In this article, we tell you everything you need to know about cryptocurrencies, their advantages, and their disadvantages, from enhanced security to transaction delays.
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, or financial products. They are intended to provide general information. The following statements do not constitute an offer to enter into a contract for the purchase or sale of financial instruments and financial products, or an invitation to make such an offer to buy or sell any particular digital asset.
Cryptocurrencies are subject to wide fluctuations in value and could suffer a decrease or total loss of value at any time. Loss of access to data and passwords can also lead to total loss.
Cryptocurrencies have the potential to transform the financial world as we know it, in addition to questioning the very existence of traditional financial infrastructures. So what are the advantages and disadvantages of cryptocurrencies, and on what basis do we decide which one to invest in (or whether to invest at all)?
If you are not clear about cryptocurrencies, fear not: in this article, we will break down the advantages and disadvantages of cryptocurrencies, so that by the end you will have no doubts about the fundamental concepts. And if you still don’t quite understand, you can take a look at our beginner’s guide to cryptocurrencies.
Five advantages of cryptocurrencies
Although cryptocurrencies are a relatively recent invention (Bitcoin, for example, started operating in 2009), they are certainly here to stay, along with all their advantages. The world of cryptocurrencies has a lot to offer: from the prospect of huge profits to the possibility of trading 24 hours a day in an extremely secure and transparent infrastructure – you just have to know how to take advantage of it.
- High risk and the possibility of high profits
There are more than 10,000 cryptocurrencies on the market today, each with its own peculiarities. However, all cryptocurrencies have aspects in common, such as the tendency to have sudden spikes (and drops) in value. Prices depend mainly on the supply of coins from miners and demand from buyers. This supply and demand dynamic can generate significant profits. The price of Ethereum, for example, practically doubled from July to December 2021, fortunate dates for those who invested at the right time.
- Blockchain, the technology on which cryptocurrencies are based, is intrinsically secure.
Some of the main advantages of cryptocurrencies are not related to the coins themselves, but to the infrastructure on which they are based, namely the blockchain, a decentralized data storage registry that tracks all transactions that take place on it. Once an entry has been recorded on the blockchain, it cannot be deleted. Since the blockchain is stored decentralized on different computers, hackers do not have the ability to access the entire chain at once, so the recorded information is always safe.
- Farewell to traditional banks: welcome a fairer and more transparent financial system.
In general, our financial system revolves around intermediaries that process transactions. This means that, if you make a transaction, you are placing your trust in one or more of these intermediaries – during the 2008 recession, many people doubted that this was a good idea. Blockchain and cryptocurrencies represent an alternative. Everyone has access, from anywhere, so they allow you to participate in the financial markets and make transactions without any intermediaries.
- The cryptocurrency market is always open
Another advantage of cryptocurrencies over banks is that cryptocurrency markets never close. Since coins are mined and transactions are recorded 24 hours a day, there is no waiting to buy, sell or trade cryptocurrencies, as is the case with the New York Stock Exchange, NASDAQ, and other stock market exchanges. The impact has been such that traditional exchanges are considering operating outside of normal banking hours, although at the moment it is something that is still a long way off. Thus, for investors who are active 24 hours a day, cryptocurrencies could be the best way to make profits outside conventional working hours.
- Cryptocurrencies could help investors win the battle against inflation
Cryptocurrencies are not tied to a single currency or economy, so their price reflects global demand, rather than, for example, national inflation. What about the inflation of cryptocurrencies themselves? If you are already invested, you have nothing to worry about (generally speaking). Since there are a limited number of coins, the amount available cannot get out of control, and therefore there can be no inflation. Some coins (such as Bitcoin) have a global limit, while others (such as Ethereum) have an annual limit. In either case, this is the approach that keeps inflation at bay.
Five disadvantages of cryptocurrencies
This all sounds very idyllic, but is the cryptocurrency landscape really that promising? We will now take a look at some of the disadvantages. Some of them are easy to solve, others not so easy, but they should always be taken into account.
- Understanding cryptocurrencies requires time and effort.
Understanding how cryptocurrencies work can take time. If you are not a digital native, the concept of cryptocurrency -not to mention the blockchain- is probably a bit abstract. And trying to invest in something you don’t understand represents a risk in itself. There are plenty of online resources available (including N26’s series of blog posts on cryptocurrencies), but you’ll still need to spend some time to really understand the advantages and disadvantages of investing in cryptocurrencies.
- Cryptocurrencies can be an extremely volatile investment.
Although the price of a cryptocurrency can reach dizzying highs (with consequent profits for investors), it can also plummet to frightening lows just as quickly. So if you’re looking for steady returns, cryptocurrencies may not be your best bet. Cryptocurrency markets are fundamentally based on speculation and their relatively small size makes them more vulnerable to price fluctuation. This, in turn, can wreak havoc on the value of coins, one of the main disadvantages of cryptocurrencies.
- Cryptocurrencies have not (yet) proven to be a good long-term investment.
Although cryptocurrencies are widely known and are still gaining popularity, it is worth remembering that they have only been around for a little over a decade. The concept did not emerge until the publication of a white paper on Bitcoin in 2008. Stock markets, by contrast, have centuries of history behind them. The London Stock Exchange, without going any further, was founded in 1801, and gold has proven to be a carrier of value for millennia. But what about cryptocurrencies? No one really knows what will happen to cryptocurrencies in the future, and it takes courage to venture into these uncharted waters as an investor.
- Cryptocurrencies have serious scalability issues
Okay, you might think that digital currencies work at lightning speed, and to some extent they do. At a certain level, however, they present major problems that hinder their large-scale deployment. Cryptocurrency providers themselves admit this is a problem, with Ethereum officials claiming that the blockchain has reached “certain capacity limitations” that slow down the pace of transaction processing. This can be very frustrating for those involved in the transaction, not to mention the potential financial
- Newcomers are vulnerable to the risks of fraud and fraudulent transactions.
Cryptocurrencies may not present the risks that come with the use of central intermediaries, but that doesn’t mean they are completely immune to security issues. As a cryptocurrency owner, you could lose the private key that allows you to access your coins and, with it, all your holdings. And then there are hackers, phishing, and other attempts to take control of your accounts by illicit means. Experienced investors tend to be quite aware of this, while novice investors are more likely to fall into these kinds of traps. losses that could be incurred.