Abascus: Should Young People Buy Cryptocurrency?

Cryptocurrencies have gained increasing attention in recent years among members of the media and the online world; as the global market capitalization of all cryptocurrencies has increased some 5,360% in the last five years, certain individuals are wondering whether it could be worth investing in virtual currencies.

While some may view owning cryptocurrencies like owning other assets, like stocks, several characteristics differentiate online currency from all other financial holdings. In fact, an aspiring cryptocurrency investor should consider a variety of risk factors, ranging from complications with outside hacking to liquidity troubles, before finalizing any speculation transactions.

Although the money investors hold in assets like real estate property and the stock market is subject to plenty of volatility in the short-term, the value of many cryptocurrencies is especially irregular.

One reason for the strong price inconsistency is because unlike the stock issued by a company or a house, there is no general agreement on how a cryptocurrency should be valued. As a method of comparison, a firm’s stock is typically priced based on said firm’s earnings, while a house can be valued based on variables such as its size and the neighborhood it's situated in.

As a result, the buying and selling of cryptocurrencies are much less uniform than it is for other assets, with less clear fundamentals, or principles, underlying changes in price.

Moreover, there is no central regulatory system that has a large effect on the value of cryptocurrencies. Unlike the stock market, which is partly impacted by the financial and monetary decisions made by the United States government and the Federal Reserve, the nation’s central bank, there is no board that provides rules or regulations for different cryptocurrencies.

To gain a better idea of how fundamentals relate to an asset’s price, consider the relationship between the Fed and the stock market. During times of recession, the Fed typically lowers interest rates and increases the money supply to incentivize firms to invest their funds and banks to expand their lending to help revive the economy.

As such, investors view low-interest rates as a positive sign for stock prices. When the Fed increases rates and decreases the money stock, the opposite is true.

Unlike stocks, cryptocurrencies cannot rely on some chief bureau or organization for an indication of where prices should head. The value of such currencies is therefore more unpredictable regarding government policy. Aside from price fluctuations, other risks are associated with virtual currencies. Take, for instance, the concept that cryptocurrencies are technically considered a currency.

Cryptocurrencies differ from most other types of currencies in critical ways. In order to better understand these differences, it helps to understand some of the inherent characteristics of money. For something to be considered money, it must satisfy a number of conditions, one of which is the state of being a medium of exchange.

The medium of exchange implies that something is widely held by the people of a society and that many individuals and businesses accept it as a currency.

Despite rising in popularity in the US, less than 15% of the country’s citizens held any cryptocurrencies in 2019. It would, therefore, be hard to contend that cryptocurrency can be considered a medium of exchange, especially considering many firms don’t accept them as payment.

In addition, money must fulfill the attribute of being a store of value, something that can be stored away and used for a future date. There are a few elements that prevent cryptocurrency from being properly considered a store of value.

For one, its volatility does not guarantee that its value will remain stable over even a short period of time. Additionally, there are issues that relate to the ability to retrieve cryptocurrency, with the problems of breach and hack remaining a concern for investors.

For example, the currency Trade.io reportedly lost almost $8 million in 2018 from the money that was stored in a physical bank.

Criminal activity remains one of the biggest concerns for investors, with other companies announcing stolen funds: the South Korean exchange Coinrail claimed that outsiders purloined 30% of its currencies, while the Japanese exchange Coincheck lost more than $500 million dollars from hackers.

These traits that prevent cryptocurrency from being regarded as money by many people should convince potential investors to view the virtual tool as solely an investment, and not as something like cash. Those who do view cryptocurrency as akin to paper money could be in for a rude awakening if they intend to buy and sell their investments without much regard to their price history.

For those who are set on investing in cryptocurrency, there could be some aspects of a given investment that are worth researching to determine if a particular cryptocurrency could provide a return. One place to start for beginning investors could be by studying a currency’s plan for the future.

For instance, the primary objective of some cryptocurrencies may be focused on becoming more internationally recognized, while others may be more concerned with becoming safer to use and store, whereas others may try to become more effective as a medium of exchange.

The aim of gaining more global attention has become increasingly common for countries in the Association of Southeast Asian Nations (ASEAN), as many financial technology firms and startup companies, have decided to incorporate cryptocurrencies into their business models to target demographics from around the world.

Understanding the goals of certain currencies could allow for an investor to be more prepared for the potential news that could decrease or increase the value of a given cryptocurrency. One metric that investors should examine in cryptocurrencies is their trading volume. Just as assets like stocks and bonds are traded among individuals and companies, cryptocurrencies are traded online, often through an exchange.

Holding other factors constant, a high trading magnitude is considered more ideal than a lower trading magnitude for two key reasons. One, a high trading volume implies that an asset is liquid, or easy to convert to cash. Due to the tendency for individuals to sell investments at any given moment in the hope of obtaining cash, liquidity is a trait that is preferred for most assets.

Therefore, the demand for liquid assets is higher than illiquid assets, all other components considered equal. Liquidity is especially important for online currencies where some investors may be suspecting of problems in which their investments could be hacked or lost.

Second, and perhaps more importantly, a cryptocurrency that is not traded at a high degree could be a sign of a venture that is not high in demand among traders. If trading remains at a low level, it could be difficult for value to rise quickly.

​In general, cryptocurrencies are not recommended projects to invest in. Aside from the natural risk that is associated with high-trading assets, not nearly enough research has been done in the elementary foundations that guide cryptocurrency prices in comparison to other assets to invest in.

However, for the risk-taking individuals who are eager to partake in the cryptocurrency platform, it is necessary that certain financials are already cared for. That is, it is probably a prerequisite that someone has a stable job with an emergency fund accounted for, in addition to having started a retirement account and other growth-oriented investments before they purchase any cryptocurrencies.

For those who do have a high income or who are particularly wealthy, investing in cryptocurrency could be perceived more for enjoyment rather than as a reliable way to build upon net worth.

Not unlike a gambler betting on sports or an individual finding pleasure by participating in the foreign exchange market, those who have the means could view trading cryptocurrencies in a lighthearted way, as it may just be worth the gamble.