The other side of bitcoin: should or not invest in cryptocurrencies?

The other side of bitcoin: should or not invest in cryptocurrencies?

The popularity of cryptocurrencies, and especially bitcoin, has grown in recent years due to its profitability and digital ease , as we analyzed in a first installment on the subject . However, the nature of these currencies involves various risks that must be considered before entering your world. In this second article on what bitcoin is and where it is going, the challenges faced by the users of these platforms will be explored , so that it is easier to analyze when it is convenient to keep money in cryptocurrencies and when to sell it .

Investing always has a risk component. This situation is due to the relationship between profitability and the possibility of return in the future. The ability to generate returns in the long term is not entirely certain, it may happen that high returns are obtained or capital losses are incurred. Uncertainty plays an important role when making investment decisions.

However, some operations carry more risk than others . It is essential, therefore, to know the market. In addition, it is important to understand that the higher the risk of an investment, the greater its potential return, which in turn increases its attractiveness. Faced with this, each investor must determine the level of risk they are willing to assume in the search for higher returns.

The dangers when it comes to investing become more palpable on digital platforms , especially in Ecuador, where these technologies continue to be unprecedented and novel for the general public. To this must be added its lack of regulation , its volatility thanks to speculation , as well as the local legal inconsistency that prevents the adoption of this currency in official transactions.

The Central Bank of Ecuador clarified that, although the purchase and sale of cryptocurrencies over the Internet is not prohibited, these cannot be considered legal tender and, therefore, are not authorized as a means of payment for goods and services within the country , in accordance with Art. 94 of the Organic Monetary and Financial Code.

Similarly, the ECB pointed out that “the use of cryptocurrencies and the problems that may arise from their speculative nature are the sole responsibility of those who decide to adopt them in their transactions.” This means that the dangers of its use must be borne entirely by the users . Faced with all the above, it is best to be informed of the possible risks.

LACK OF CUSTOMER PROTECTION AGAINST MARKET VULNERABILITY

Before starting, it is essential to take into account in the first place that cryptocurrencies are not considered as a means of payment, nor do they have the backing of a central bank or other public regulatory authorities, in addition to lacking customer protection coverage. Basically, this is where the risk arises, since the only way to verify and guarantee the veracity and completion of transactions is through their real-time records.

In the first instance, this situation could be attractive, due to the general mistrust of formal financial institutions. But operating alone and without backup should put people more alert , since they will not be able to access the help of the legal or financial system if something goes wrong.

The decentralization of these digital schemes implies that the only actors are the originators and the beneficiaries, sometimes anonymously. As there are no intermediaries, it complicates the identification and early warning of possible suspicious behavior of fraudulent activities or scams , as well as piracy of personal information or invested capital.

Since the protocols on which cryptocurrencies are based are implemented within open software logic, with anonymity and irreversibility of transactions, people are more prone to incurring fake exchanges or cyberattacks. In this perspective, it is clear that cryptocurrencies are especially vulnerable to deception, price manipulation or other activities of a dubious nature .

The lack of trust regarding bitcoin transactions constitutes an obstacle for the virtual currency to become more general, to which must be added the weaknesses of virtual currencies compared to other means of payment extended to the online environment , like credit or debit cards.

Faced with all the above, citizens who wish to enter the world of virtual currencies must be vigilant and protect their money and data through a secure crypto wallet, with passwords that are difficult to track or hack. In the same way, investing only in what they really know and being well informed are the two keys to considerably reduce risks and protect yourself in a vulnerable virtual market.  

ELON MUSK AND THE RUSSIAN MOUNTAIN OF CRYPTOCURRENCIES THANKS TO SPECULATION

Bitcoin and cryptocurrencies in general fluctuate with more recurring volatility than traditional currencies. According to the BBC, bitcoin has closed the first half of 2021 with such deep variations in its price that users are amazed. In April, prices reached historical peaks that were around $ 65,000 , but in June there was a colossal collapse, with a drop of 47% from those levels. Why are there such volatile fluctuations?

The volatility of cryptocurrencies means that their value can go up or down substantially from one moment to the next. The more volatility you see, the more people will want to limit their exposure to it, and vice versa. That it is, if the b itcoin is perceived less volatile and more stable over time, lower the cost of convertibility .

In this sense, sudden changes have a great impact on price stability and financial stability, given the high volatility of prices due to speculative movements . Speculation is especially important when it comes to understanding where price fluctuations come from.

The price of cryptocurrencies is based, especially, on speculation about their future value. Not having a backing in precious metals, its value lies in its widespread acceptance as a medium of exchange . The more accepted it is, the more valuable it will be perceived by traders in its dollar equivalent. However, according to Caixa Bank, the degree of future acceptance of cryptos is a great unknown. The strong volatility of prices reflects, to a large extent, changes in the perception of this degree of acceptance.

A particular case that demonstrates how the perception of cryptocurrencies affects price changes is Elon Musk and his decision, in May this year, to stop accepting bitcoin in transactions within his company Tesla . This, because cryptocurrencies use large amounts of energy within data centers for their “mining” system.

On May 12, in the first 5 minutes after the release of the statement, bitcoin lost 5% of its value and five hours later, 20%. The impact of Musk’s decisions led to the prices of bitcoin, as well as that of other cryptocurrencies, plummeting.

However, the volatility of the currency is such that, when an agreement between Jack Dorsey, the CEO of Twitter, and Elon Musk was made public, to hold a meeting at the end of July and discuss the use of renewable energy in their operations , bitcoin was up 50%, prices started to rise again . In figures, bitcoin rose 10% in mid-June, topping $ 40,000 , after stalling at $ 30,000 .

Faced with all the above, the highly speculative nature of cryptocurrencies is clear, which changes according to the degree of acceptance of them within the market. These sudden changes in prices and their high volatility imply a risk of possible losses in the amounts invested.

Therefore, before investing, it is necessary to understand that the price of bitcoin changes continuously, and that, when entering the world of cryptocurrencies, you have to abide by that volatility. In this fluctuating market, a positive return on investment cannot be guaranteed, which is why it is essential to be constantly aware of the market , and review day by day the changes that prices are presenting.

RECOMMENDATIONS

Faced with all the above, before investing in virtual currencies, it is necessary to be cautious and take into account market fluctuations. To alleviate possible losses, it is imperative to avoid using the money that is used daily in bitcoin, it is best to only allocate surpluses or savings in case of losses . It is important to consider that it is a process where gains could be perceived in the medium and long term, so being patient is substantial.

Strong passwords are the backbone of information protection, therefore, it is important to secure bitcoin transactions with keys that are difficult to hack or track , to avoid loss of money or personal information. It is also necessary to investigate the places where the capital will be deposited, since there are scammers taking advantage of the anonymity to act fraudulently. It is better to avoid dubious operations and reduce vulnerability to online fraud and cyber threats.

Finally, the most convenient thing is to start little by little to enter the world of bitcoin, until you fully understand the operational dynamics within these digital platforms. Studying price changes and being aware of the risks and the limited use that can be made of it in terms of buying and selling goods and services within the country is essential before starting.

In sum, cryptocurrencies have taken the world of virtual transactions by storm due to their growing popularity and ease of access and digital use. However, before investing it is essential to understand that these operations carry with them a high risk of loss of the capital invested , since the activities carried out with bitcoin are not protected by any state regulatory entity. Therefore, to reduce the chances of loss, it is imperative to stay informed , avoid scams at all costs and monitor price fluctuations day by day , so that it is possible to obtain long-term returns.

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