As students, we are always looking for ways to make some extra cash. And wouldn’t it be awesome if we could make a lot of it without even trying? There has been a lot of publicity around cryptocurrency, with stories of people who invested a small amount and are now rolling in the cash they’ve made. So what is cryptocurrency all about and should you be looking to invest in it?
What is cryptocurrency?
First of all, what is cryptocurrency? Cryptocurrency is a digital currency that can be transferred and exchanged through a blockchain system. The blockchain means that each recorded transaction is created as a block that becomes sealed and links up to the last block and the block to come, meaning the records can’t be altered without the data in all the other blocks also being altered. The transactions operate through a decentralised system, as opposed to a centralised banking or government system, meaning that transactions can take place anonymously and without a central system to control the supply or production.
After the first cryptocurrency, Bitcoin, was created around 10 years ago, there have since been numerous (and we’re talking around a thousand) different cryptocurrencies created. Obviously, bitcoin is the one we’ve all heard about and the one that has been hitting the headlines in recent years and months. But should you be looking to invest in cryptocurrency? Well, the short answer is no, you probably shouldn’t.
What’s the danger?
Cryptocurrency is a speculative virtual currency. Bitcoin’s value, for example, was pushed up by people across the world speculating that it will be worth something to someone in the future. With this idea, the more the value appears to rise, the more people might want to jump on the bandwagon and ride the gold rush to the top. However, the people who have made money from bitcoin invested in it while the price of a bitcoin was low, for example under $100. While the price of a bitcoin reached almost $20,000 a few months ago, at the time of writing it’s trading at $8683. So if you bought your bitcoin even a couple of months ago, your investment will likely have lost value. In many respects, the money to be made in bitcoin may already have been made.
Another reason why you shouldn’t invest in cryptocurrency is because it has no real value. It’s not a real currency and its value is determined by the number of people buying and selling it. The real value is in the blockchain technology. However, all of the cryptocurrencies are using the same technology, so it’s not a secret technology if it can be replicated by so many other companies, meaning potentially anyone could create a cryptocurrency.
In addition to this, because cryptocurrencies are essentially unregulated, compared to global stock exchange markets, they can be less stable and carry more risks for your money, for example if it gets lost. The instability of cryptocurrencies is also another reason against investing in it. You would essentially be gambling, as the price of the cryptocurrency that you buy could change in the time that it takes for the transaction to be sealed in the blockchain. So you could lose your money before it even gets sent. The potential for losses is so high that even Google will be banning cryptocurrency adverts from June this year.
But let’s say you took a gamble, bought some bitcoin and made some money. How do you get your cash? Because there is no real value in the bitcoin, you need to be able to cash it out into real money so you can spend it. But what if what you want to buy is a house? Many banks and mortgage lenders won’t work with cryptocurrency proceeds because of the ambiguity of where the money has actually come from. It’s been reported that several UK banks have turned down mortgage applications because there is no firm trail of where an applicant’s money originated. And due to money laundering regulations, there is a process that banks must adhere to, and at the moment many of them don’t appear to have any measures in place to be able to approve cryptocurrency proceeds. This could just be that banks haven’t caught up with technology or it could be that because cryptocurrencies are unregulated, lenders are concerned with not having a paper trail to comply with banking and lending regulations.
If you’re looking to invest your money in something, it might be better to opt for something that has actual value. Keep in mind that if something is at its highest price, chances are it’ll come down. Buy low, sell high, as they say.