Cryptocurrencies: Speculation upon Speculation

December, 30th 2021.

2021 has been a big year for cryptocurrency. But what’s next?

We’ve seen Bitcoin hit multiple new all-time prices and more institutional buy-in from major companies. Ethereum, the second-biggest cryptocurrency, notched its new all-time high recently as well. U.S. government officials and the Biden administration have increasingly expressed interest in new regulations for cryptocurrency. 

What exactly is bitcoin and how exactly does it work?

The concept of digital money that you use online is not that complicated in itself. After all, most of us will be familiar with transferring money from one online bank account to another.

Bitcoin is a digital asset that operates as a normal currency with notable differences. Cryptocurrencies are peer to peer payment methods, without the banks taking a cut with every transaction. There are no physical versions of the coins either.

Each bitcoin is created (or mined) using an encrypted code, which is a string of numbers and letters. The same equation used to create the code is an “unlock” it (like a virtual key).

Other important points about bitcoin:

• Cryptocurrencies, like bitcoin, ethereum and Cardano, are a form of payment that uses blockchain technology to send data in cyberspace

• Each bitcoin must be mined

• I heard that Bitcoin is finite: only 21 million bitcoins can be mined in total

All the while, people’s interest in crypto has skyrocketed this year: it’s a hot topic not only among investors but in popular culture too, thanks to everyone from long-standing investors like Elon Musk to that kid from your high school on Facebook.  

Bitcoin's soaring popularity and value since its inception in 2009 is a curious case for many investors. Like the Internet boom, cryptocurrency also took only a few years to become a mainstream topic, and it is growing now more than ever. Many investors, as well as professionals, have made cryptocurrency investment a part of their portfolio. But Bitcoin and other cryptocurrencies, unlike fiat currency, aren't physical assets. These digital currencies do not follow a centralised system and don't rely on banks. Their transactions happen through a decentralised network of computers.

So, are we investing in anything at all? Or are we just speculating some returns that may happen only in the far future?

In 2018, business magnate Warren Buffett had publicly denounced Bitcoin as not an investment. Three years since the world has seen a lot happening on the cryptocurrency front. On one hand, business giants are investing in these digital assets. On the other hand, crypto scams have left wreckage behind them.

We should perhaps stop asking whether buying Bitcoin is speculation. Instead, let us focus on the simple rules to follow in the cryptocurrency market for the ones who would like to turn it into a real investment.

1) Long-term or short-term profits

Speculation is when we are engaging in a risky transaction, hoping for a short-term profit. Instead of being a speculator, become a real investor by focussing on long-term goals. It's a thumb rule not to invest an amount that we can't bear losing. Cryptocurrency risks are as real as they can get. So, we should weigh the risks and goals that suit us best.

2) Cryptocurrency quality

It's better to stay away from flashy and risky projects while buying coins. The promise of a quick profit may often leave us hoping for returns for eternity. But if we want to invest in a coin, we should check the red flags. Profits may not be as quick, but it'll save us in the long run. 

3) Diversify holdings

Don't put all the eggs in the same basket. Diversify the portfolio, so that, in case a coin fails in the market, all isn't lost. That's better than stocking up false cryptocurrency and speculating that things get better. Real investment is when we prudently choose a safe ground in a volatile market.

Some see cryptocurrencies as a potential substitute for fiat money and commercial banking, a new form of exchange resistant to debasement and censorship by governments and financial institutions.

This column examines whether cryptocurrency investors are motivated by distrust in fiat currencies or regulated finance, and finds that investors show no differences from the general population in their level of security concerns about either cash or commercial banking services.

Cryptocurrency investors tend to be educated and young and to be digital natives. In recent years, a gap in ownership of cryptocurrencies across genders has emerged.

Earlier in 2021, after having read and gotten inspired by "The rise and fall of money God" which is a semi-fictional story of the financial nature of our world, I had decided to do my best to understand, then invest in cryptocurrency.

The bitcoin community has recently been in a good deal of strife, with a very contentious hard fork and now a civil war over the future of bitcoin. This has led to much drama, infighting and general disagreement which makes for an unsure environment.

The people who have stuck with bitcoin and kept mining it are hoping that the price will rise again soon so they can recoup their losses. However, someone might say that they are speculating that it is worthless. That might or might not be true.

Although bitcoin cash and bitcoin are being treated as equivalent, they are not- they have different use cases. BitcoinCash aims to be digital cash, replacing fiat currency and bank transfers. Because of this, it will have minimal fees and confirmations. This means that it can be used for smaller purchases, like a coffee or a sandwich- anything where the dollar amount doesn't matter so much.