eBusiness Weekly
Anele Zifiso Dube
Investing in cryptocurrency has numerous huge advantages over conventional investments but like any other investment, it has its risks and benefits. The following are the risks and benefits of cryptocurrency as a type of investment.
Benefits of cryptocurrency
- Security
Without access to your crypto wallets private key no one has the capability to access your funds or is allowed to make any transaction. To that end, if you lose your private key, you won’t be able to access your funds. Furthermore, the Blockchain together with scattered network of computers verify transactions so it’s more secure for investors to store crypto assets in their wallet.
2.Accessibility
Cryptocurrency investors only need a smartphone or a computer and access to the internet and they are set to use the digital currency. Also, there is no need to provide for credit check or a valid identification to acquire cryptocurrency and this can be attractive to some investors.
- Low Fees
The cost of using cryptocurrency is substantially lower as there is no fee of storing the digital currency. Transactions made for example sending crypto to someone as payment internationally are extremely low compared to a regular bank transaction. This will enable investors to minimise the costs hence the investment is profitable.
- Transactional Speed
Cryptocurrency transactions are done in a matter of minutes and that is appealing to investors because funds are able to be used as soon as they reflect in the account rather than waiting for a bank to approve the transaction. Wire transfers which are international take less than twenty-four hours to process.
5.High investment Returns.
Cryptocurrency can be volatile but history of the past decade indicates that cryptocurrency earns investors a higher return than stocks. Lastly the world is slowly moving to digitalisation that is why there are higher investment returns as it’s a taste into the future.
Risk of cryptocurrency
- No Insurance
With any other investment if you deposit your investment proceeds and the bank loses the money you are insured up to a certain amount. But with cryptocurrency you are not insured, there is not necessarily any recourse in case of any loss.
- High Volatility
The value of cryptocurrency is extremely volatile, this is when the digital currency changes rapidly or is very unpredictable. This can be very difficult for investors as some goods and services they need to diversify their portfolio may change anytime by more than 10 percent as it is still a nascent technology.
- Data Theft
Although hackers cannot take control of the entire cryptocurrency system called the Blockchain they still can hack into individual accounts. This is done through phishing mostly where they prompt and trick investors and obtain the password voluntarily.
There is no centralised authority that facilitates cryptocurrency this is why there are common data thefts. In the year 2020 the estimated data theft related to cryptocurrency were $2 billion according to a study by the International Monetary Fund (IMF).
- Unregulated Markets
In as much as it is one of the major benefits of cryptocurrency it is also a major risk of this type of investment. Since there is no central regulatory bank or exchange to mediate all transactions once the transaction goes through it is irreversible.
The price of the digital currency is regulated by traders so if a type of cryptocurrency is not secure to some traders it may lose value quickly.
- Legal Hassles
With the nature of cryptocurrency that there is no central governance it is a playing ground for money laundering schemes. A gain on cryptocurrency is classified as investment income and thus taxes are supposed to be paid but the regulations are not clear. This is why you need a financial advisor or accountant to tell how much tax on investment is due if not you pay higher taxes.
Anele Zifiso Dube is a Charted Professional Accountant student at CPA BC in Canada. +1 (778) 512 4588 or [email protected].
