideal investment instrument and offer solutions to all our financial woes, they’re not perfect by any stretch. Cryptocurrencies are, in fact, a double-edged sword. For all the advantages they provide, there are also drawbacks to take into consideration. So, if you’re thinking about joining the crypto hype, you need to be aware of both the pros and the cons.
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The pros
While cryptocurrencies are often described as virtual money, they represent a brand-new asset class that’s completely different from anything we’ve ever seen before. Unlike conventional currencies, they have no physical representation, and they’re not regulated by a central entity like a bank or government. They only exist in the digital realm, running on a virtual peer-to-peer network secured by cryptography, which gives users full control over the management of these assets.
Given their innovative nature and unique features that set them apart from all other types of assets, cryptos provide a host of benefits to both professional traders and average individuals. So, here are the most notable advantages that crypto brings to the financial scene.
Earning potential
While cryptocurrencies are generally designed to serve as a payment method, given their novelty and volatility, they’re mostly used as a speculative form of investment. For example, traders and investors speculate on the Bitcoin price and sell or buy coins when the time is right in order to make a profit. The classic strategy is to check the price, buy when values are low, and then sell when prices surge again. This applies to all other cryptocurrencies available on crypto exchanges. The constant price movements in the crypto market give traders the possibility to generate large profits if their predictions are correct.
Decentralization
The blockchain technology that underpins cryptocurrencies allows for complete decentralization, eliminating the middleman from the equation. Intermediaries like banks and financial institutions are replaced by a trustless system in which transactions take place over a peer-to-peer network where each computer holds a copy of the ledger and validates the data before they’re added onto the blockchain, thus ensuring accuracy, security and immutability. For crypto users, this means they no longer have to trust a third party with the management of their assets and can take control of their financial lives.
Fast and easy transactions
The lack of a middleman to verify and approve transfers makes crypto transactions a lot easier and faster to process. This allows users to send and receive funds almost instantly and eliminate unnecessary waiting times. By comparison, fiat transactions take a lot longer to process and also incur larger fees.
Solution for the unbanked
For most of us, having a bank account or a credit card is something perfectly normal, but for people in underserved communities or remote parts of the world, access to basic banking services is a privilege. By the latest count, there are over 1.7 billion unbanked adults globally, a large percentage of them being women or less educated and poor individuals living in rural areas. Cryptocurrencies can address the inequalities in the financial system by allowing these people to send and receive funds quickly and safely via the internet and bypass bank and government restrictions.
The cons
Unfortunately, crypto trading is not always rainbows and butterflies, as some might assume. There’s also a less shiny part to the crypto world that has to do with the risks users expose themselves to and the way different crypto projects operate.
Volatility
While volatility can benefit crypto traders by creating opportunities for profit, it can also work against them. Unexpected changes in the market can lead to sudden price drops, and that can spell disaster for those who put their life savings in crypto. That’s why experts advise investing only a small percentage of your portfolio, preferably under 10%, in cryptocurrencies so that you don’t lose all your funds in one fell swoop if things don’t go the way you expected.
Energy consumption
Most cryptocurrencies in existence today are created through a process called mining, which is based on a proof-of-work (PoW) consensus mechanism. This means that miners have to solve complicated mathematical equations in order to verify transactions and add new data blocks onto the blockchain. The problem with these procedures is they use vast amounts of energy sourced from fossil fuels. While some cryptos like Ethereum have made important upgrades to address this issue by switching from PoW to a proof-of-stake (PoS) system, many digital currencies still use energy-intensive methods that are harmful to the environment.
Hacking risks
Cryptocurrencies are touted as being extremely safe and secure since the underlying blockchain technology ensures immutability and prevents double-spending. However, this high level of security is only inherent to blockchain technology but does not cover exchanges or crypto wallets. Therefore, like any other data that resides on the internet, digital currencies are exposed to hacking risks.
Getting into crypto is not as easy as some might think, as there are numerous factors influencing the market. Therefore, trading crypto successfully is often an act of balance that implies taking into account both the pros and the cons so that you can make sensible decisions.
