Cryptocurrencies are seen by more and more people as a form of investment. Especially the history of the Bitcoin arouses the interest of potential buyers. Because about a decade ago, it was still possible to purchase a Bitcoin for a few cents. In the meantime, Bitcoins move in the range of several thousand euros.
So those who got in during the first few years were able to achieve quite enormous returns. Even in 2020, many people still hope that they will be lucky and get into a small and unknown Coin in time and participate in such a development. Of course, the probability of this is very low and an investment in cryptocurrencies is associated with many risks. Nevertheless, it can be worth investing in cryptocurrencies. This article aims to show what is important in the process.
Finding the right cryptocurrency
There are an enormous number of different cryptocurrencies. This makes it almost impossible to be an expert on each of them. Therefore, you need to develop a strategy to find the right currency. For example, you should consider in advance whether you would rather bet on smaller or larger coins. If you choose small cryptocurrencies with a small market capitalization, you can achieve huge returns within a very short time. However, it can also happen that such coins become almost worthless when more is known about the background.
For this reason, the majority of investors opt for larger coins. Those who want to buy Ripple, for example, don’t have to face the fluctuations that are common with very small coins. It is true that it can happen that the Ripple price rises or falls sharply. But even in the current crisis, the turbulence on the major crypto markets was not much stronger than on the stock markets.
For smaller cryptocurrencies, things look a bit different. Therefore, especially inexperienced investors should rather stick to the large cryptocurrencies.
The right time to start investing in cryptocurrencies
There is no way to definitively find the right time to get started. This is because there are an enormous number of different factors that can influence the price of a cryptocurrency. Nevertheless, depending on your planned investment horizon, you should think about finding the right time for you personally. If there is turbulence on the stock markets, then this is usually also the case on the trading venues for cryptocurrencies. With a long investment horizon, you can then buy cheaply to benefit from the long-term performance. Especially in the crisis, it is important to look closely at the respective cryptocurrency. Because there are some factors that can drastically influence the price of individual currencies. Compared to stocks and funds, the volatility of cryptocurrencies is higher. That is the reason why daytrading is very interesting.
Under what conditions is it worth investing in cryptocurrencies?
Of course, cryptocurrencies are not suitable for every investor. This is because, unlike stocks or funds, they have no real equivalent value. Their price is determined only by the current willingness of buyers to pay. Furthermore, cryptocurrencies do not generate cash flow. Those who are otherwise rather fans of dividend stocks will not be happy with cryptocurrencies. In addition, investors have to put up with the higher fluctuations.
Therefore, one must not be fooled by red numbers in the portfolio, but stick to the actual strategy. Admittedly, this can be difficult at times. But it is a basic requirement for a long-term investment in cryptocurrencies.
Blockchain, the digital revolution?
The commercial application of the Internet can hardly look back on a longer history than two decades. The smartphone is just over ten years old. Today, both determine our lives in unimagined ways. Blockchain could also mean such a fundamental upheaval.
Among financial and IT experts, the possibilities and prospects of blockchain technology are currently being discussed intensively. However, the number of applications has been limited so far. In this respect, blockchain is still more of a vision than a reality. But that could change. The Internet and smartphones have shown the way.
Bitcoins as the first practical application
But what is the “blockchain” anyway? That can only be explained briefly at this point. Put simply, it is a list of data records that are chained together using encryption techniques – cryptographic processes – and stored in a decentralized manner. The data records are thereby referred to as “blocks”, and the “blockchain” is created by the chaining.
Blockchain theory was developed as early as the 1990s. The first practical application is the cryptocurrency Bitcoin. Its principle was first described in 2008, and the practical introduction started in 2009. Since then, Bitcoins have written an amazing success story and have become a true object of speculation. Regardless of what one may think of virtual money – Bitcoins prove that the blockchain principle works.
Revolutionary – intermediaries become superfluous
Still something to get used to
So what’s so special about it? The answer is simple: cryptocurrency does not require a central bank or other financial institutions. The exchange always takes place directly between participating actors. Blockchain technology ensures that transactions can take place in a practically forgery-proof manner. The booking data is stored in encrypted form on all computers involved in the transactions, and the blockchain thus created can hardly be attacked from the outside. The lack of an “intermediate instance” also ensures that every transaction is realized in virtually real time. No bank is that fast – even with state-of-the-art technology.
The revolutionary aspect of blockchain technology is its speed and the fact that it does not require an intermediary to carry out and secure transactions. This explains why the financial sector is paying particularly close attention to the topic. After all, the “intermediary activity” is ultimately the core of their business model. Where intermediation becomes superfluous, the basis for business falls away, so to speak. And it is not just payment transactions that are affected, but many areas of business. The spectrum ranges from securities trading to loans to insurance. Blockchain potentially affects all activities that involve mediation – from brokers to travel agencies.
Blockchain as a process accelerator
Even many Internet business models are affected, as quite a few platforms are based on the intermediation principle. However, blockchain also offers other potentials. It can serve as a process accelerator and ensure that data is available more quickly where it is needed, without this being at the expense of security. Applications range from logistics to healthcare.
However, there are still a number of hurdles to overcome that stand in the way of widespread use. So far, there is no sufficiently developed technical infrastructure for blockchain applications and the development effort is high. So perhaps the next digital revolution will take a little more time.