In this article we tell you everything you need to know about cryptocurrencies, their advantages and disadvantages, from the reinforced security to the delay in transactions.
The following statements do not constitute investment advice or any other advice regarding financial services, financial instruments or financial products. Its purpose is 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 large fluctuations in value, and could experience a decline or complete loss of value at any time. Loss of access to data and passwords can also lead to a total loss.
Cryptocurrencies have the potential to transform the financial world as we know it, as well as question the very existence of traditional financial infrastructures. And so, what are the advantages and disadvantages of cryptocurrencies? What do we base our decision on which one to invest in (or whether to invest at all)?
If this about cryptocurrencies is not clear to you, fear not: in this article we are going to break down the advantages and disadvantages of cryptocurrencies, so that in the end you do not have any doubts about the fundamental concepts. And if you still don’t fully understand it, you can take a look at our beginner’s guide to cryptocurrency.
Five advantages of cryptocurrencies
Although cryptocurrencies are a relatively recent invention (Bitcoin, for example, started life in 2009), they are certainly here to stay, along with all their benefits. The world of cryptocurrencies has a lot to offer: from the prospect of great profits to the possibility of operating 24 hours a day in an extremely secure and transparent infrastructure – it is enough to know how to take advantage of it.
1. High risk and high reward potential
In the current market there are more than 10,000 cryptocurrencies, each one with its peculiarities. Now, all cryptocurrencies have aspects in common, such as the tendency to register sudden peaks (and falls) in value. The prices mainly depend on the supply of coins from the miners and the demand from the buyers. This supply and demand dynamic can generate significant benefits. The price of Ethereum, for example, practically doubled from July to December 2021, lucky dates for those who invested at the right time.
2. Blockchain , the technology on which cryptocurrencies are based, is intrinsically secure
Some of the main advantages of cryptocurrencies are not related to the currencies themselves, but to the infrastructure on which they are supported, that is, the blockchain ( or chain of blocks), a decentralized data storage registry that tracks all the transactions that take place on it. Once an entry has been registered on the blockchain , it cannot be deleted. Since the blockchain is stored in a decentralized way on different computers, hackers do not have the possibility to access the entire chain at once, so the registered information is always safe.
3. Goodbye to traditional banks: let’s say hello to a fairer and more transparent financial system
In general, our financial system revolves around intermediaries that are in charge of processing transactions. This means that if you make a transaction, you are placing your trust in one or more of these intermediaries – during the recession of 2008, 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 financial markets and carry out transactions without any type of intermediary.
4. 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 around to buy, sell, or trade cryptocurrency like the New York Stock Exchange, NASDAQ, and other stock exchanges. The repercussion has been such that the traditional stock markets are considering operating outside normal banking hours, although for now 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 of normal business hours.
5. 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, say, national inflation . And what about the inflation of the cryptocurrencies themselves? If you’ve already invested, you don’t have to worry (generally speaking). As there are a limited number of currencies, the amount available cannot run out of control and therefore there can be no inflation. Some currencies (like Bitcoin) have a global limit, others (like Ethereum) have a yearly limit. In any 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 rosy? Next we will see some of its drawbacks. Some have an easy solution, others not so much, but they should always be taken into account.
1. Understanding cryptocurrencies takes time and effort
Understanding how cryptocurrencies work can take time. If you’re not a digital native, chances are the concept of cryptocurrency—not to mention blockchain— is somewhat abstract to you. And trying to invest in something you don’t understand is a risk in itself. There are plenty of resources available online (including N26’s blog series on cryptocurrency), but you’ll still need to spend some time really understanding the pros and cons of investing in cryptocurrency.
2. Cryptocurrencies can be an extremely volatile investment.
Although the price of a cryptocurrency can reach dizzying highs (with attendant benefits for investors), it can also plummet to frightening lows just as quickly. Therefore, if you are looking for a stable return, cryptocurrencies may not be your best bet. Cryptocurrency markets are largely based on speculation and their relatively small size makes them more vulnerable to price fluctuations. This, in turn, can wreak havoc on the value of coins, one of the main disadvantages of cryptocurrencies.
3. Cryptocurrencies have not (yet) proven to be a good long-term investment
Although cryptocurrencies are widely known and still gaining in popularity, it should be remembered 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, for example, was founded in 1801, and gold has proven to be a carrier of value for millennia. But what about cryptocurrencies? Nobody really knows what will happen to cryptocurrencies in the future, and it takes courage to venture into these uncharted waters as an investor.
4. Cryptocurrencies present serious scalability problems
Ok, one might think that digital currencies work at lightning speeds and to some extent they do. Once they reach a certain level, however, they present major problems that make it difficult to deploy them on a large scale. The cryptocurrency providers themselves admit that this is a problem, and Ethereum officials say that the blockchain has reached “certain capacity limitations” that slow down the rate of transaction processing. This can be very frustrating for those involved in the transaction, not to mention the possible financial losses that could be caused.
5. Beginners are vulnerable to security risks
Cryptocurrencies may not present the risks that come with using central intermediaries, but that doesn’t mean they are completely unaffected by 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 gain control of your accounts through illicit means. Experienced investors tend to be quite aware of this, while newer ones are more prone to fall into these types of traps.
What is the best cryptocurrency to invest?
There is no cryptocurrency that is significantly better than the others. It depends on personal preferences, although there are aspects that you can take into account. Think about your personal risk tolerance: could you bear to lose a substantial part of your investment if the value of your chosen currency plummets? Do you use cryptocurrencies only to generate profit or do you also hope to be able to pay with them? Do you invest just for the money or do you want to invest in a currency that has a broader social or environmental impact? An easy approach is to simply go with the market leader: Bitcoin. It is the original cryptocurrency and also the one that has created the largest information base.
What are the advantages and disadvantages of Bitcoin?
Bitcoin, which operates under the abbreviation “BTC”, has many advantages. It is limited to 21 million coins, is guaranteed to be resistant to inflation, and its attractive prices offer investors the possibility of profit. In addition, Bitcoin is the most accepted cryptocurrency to make payments. But, of course, it also has its drawbacks. Bitcoin’s blockchain infrastructure starts to slow down when it exceeds a rate of seven transactions per second (a real problem when you consider that Visa processes about 1,700 transactions per second). And because it is the best known cryptocurrency, it is a key target for hackers and scammers of all kinds. To learn more about Bitcoin, read our articleWhat is Bitcoin? .
What else do I have to know before investing in cryptocurrencies?
Cryptocurrencies can be a minefield for new investors. It is a topic that requires familiarity, both with the terminology and with its complex technology. As with everything in life, trading cryptocurrency comes with certain benefits and risks, but N26 is here to help. Whether you want to meet your daily expenses with Bitcoin or use another currency to expand your investment portfolio, we can show you all the advantages and disadvantages of cryptocurrencies.