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Seeing how the acrimonious feud unfolded in the popular movie “The Social Network” back in 2010, the failure of a lawsuit against Facebook seemed to have ended all hopes and dreams of the Winklevoss brothers to become the pioneers of social media.
However, the twins made an epic comeback three years later after investing 11 million USD into Bitcoin and initiated the “Gemini exchange” to facilitate cryptocurrency exchanges.
Changpeng Zhao, a Chinese-Canadian who is known as the founder of Binance, was named by Forbes as the “third richest person in cryptocurrency” when Binance became the largest cryptocurrency exchange in the world in terms of trading volume in less than 8 months.
Now, Coinbase has just managed to set precedence for all digital currency platforms by becoming the first publicly traded company on Nasdaq. The trend says it all: cryptocurrency seems akin to the “great gold rush of California” that happened in 1848, where people from within the US and abroad rushed to goldfields to begin mining for their riches.
Like gold, the value of cryptocurrencies (notably Bitcoin) has thrown investors worldwide into a frenzy, all hoping for a stake in this high-yield investment.
But does it sound too good to be true? Albeit the lucrative sums of money to be made in crypto-investments, there are certainly downsides to it, together with the tremendous amounts of risk associated with it as well.
Cryptocurrency is the Enabler to “Fly You to the Moon”
1. Its Ability to Generate High Returns
Just like the Winklevoss twins, many others have found fame and fortune investing in cryptocurrencies. Michael Novogratz, the current CEO of Galaxy Digital Holdings, was able to buy a private jet thanks to the proceeds made from crypto investments.
Given that cryptocurrency investment is one of the most speculative forms of investment, there are bound to be high returns should there be a continued upward trajectory in its valuation.
Speaking of speculative investments, Dogecoin became the centre of attention in the past week. Inspired by the popular meme featuring a “Japanese Shiba Inu dog” back in 2013, what started off partially as some harmless fun turned into a highly speculative investment.
After a hilarious photoshop of Elon Musk’s face on the baboon holding up “doge” from a snippet of “the Lion King”, investors have been pouring their funds into it.
The value of Dogecoin has skyrocketed ever since, increasing up to 400% in the past week, and enriched those who somehow decided to put their faith into an internet parody.
2. It’s a Great Way to Diversify Your Portfolio
What makes cryptocurrencies stand out is their independence from governments. For conventional investments, it hinges on the government’s ability to ensure robust institutions and political stability, coupled with a booming economy, so that a higher rate of return becomes more probable for stakeholders.
Since governments are not the ones issuing cryptocurrencies, they’re taken out of the equation altogether when it comes to its valuation.
Known as “decentralized finance” (or defi for short), cryptocurrencies operate independently from not just governments, but any forms of financial intermediaries.
A whole host of Defi (decentralized finance”) platforms came into existence as a result, with popular platforms like “pancakeswap” and “pancakebunny swap” that allows you to earn passive incomes by loaning out your money to provide liquidity to the currency pairs while generating returns in the form of interests.
For crypto diversification, putting your eggs in different baskets is perhaps the safest bet. You can look into a myriad of different currencies such as Etherium, BNB, Thor, or ZIL, developed by our indigenous blockchain platform Zilliqa.
3. Yes, They Solve Real World Economic Problems Too
(Smart contracts and the creation of Dapps), but mostly talks about the benefits of blockchain thought
The most notable example would be Vechain, a blockchain platform with the sole purpose to improve supply chain management and business processes within the crypto-world. One of its tokens, the VeChainThor energy, powers these smart contract transactions
Just like any contracts that are legally binding between two parties that have agreed upon something, smart contracts do the same thing, just that they’re part of a decentralized blockchain network, whose executions are controlled by lines of code that were pre-written by a programmer.
This was made possible by decentralized applications (Dapps), programs that run on a blockchain. By empowering smart contracts, safeguards agreements between two parties(even if they have never met), without the need of a lawyer, or central authority.
There won’t be a case of scams, because, with Vechain, information regarding the product and transactions are crystal clear. There’s greater market transparency, and everyone is happy.
Now, the Downsides to it:
1. High Returns, High Risks
As much as how our friendly dogecoin will bring us prosperity as aforementioned, there is only one caveat: this only holds true provided that it continues to rise in value.
Otherwise, your dreams of becoming a “crypto-billionaire” could be shattered before you know it. Like any investment, it follows the concepts laid out in Modern Portfolio Theory, where risks and returns are inextricably linked.
Given the astronomical sum of its payouts, the risks taken upon foraying in the crypto world are bound to generate incredible levels of risks.
Cryptocurrencies are well-known for their highly volatile nature. Just a few days ago, TLM, or the Alien Worlds Coin, saw its prices plummet by a whopping 90% within the day itself.
Although cryptocurrencies like Bitcoin and Ethereum have been resilient thus far, you can never rule out the possibility of them suffering the same fate, or even worse.
2. Honesty May Not be the Best Policy When Dealing With Crypto
If you’re well aware of Ponzi schemes, then you’ll be quick to pick up this new term called “rug pull”.
“Rug pull” basically just means getting scammed of your money through a decentralized finance exchange where a smart contract (agreement between two parties in the form of a computer code) is violated and tokens released are actually worthless.
By getting the public to purchase these “worthless tokens”, the scammers can then pull off a quick exit with their newfound wealth.
A recent incident may be better to illustrate this phenomenon. Under the guise of a decentralized finance file storage platform that helps users store data and files securely online (even without the need of a computer),
Binance smart Chain project (BSC) TurtleDex managed to launch a successful initial fundraising round and opened liquidity pools (collection of funds to facilitate decentralized cryptocurrency trading and lending) on two BSC decentralized exchanges, Pancakeswap and Apeswap.
Following that, Turtledex launched their “Turtledex Tokens” (TTDX) into circulation, which became popular in a mere few hours, and rose quickly above its pre-sale value.
Shockingly, liquidity on the two decentralized exchanges was removed in just 24 hours, sparking alarm bells that it could be a case of theft.
True enough, Turtledex pulled a “rug pull” exit scam in less than one week of its inception and made off with 2.4 million in funds drained from the two trading pools. Turtledex was quick to pull the plugs of its social media sites as well and went offline completely as if it has never existed.
This happened even though Turtledex’s smart contract was well audited, which puts to question: How reliable are crypto-trading platforms in this case?
3. It Remains a Security Concern
When you choose to invest in cryptocurrencies, it’s not just its prices you’re worried about.
Although these cutting-edge technologies do look promising, they are still very much in their nascent state.
This means they are relatively more susceptible to cyber attacks, with ongoing efforts to strengthen cyber security in crypt-dealings.
Coincheck, a Japanese bitcoin wallet, and exchange service learnt the hard way in 2018: labeled by the BBC as the world’s biggest ever digital currency hack, it lost USD 534million worth of NEM coins after hackers emailed malware to Coincheck’s employees and granted themselves access to infected systems.
In local news, a recent incident where Singaporeans who have invested with crypto-trading platform “Torque” have reportedly lost their “ life savings” in a crypto fraud has made the headlines, when an unscrupulous employee of the company created unauthorized trades and pocketed the money.
It’s incidents like these that prompted Senior Minister Mr. Tharman to speak out in Parliament, warning against investing in something where the “value is typically not related to economic fundamentals”, and the risks of being cheated from digital asset investments.
Will Cryptocurrencies Be Your Next Pot of Gold?
Like stocks and bonds, it shouldn’t be a gamble, nor taking chances when you’re betting on crypto-investments to reap huge monetary rewards.
As of January 2021, there are more than 4000 cryptocurrencies in existence on the market. When going into cryptocurrency, adopt a similar approach as you would stocks and bonds: observe, study, and keep up to date with the crypto market first.
Unlike investments that have existed almost four centuries, the potential of cryptocurrencies as an investment is certainly there, but there are additional elements of social media and the power of community that can sometimes go beyond reason and conventional
One piece of advice would be to look at the market capitalization of Defi tokens, the accountability of the team that is backing that token and finding a trusted broker.
Through online cryptocurrency courses, select suitable investment strategies for use at different points in time. Studying the Elliott Wave Theory could be a good start if you want to invest in something that is highly speculative like bitcoin.
Lastly, as the old saying goes: never put all your eggs into one basket. Investing in a basket of different cryptocurrencies, or together with conventional stock and bonds would be a wiser approach to hedge against risks.
Stay tuned with SBO to receive more insights on how you can start your crypto journey.
Featured Image by Sajad Nori on Unsplash