Advantages of cryptocurrency
Cryptocurrencies have the potential to transform the financial world as we know it today. Finally, they challenge the traditional financial infrastructure. But what are the pros and cons of cryptocurrencies? How do you decide which cryptocurrency is best to invest in? Or whether you should invest in this asset class at all?
If you don't quite understand cryptocurrencies yet, that's no problem. In this article we will show you the advantages and disadvantages of cryptocurrencies. This way you will find out everything you need to know.
(5) advantages of cryptocurrencies
Even though cryptocurrencies are a relatively recent phenomenon (Bitcoin, for example, has only been around since 2009), they will definitely catch on. The crypto world has a lot to offer: from the prospect of high returns to trading in a very secure, transparent infrastructure 24/7 - you just have to know how to take advantage of the offer.
1. High risk - and the potential for high returns
There are more than 10,000 cryptocurrencies on the market today, and each one has its own unique characteristics. But all cryptocurrencies share a few traits — such as their tendency to suddenly appreciate (and lose) in value. The courses are mainly determined by the supply of mined coins and buyer demand. And this dynamic of supply and demand can lead to very high returns. Example: Ethereum price almost doubled from July 2021 to December 2021 - a bonanza for investors who jumped in at the right time.
2. Blockchain technology is fundamentally secure
Some of the most important benefits of cryptocurrencies are not in the cryptocurrencies themselves, but in the infrastructure they are built on. The so-called blockchain is a decentralized, digital cash book. It records every transaction that is carried out in it. Once an entry has been created in the blockchain, it cannot be deleted. And because the blockchain is stored decentrally across multiple computers, no hacker can access the entire database at once. In this way, all information stored on it is secured forever
3. The financial system of the future is fairer and more transparent
Broadly speaking, our financial system is built around intermediaries who execute transactions. So you trust one or more of these intermediaries for a transaction. However, the recession in the early 2000s caused many people to question whether this is really such a good idea. The blockchain and cryptocurrencies offer an alternative for this. Anyone can see them anywhere, so you can trade and make transactions in the financial markets without intermediaries.
4. Cryptocurrencies are traded 24/7
Another advantage that cryptocurrencies have over banks is that the crypto market is always open. Coin mining takes place around the clock and transactions can be booked at any time. So you don't have to wait for the Frankfurt Stock Exchange, NYSE or any other exchange to start trading for the day when you want to buy, sell or trade cryptocurrencies. This development had such a major impact that even normal stock exchanges are now examining whether stocks can also be traded outside of regular bank opening hours - although it could take some time until then. Therefore, for 24/7 investors, cryptocurrencies could be the best way to generate returns outside of normal trading hours.
5. Cryptocurrencies could help investors counteract inflation
Cryptocurrencies are not tied to a single currency or economy, so their price reflects global demand rather than national inflation, for example. As an investor, you can rest easy – at least almost. The number of some coins is limited, which is why the available amount cannot get out of control and inflation does not occur. Some coins (like Bitcoin) have a cap, others (like Ethereum) have an annual cap – but no matter how the cap is calculated, it tends to keep inflation in check.
(5) disadvantages of cryptocurrencies
Well, that all sounds great, but is the outlook for cryptocurrencies really that bright? Now let's look at some disadvantages. Some are easy to deal with, others less so - but it's always good to keep them in mind.
1. Understanding cryptocurrencies takes time and effort
It may take a while to figure out what cryptocurrencies are really about. If you are not a digital native, you may not become familiar with the concept of cryptocurrencies (and especially with the blockchain) at all. And trying to invest in something you don't really understand is a risk in itself. There are plenty of resources online at your disposal (including N26's cryptocurrency blog series ). But you still need to spend some time to really understand the pros and cons of investing in cryptocurrencies.
2. Cryptocurrencies can be an extremely volatile asset
While the price of a cryptocurrency can climb to dizzying heights (with the attendant benefits for investors), it can also quickly plummet to shockingly low levels. So if you're looking to generate steady returns, this investment probably isn't the best option for you. The crypto market basically thrives on speculation, and its relatively small size makes it more vulnerable to price fluctuations. This in turn can damage the value of the coins - one of the biggest disadvantages of cryptocurrency.
3 . Cryptocurrencies haven't established themselves as a long-term investment—yet
While cryptocurrencies are becoming more well-known and popular, let's not forget that they've only been around for a little over a decade. The concept only became known with the publication of a white paper on Bitcoin in 2008. Stock markets, on the other hand, have been around for centuries. For example, the London Stock Exchange was founded in 1801. Gold has been considered a store of value for thousands of years. But cryptocurrencies? Nobody really knows what will happen to cryptocurrencies in the future - and as an investor you need to have the courage to enter this new territory.
4. Cryptocurrencies have serious scalability issues
You might think that digital currency transactions happen at the speed of light—and they do, up to a point. But at a certain level they are reaching their limits, making it difficult to implement them on a large scale until now. Even cryptocurrency providers admit that this is a problem. For example, those behind Ethereum confirm that the blockchain has reached “certain capacity limits” that throttle the speed at which transactions can be processed. This can be a frustrating experience for the transaction participants - not to mention the potential financial losses it can lead to.
5. Crypto newbies are vulnerable to security risks
Cryptocurrencies may not pose the risks associated with using centralized intermediaries – but that doesn't mean they don't have security issues at all. As a cryptocurrency owner, you could lose your private key that gives you access to your coins - and thus your entire inventory. Cyber criminals also attempt to gain access to cryptocurrencies through hacking, phishing, and other means. Experienced investors tend to pay attention to this - but inexperienced newbies need to be wary because they are often less well prepared.
Which cryptocurrency should I buy best?
There is no particular cryptocurrency that is significantly better than all others. It all comes down to personal preference, but there are things you should pay attention to. Think about your individual risk tolerance; can you afford to lose a large chunk of your investment if your chosen coin falls in value? Do you only use the coin to generate returns, or do you also want to use it for payments? Is it just about the money, or do you want to invest in a coin with social or environmental goals? For an easy start, it is best to choose the market leader, Bitcoin. This is the very first cryptocurrency about which there is also the most information.
What are the pros and cons of Bitcoin?
Bitcoin, traded under the abbreviation BTC, offers a number of benefits. It's capped at 21 million coins, it's proven inflation-proof, and its upside potential offers investors good opportunities to generate returns. In addition, Bitcoin is the most widely accepted cryptocurrency for payments. Of course, Bitcoin also has disadvantages. Bitcoin's blockchain infrastructure slows down as soon as it processes more than seven transactions per second (a real problem considering that Visa processes around 1,700 transactions per second!). And since Bitcoin is the most well-known cryptocurrency of all, it is a popular target for hackers and scammers. You can find more information about Bitcoin in our article on Bitcoin.
What else should I know before trading cryptocurrencies?
Cryptocurrencies can be challenging for new investors. From foreign terminology to complex technology, it is an area that you first have to familiarize yourself with. And trading in cryptocurrencies has advantages, but also risks - but N26 will help you. Whether you want to pay for everyday necessities with cryptocurrencies or want to expand your investment portfolio with cryptos - in our blog series on cryptocurrencies you will find out everything you need to know about the advantages and disadvantages of cryptocurrencies.
You can read more about cryptocurrency here
Disclaimer
The following statements do not constitute investment advice or other advice on financial services, financial instruments or financial products. They are intended for general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products, nor an invitation to submit such an offer. Cryptocurrencies are subject to strong fluctuations in value. A reduction in value or a total loss is possible at any time. Losing access to data and can also lead to access loss.
