Should I get into Cryptocurrencies?

Cryptocurrencies are a relative new and not well understood phenomenon which is leading to wild stories on different news media and the general public as well as law makers having trouble making sense of it. So now an article trying to make sense of where we are at and what the opinions are.

What you’ve read in the news.

So the first step is to look at the past. In 2008 someone under the moniker Satoshi Nakamoto wrote a white paper explaining a new sort of technology he called a peer to peer electronic cash system. This is immediately where the first questions appear. At this moment it is unclear who this person is, and that is making people nervous. Satoshi mined the first 980.000 Bitcoins and as far as people are aware these are still not used. However, this would make Satoshi one of the top 100 richest people in the world as his net worth would be far into the billions. For Satoshi, coming forward now would mean admitting to not paying tax for many years over a significant amount. We have seen in Australia when someone claimed to be Satoshi that he was immediately arrested. Either way, the 980.000 Bitcoins are like a sword of Damocles hanging over the markets head though the fact that they have not been converted yet may give some sense of security.

In 2010 the first purchase is made with Bitcoins. Two pizzas are bought in Florida, USA, for a total of 10.000 Bitcoins which in today’s value would be 80 million dollars. Though this doesn’t tell you anything about the security it does indicate what extreme price fluctuations can mean to something used as a currency.

Bitcoin then made news right after the price hit 1.000 dollars in 2013 because the then biggest exchange, Mt Gox, claimed to have been hacked and went out of business leading to a big loss to investors. On the upside, the Cryptocurrency community has repaid investors their losses under the condition that they could prove their investment. Even now some exchanges allow you to send them a claim for lost Bitcoins. This should give you some sense of security as the community is actively protecting you. In Fiat currency world an organization is trying to make a profit, while the government forces through oversight that customers rights are protected as well. Blockchain communities are not controlled by a government but by the community. This means that the question becomes who you trust more. Your government’s ability to control organizations while still protecting your economic interests or a very large group of mostly anonymous people running the community.

In 2013 the FBI also shut down a market place called the Silk Road down where people were buying anything they wanted using Bitcoins. Bitcoins were used to ensure that the manager of the Silk Road, Dread Pirate Roberts, could be paid for his services as well as suppliers could be paid in a mostly untraceable environment. Regardless of your political opinions, whether or not you believe that market places like the Silk Road should exist. Media outlets made waves about a method of anonymous transactions, but the truth is that being anonymous with cryptocurrencies is difficult to do as all transactions are forever stored on the blockchain and an easier method is using Fiat cash. Bitcoin just allows for a cash alternative online, as long as you are technically savvy enough to pull it off.

Since then we have read about smaller exchanges going offline, criminals using cryptocurrency for their business, rogue states supposedly using cryptocurrencies. We have also seen countries where the Fiat system is failing them such as certain Latin American and African countries looking at cryptocurrencies for alternative solutions.

So where are we now?

Governments are weighing decisions basically on three factors:

  1. Willingness to accept lack of control. Fiat currencies can be devalued, called inflation, which not only allows for governments to bring new currency into the economy but also to lower the value of government debt. In 1900 a Country could borrow 1 Million dollars and pay for their military that year, just pay off the interest and the value of the debt would become negligible. As the world is globalizing Europe has already seen the problems of not being able to devalue their own currency after the introduction of the Euro, and cryptocurrencies if they were to become a major currency would introduce similar issues for countries.
  2. Just like many people who have heard that their neighbors or friends made a lot of money from Cryptocurrencies governments are equally afraid of losing out on a new booming economy. If a country were to ban all Cryptocurrency related industries than the new Google or Amazon might be started somewhere else and they may negatively impact their current companies. This leads to governments flip-flopping on the issue and not knowing where to stand.
  3. Economic environment. This is technically not a new reason but makes the above two stronger. When looking at a countries government’s stance on cryptocurrencies and their current economic and political situation there is a clear relationship here. England has a large banking sector it wants to protect and which is threatening to leave due to Brexit so they ban a new system which could compete. The US, Russia and China all have a strong economic situation but are dominated by a few large corporations with a lot of power on the one hand, but most jobs come from smaller startups on the other hand. This leads to a changing opinion based on the news of the day. One month they want to ban, the next they are trying to attract more of these start-ups into their borders. Small rich countries such as Bermuda and Malta have opened their borders to these new companies, just as large economically weaker countries have.

For you when deciding if you want to enter the cryptocurrency market there are multiple factors to consider as well:

  1. Am I willing to deal with the changing tax systems in my country, as most countries don’t have a definitive taxing policy on Cryptocurrencies yet? Also, Am I willing to risk investing in something that might be made illegal for a period of time in my country?
  2. Am I a trader, meaning quick buys and sells with the purpose of making money? An investor, making a purchase for a longer time with either the purpose of making money after a while or to support a new startup or the technology itself? Or are you an early adopter believing crypto currencies are the future and you are trying to get in on the ground floor. You need to decide this because it determines where you want to buy, how you want to store your assets and what risks you are willing to take
  3. Am I willing to do the research? You are reading this article so the answer is most likely yes, but don’t follow other people opinions. The thing about cryptocurrency is that it empowers the individual and the masses of people and takes away from a small group of influencers so if you were to follow someone else you are defeating one of the most beautiful things about crypto currencies.
  4. Cryptocurrencies empower the used but with opportunity comes risk. A Bitcoin is yours and no one can take it from you as a bank could do with your bank account. The downside is that if someone gains access to your Bitcoins it is impossible to get them back. Were you to make a purchase with Bitcoins you can’t call your credit card company to get your money back later, but if someone pays you in Bitcoin they also can’t take it back.

To conclude: Cryptocurrencies are just as much a political statement as they are a technological one. Every week new ideas on how to apply the technology comes out and Governments are having trouble keeping up and making sense of it all. With so many different applications and so many incentives it is very likely that we are looking at a newcomer into the worlds stages but how and in what form is still unknown. Do your research, decide on what you want to do when you invest and make sure you cover your risks.

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