There's little doubt that digital currencies have seen remarkable growth. Spurred on by the incredible growth of Bitcoin (BTC) and Ether (ETH), the field of cryptocurrencies has only continued to expand.
In addition to Initial Coin Offerings (ICOs), there are now many new types of blockchain investment products, from Decentralized Finance, DeFi to Non-Fungible Tokens, NFTs. Many digital currency enthusiasts believe that these investments could produce a new batch of digital currency millionaires, even billionaires. But those who have not yet invested in the digital currency space may be wondering if there are compelling reasons to start now. Below, we'll consider some of the reasons people might want to buy digital currencies, as well as some other considerations before investing.
A Transformational Technology?
The blockchain technology underlying bitcoin and other cryptocurrencies has been hailed as a potential gamechanger for a large number of industries, from shipping and supply chains to banking and healthcare. By removing intermediaries and trusted actors from computer networks, distributed ledgers can facilitate new types of economic activity that were not possible before.
This potential makes for an attractive investment to people who believe in the future of digital currencies. For people who believe in that promise, investing in cryptocurrency represents a way to earn high returns while supporting the future of technology.
A Stable, Censorship-Resistant Store of Value
Another common reason to invest in cryptocurrency is the desire for a reliable, long-term store of value. Unlike fiat money, most cryptocurrencies have a limited supply, capped by mathematical algorithms. This makes it impossible for any political body or government agency to dilute their value through inflation. Moreover, due to the cryptographic nature of cryptocurrencies, it is impossible for a government body to tax or confiscate tokens without the cooperation of the owner.
This property makes cryptocurrency attractive to people who are worried about hyperinflationary events, bank failures, or other disaster scenarios. Bitcoin in particular has attracted attention due to its deflationary and censorship-resistant properties, leading proponents to describe it as "digital gold."
Potential or Speculation?
While many supporters believe that digital currencies could become part of daily life, the cryptocurrency market is currently dominated by speculative trading.
Studies of blockchain activity show that exchange trades remain the most prevalent use for cryptocurrencies—and account for far more economic activity than ordinary trades and purchases. Cryptocurrency skeptics, including Warren Buffett, Bill Gates, and JPMorgan CEO Jamie Dimon have all warned of a potential crypto bubble.
Cryptocurrencies are not unique in being subject to speculative manias and irrational exuberance. Other assets such as cannabis stocks, technology stocks, precious metals, and even houses have also been subject to market bubbles, which ended badly for many investors.
As a new technology, some speculative behavior is to be expected in the cryptocurrency space, especially as blockchain technology matures. However, new investors should be wary of falling into psychological traps such as herd instinct, Fear of Missing Out, or the Greater Fool Fallacy, which can make all the difference between a calculated risk and a foolish one.