A collective insanity about cryptocurrencies was caused by their unbelievable performance. Everyone from finance professionals to people who have at least 100$ of savings were in a fear of missing an opportunity to gain more than 1000% return. The price of a single bitcoin has skyrocketed from $0.06 in 2009 to nearly $20,000 in 2017. But before investing your money in cryptocurrencies, you need to consider that there is no single optimal way to invest and all of them have different drawbacks. So lets have a look at some options.
Synthetic vs physical exposure
After you have decided to invest in Cryptocurrencies, you need to come up with the choice of instrument. You can either access synthetic or physical exposure and both of them have some disadvantages. Synthetic exposure assumes that you buy an ETF or a fund that gives an exposure to cryptocurrency prices. But it is contradictory with the main principles of cryptocurrencies such as privacy and decentralization.
On the other hand, you can choose to use specialized platform which offers cryptocurrencies trading. But be careful in your choice: even if such platform provides quick and convenient way to convert money from your credit card or bank account to cryptocurrencies, there’s a long history of thefts at cryptocurrency exchanges and wallets. Thus, it’s crucial to verify the security of the platform.
Another drawback of physical exposure is complexity in account creation because some of the platforms with alternative coins, such as Factom or Augur, require cryptocurrency funding.
After deciding on instrument you will face a storing problem. Let’s consider three opportunities for storing coins: leaving them on the exchange, saving them in a wallet or taking the coins off the network.
If you decide to leave coins on the exchange, you exposure yourself to a higher risk, because you would not be able to access the coins if the platform is down. As it was discussed above, there were quite a lot of heists in cryptocurrency exchanges: in January 2018 Coincheck Inc. was hacked and lost nearly $500 million in digital tokens.
Saving coins in a wallet – special application for storing private keys is less risky as you are not dependent from exchange anymore, but there is still a possibility of being hacked.
Taking the coins off the network is most secure decision, but the worst one if you require swift access to your coins due to their illiquidity.
For sure, this is not a full list of disadvantages of investing in cryptocurrencies: they are extremely volatile and transaction cost are high. But we cannot deny the fact that even if there is still lack of clarity about cryptocurrencies, one thing is obvious: blockchain technology and digital currency will transform the way the business is conducted.
Fantastic innovation in Fantastic Switzerland