The cryptocurrency market is a vast and complex entity and one that continues to see its total market capitalisation value fluctuate wildly over time.
This has been borne out recently, when the crypto bear run that occurred between May and July saw the total market cap slump to less than $1.5 trillion, but this has since returned to its previous high of around $2.13 trillion.
But what exactly is a cryptocurrency, and what are its core advantages and disadvantages from the perspective of investors?
What is Cryptocurrency?
In simple terms, a cryptocurrency is a digital asset that’s built on the principle of blockchain technology, which essentially serves as decentralised ledger technology that’s managed and stored across a number of computers (or nodes).
Various crypto assets can be ‘mined’ within this broader infrastructure, while the decentralised network of each blockchain enables the assets to exist outside of governmental control and the machinations of central authorities.
So, unlike investment vehicles like forex trading, there’s no control held by central banks or authorities, creating an immutable list of transactions that simply cannot be manipulated.
The world ‘cryptocurrency’ is derived from the unique encryption techniques that are used to secure the network, from unique wallet addresses to cryptographic private keys (which are used to decrypt encrypted data and process transactions).
The Pros and Cons of Trading Cryptocurrency
Ultimately, blockchain technology and crypto assets offer huge advantages to adopters, customers and investors alike, with these entities considered to be amongst the most disruptive in the current climate.
Both customers and investors can leverage the immutable nature of crypto assets to operate with complete transparency, for example, while also processing anonymous transactions that aren’t linked directly to a bank or credit account.
In fact, crypto wallets are completely decentralised and can be opened without providing proof of ID in many instances, so you’ll only need to provide a password to secure your unique wallet address.
Another key benefit of crypto is its resistance to macroeconomic factors such as inflation, which often weigh heavily on fiat currency.
More specifically, the value of a crypto token doesn’t depreciate as inflation rises, while constantly changing interest rates don’t directly impact demand over time. This, coupled with the fact that there’s a finite supply of tokens such as Bitcoin, means that the value of assets isn’t vulnerable to usual pressure.
However, crypto assets are also inherently volatile, with their lack of tangible value making tokens particularly susceptible to market sentiment and the machinations of dominant investors (often referred to as ‘whales’).
It can also be argued that the underlying infrastructure has had historic issues, with scalability and transaction costs amongst them.
However, the good news is that new, third-generation blockchains are successfully tackling these issues, creating scalable platforms that can further deliver on the promise of this technology going forward.