Cryptocurrencies (cryptos) are again on the rise after Trump’s victory. But are they good instruments for investing financially without excessive risks? That is the million-dollar question. ATH (All Time High) of Bitcoins is at $ 95,200, which looks good for BTC, but will it reach the 1,00,000 tip? What about other cryptos like Ethereum,
- Is cryptocurrency safe?
- Why are big guns opting for cryptocurrency?
- What is blockchain technology’s safety?
- Should we invest in cryptocurrency?
The answer to all these is in this article: read on and be enlightened.
Table of Contents
What’s in the name ‘Cryptocurrency’?
The prefix ‘crypto’ comes from scientific cryptography. This uses mathematical methods to safeguard information in the digital domain. They are popularly called ‘Cryptos’. During the war in 1920 the Germans used cyphered messages. The coding was done using a mechanical machine, Enigma, which the Allies could not decode till around 1941. Even so, it was possible only due to overconfidence and carelessness of the Germans. The decoding of messages formed by Enigma, the crypto machine, was called Ultra Intelligence by the Allies. This eventually ended the WWII after the D-Day Landings in 1944.
Today, cryptography has become a significant science that uses digital mathematical techniques to code and decode, which is much more secure and has many other advantages.
Here is a simple example that will clarify most of what happens in cryptography:
Scenario: Asha wants to send Sundar a secured SMS message, “I AM NOT HOME, DEAR.” They have a coding method (encryption), which both understand.
Step 1
She encrypts the sentence by replacing all even characters of words with their next alphabet. The encrypted sentence will be:
“I AN NPT HPMF, DFAS.”
M is even and is replaced by the next letter; N; O is replaced by P, and so on.
Step 2
She also produces a secret code (3ac674216f) by passing the string into another program and adding this number to the sentence. The sentence will now look like:
“3ac674216f I AN NPT HPMF, DFAS.” This secret code further ensures nobody tampers with the string.
Step 3
She sends this string to his mobile number as an SMS.
Step 4
The husband receives the SMS, separates the secret code, and passes the remaining string through the program. He will also get “3ac674216f.”
Step 5
Decrypts the string using the Formula and reads a meaningful sentence. The actions can be mapped to formal processes in cryptography:
- Public key is the Mobile Number known to everybody in the group or network.
- Private Key is the Formula used to encrypt, known only to the receiver.
Without the formula, the message is gibberish.
- Hashing is a secret code a program generates that gets appended to the encrypted message. It helps detect message tampering. SHA-256 (used by Bitcoin) is an example that produces a unique 256-bit string or hash.
- Digital signature can be another layer of protection against tampering and intercepting messages. The hash code is passed through a private key.
Basic Blockchain Technology
Without going into the technical stuff, Blockchain is revolutionizing industries by fostering trust, efficiency, and innovation. Among other features of cryptography, it extensively uses hashing.
Its salient features are:
- Increased security.
- Enhanced transparency and traceability
- Decentralization. Elimination of intermediaries, reduced costs
- Faster and borderless transactions
Though blockchain was developed exclusively for cryptos, it has since been used in other domains where security is a concern, such as:
- Financial Services of traditional banks
- Supply chain management
- Healthcare
- Real estate
So, is it safe to invest in cryptocurrencies then?
While one may say there is risk in every financial investment, it is not the same with cryptocurrencies since they are virtual. Let us examine how those risks are different and riskier. Though blockchain technology protects cryptos, several other loopholes make investing in them extremely risky.
- Volatility
Market prices can fluctuate wildly, leading to large losses in a short time.
- Regulatory Uncertainty
Various governments are still unsure of how to regulate crypto, which can lead to its value and legality.
- Lack of tangible value
Unlike gold, stocks, or bonds, crypto is purely virtual.
- Loss of private key
If one’s private key is lost, one cannot access or transfer funds. Nobody monitors these!
- Wallet and Exchange Hacks
A wallet is susceptible to hacking if connected to the internet (Hot).
- Malware
Malicious software is installed surreptitiously onto mobiles and laptops, compromising the user’s private key.
- Fake Wallets and Exchanges
Fraudsters create fake wallets or exchanges that appear legitimate and steal funds.
- Social Engineering
Fraudsters force users into human error and make them share sensitive information that can compromise security.
- Large Energy consumption
Cryptos consume excessive amounts of energy, hardware, and network access. These are environmental concerns.
These risks are typical of digital and online transactions and apply to traditional banking. However, the risks here are that these cryptocurrencies, wallets, and exchanges have no owners or authority to moderate in case of fraud. Traditional banks at least cover risks to an extent.
Look away from cryptos, then?
Humans could not have come this far without taking unmindful risks, and the same is true of highly risky cryptos.
There are always ways to mitigate those risks; here are some:
- Using ‘Cold’ wallets that are not connected to the internet.
Move your funds into cold wallets once the transaction is over.
- Secure your private key
Keep them offline, secured, and stored in hardware wallets.
- Have multi-level authentication
Use biometrics and PINs, or facial recognition, etc.
- Authenticate wallets and exchange providers
Install wallet apps only from official sources.
Types of cryptos
They say one is spoilt for choice, with so many types available.
- Bitcoin (BTC)—the first and most popular.
- Ethereum (ETH)
- Ripple (XRP)
- Cardano (ADA)
- Tether (USDT)
Surprise! Human Enterprise!
Human enterprise is such that cryptos are thriving, and it seems they are here to stay. Bitcoin is a very popular crypto, and its ATH has reached USD 1,00,000!
Here are some reasons why:
- BITCOIN is capped at 21 million (21,000,000) coins worldwide. So there is always demand because of scarcity.
- Scarcity increases its value, just like gold or diamond.
- Crypto ETFs bridge the gap between the traditional financial world and the crypto
- ETFs are safer attract fees (operational fees can eat away returns)
- Its existence depends on demand; it increases or decreases with demand.
- Demand is created, say, by making more noise! As is seen.
- Tesla and Microsoft’s investment in it has provided fresh impetus. More like this will increase its value.
- Likewise, it loses value if governments regulate or ban it. This presently is the riskiest part of investing in it.
- This unregulated feature attracts some with high values because it does not attract commissions or interference from banks and the government.
- Borderless investment is why big guys are attracted.
- Security is inherent due to blockchain technology and is safer if one is disciplined on the internet.
Conclusion
With BTC’s rise and entry into the consolidation phase, the overall structure is positive. Crypto ETFs are an attractive option for BTC; the only cryptocurrency traded on stock exchanges is the USA. Though these trends are only on technical analysis, cryptos can evolve depending of other fundamentals like:
- Adoption and utility by governments and financial institutions.
- Decentralized Finance (DeFi) and NFTs (Non-Fungible Token)
- Favourable Regulations/Tax Policies
- Social media influence positively.
- Global Economic Trends.
- Lower Bank Interest rates
- Market liquidity and institutional interest.
The cybercrime scenario still remains, though!
So, it is better to be cautious. As they say:
“The better part of valour is discretion.”
