A 2018 Guide for Cryptocurrencies

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In the past few years cryptocurrencies have gained a lot of media attention. Cryptocurrencies such as Bitcoin and Ethereum are amongst some of the well known cryptocurrencies. The rise to fame has much to do with the way cryptocurrencies would exponentially increase in value in a matter of weeks. Drawing many people in with the hope that this could be the path to plenty of riches. The only problem is that there are several people buying and selling cryptocurrencies without being well informed about what exactly digital currency is. As an investor and trader I find it shocking that people would buy and sell assets they don’t understand, especially something as complex as cryptocurrencies. Therefore, in this article I have done my best to lay out a guide about cryptocurrencies to help people make more informed decisions.

1. Cryptocurrencies are digital money that is designed using Blockchain technology. This technology allows people to make transactions with each other without the need for mediation from a third party such as a bank. It is important to understand that cryptocurrencies are not a synonym Blockchain technology, but instead are a product of Blockchain technology.

2. Cryptocurrencies currently are not regulated by any centralized system and therefore are not subject to interest rates, inflation or exchange rates.

3. Cryptocurrencies are have no intrinsic value that can be correlated to any institution or company. Intrinsic value is the underlying true value of a business or asset and this is determined by both tangible and intangible assets. The value of cryptocurrencies is based on how much it will be used as a medium of exchange and how people will perceive it as a store of value.

4. Cryptocurrencies are extremely volatile. Cryptocurrencies are known to increase in value in very short periods of time and then crash shortly afterwards. This high volatility in the cryptocurrency market has many people to believe that cryptocurrencies are in a bubble and are not a sound investment. A bubble can be defined as “an economic cycle characterized  by rapid escalation of asset prices followed by a contraction”.

 

5. The chart patterns of most cryptocurrencies can be compared to those of previous bubbles that have occurred throughout history, such as the  dotcom crash and the tulip mania.

6. Cryptocurrencies are regarded with much controversy. In some countries they are accepted in stores to be used to transact and conclude payments, while in some countries they face the risk of being banned. If cryptocurrencies are banned in some states this will have a negative impact on the overall cryptocurrency markets.

7.The cryptocurrencies market is infiltrated with scams. The most recent cryptocurrencies scam to take the world by storm is Bitconnect coin. The Bitconnect coin offered people to store the money in a decentralized system, just like other cryptocurrencies. Bitconnect also promised that people who invested in their coin would receive additional interest payments. It was later discovered that it was operating like a Ponzi scheme, and when this news became public the price fell from $300 a token to $ 32.

8. Cryptocurrencies are still subject to tax. Even though cryptocurrencies are part of a deregulated system they are still subject to tax. Any of the proceeds and gains that you earn from trading or investing in cryptocurrencies are subject to tax rates.

 

9. ICOs are not necessarily a better deal. ICOs stands for initial coin offerings. These are new cryptocurrencies that have just been listed. ICO’s tend to lure people in, this is because they are usually substantially cheaper than cryptos that are more established. However, ICO’s are susceptible to a lot of volatility and also scams, particularly “pump and dump” schemes. This is when the scammer builds up hype about the coin in order to drive the value of the coin up. Once the coin increases in value they take the profits and dump the coins.

10. Cryptocurrencies are an oxymoron. An oxymoron is anything of ostensible self-contradiction, for example cryptocurrencies. Cryptocurrencies are meant to be used as  an alternative option to conclude transactions. The grand ideas is they can be a substitute for fiat(traditional money). However, at the same time there is an expectation that cryptocurrencies are going to fly sky high in value. This is a problematic idea. Lets suppose that cryptocurrencies continue to rise in value, and hypothetically  one Bitcoin becomes $100 000. Who is going to trade with a coin that has the same value as a house? Also the number of cryptocurrencies is limited, for example there are only 21 million bitcoins available in the world. For these reasons scalability of digital currencies seems limited. Some people would argue that the limited number of cryptocurrencies will increase the demand and therefore drive the price of cryptocurrencies up. However, the opposite is more likely . As we speak there are over 1384 cryptocurrencies that are available on the internet  which is already 7 times more than the number of fiat currencies in the world. Therefore it is more likely that five ten years from now the crypto market will be over supplied with cryptocurrencies and there will not be a great demand for cryptocurrencies.

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