Writing Award Winner: Cryptocurrency

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Writing Award Winner: Cryptocurrency

Phoebe Martin, Co-Editor

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In our community of youth interested in finance, we are also a generation that is deeply connected with technology. Thus, the question I pose today is, should we be investing in cryptocurrency and is it the currency of the future?

First, it is important to be an informed investor. What is cryptocurrency? Cryptocurrency is essentially a digital currency that uses cryptography and blockchain technology. Blockchains connect servers that hold copies of transaction records. Every server operator can monitor everyone else’s records, which means it is impossible to hack just one account. In order to hack into the server, one would need to compromise all the machines in the network, a task so impossible that Bitcoin’s blockchain is supposedly immune to hacking. New coins are created through mining: computers compete to secure the network through incredibly complicated mathematical equations and collect coins as a means of reimbursement for the “block.” One can involve themselves in the cryptocurrency industry by mining cryptocurrency or by buying a share of bitcoin with a fiat currency, such as the U.S. dollar.

Second, it is necessary to understand the opposition to cryptocurrency investment. The main argument of skeptics is that cryptocurrencies, like Bitcoin, are not investments so much as they are speculation. In general, a theoretical investor buys Bitcoin in hopes that it will go up in value, and then he can sell his shares for a higher value in the future. This type of investment relies on the fact that there will be a buyer later on. Financial advisors recommend investments that create products, services, or cash flow. It is wiser to purchase a piece of property or to invest in a legitimate company. In general, the uninformed public confuses blockchain technology and cryptocurrency. Cryptocurrency uses blockchain technology, but it is just one usage of that technology. Ergo, it is possible to invest in the technology behind Bitcoin, rather than to purchase an imaginary value from bits of computer data. Currently, Bitcoin cannot be deemed a legitimate currency, mostly because its unstable evaluation makes it impossible to set prices. Critics believe cryptocurrency is a nonessential form of payment. Warren Buffet put it best, by comparing cryptocurrency to other forms of payment: “A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? … The idea that it has some huge intrinsic value is just a joke in my view.” Many have called it a scam or a trend that they predict will blow over.

Lastly, as essential as it is to understand the counter-argument, informed investors should be aware of what fellow investors believe and why they choose to invest.  Many of Bitcoin’s early investors are quite wealthy to begin with and were looking to diversify their portfolios. These investors might actually be a huge asset to your investment because it is in their best interest to use their influence to help cryptocurrency go “mainstream.” However, many of the investors have the financial security to justify the risk of investment. If you are not in this position, it might be wise to seek out more stable investments, or to at the very least, not go all-in. Furthermore, Bitcoin is only an intelligent investment if one genuinely believes that it has the potential to become a long-term trusted store of value; otherwise, you are only buying into it because prices are going up right now. To further complicate things, cryptocurrency and criminal activity seem to go hand in hand. Because the use of cryptocurrency promises some level of anonymity, it is the main form of payment for transactions on the Dark Web for illegal drugs, firearms, false identification, and contract killers.

Overall, cryptocurrency has sparked great controversy in the finance world, mostly because it is such a complex concept and because it is a risky investment. Older generations are always afraid of change, which might be the source of hesitation from highly influential fiance moguls such as Warren Buffet and Jamie Dimon. It is difficult to advise whether or not to invest, as it is difficult to predict the future of cryptocurrency. However, due to the high risk associated with cryptocurrency investment, I would suggest being cautious and following the idiom: “Don’t put all your eggs in one basket.” If you choose to invest, do it as a means of diversification and definitely keep much of your money in more secure investments.

 

 

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