Cryptocurrencies: Worth watching from the sidelines or spending your money on?

Dubai: A renewed interest around cryptocurrencies is making a comeback among those who are looking for means to grow their money quickly. However, questions around how one should go about it if they are interested to pursue it, and what needs to be kept in mind when doing so, resurfaces as well.

However, before knowing how one could venture into the world of cryptocurrencies, it’s vital to understand the science behind this decade-old currency, in order to gain much-needed clarity for those looking to invest their hard-earned money for the first time.

Rise of digital money

Cryptocurrency is, simply put, digital money. That means there's no physical coin or bill — it's all online. You can transfer cryptocurrency to someone online without a go-between, like a bank.

It’s understood that when we buy or sell things, the payment is usually processed by banks or a credit card company, but the problems with this process is that the companies often take a cut of the transactions and we have to trust these companies to protect our data from hackers.

In order to solve such problems, cryptocurrency was introduced and in order to guarantee security it is based on the science of cryptography – a math-based seemingly airtight method of protecting information. However, this unique currency only exists in computer networks.

How airtight is the science

When you send this distinct currency, the money goes directly to the receiver, without involving any middlemen. And at the same time, the transaction is broadcast to the entire network and recorded permanently, which means it is impossible to fool the system.

The costs of making payments are lower and the transactions are faster especially across countries, and even those people across the globe who don’t have banks accounts, can buy or sell goods and participate in the global economy.

Risks of using digital currency

However, there are some risks of using cryptocurrency. The transaction in most cryptocurrencies are anonymous and some cryptocurrencies can even be untraceable. This can make it easier for the “bad guys” to make payments without being noticed.

Cryptocurrencies have also time and again proved they are highly volatile – meaning if you are looking to invest in them hoping to make a quick buck without keeping an eye on its prices or monitoring the market (where it’s traded) regularly, you may be putting your finances at risk and in for a torrid ride.

You can make a nice profit if you manage to correctly anticipate the market, but if you sell out as soon as you see a drop, you are in for significant losses. Timing the market accurately is often deemed nearly impossible even by countless experienced traders.

Moreover, it’s still not possible to process large amounts of transaction quickly just yet, and they are not as widely accepted as it should be, despite being in circulation for little over a decade now.

Is the volatility worth it?

As cryptocurrencies have seen huge gains since its inception more than a decade ago, despite there being plenty of volatility along the way, the question on most minds is that is it worth at least partly spending your money into buying them, while staying invested in them in the long run.

To know this, while illustrating the claims of its extreme volatile nature, let’s take a look at the decade-long journey of one such cryptocurrency, Bitcoin, which is universally accepted and works for the purchase of virtually all cryptocurrencies.

In 2017, Bitcoin rocked the market by reaching an unforeseen peak of nearly $20,000 (Dh73,460) back in late 2017. But Bitcoin suffered a drop of more than 80 per cent to fall below $3,500 (Dh12,855) by early 2019. It again rose colossally by over 300 per cent by 2020-end, and surged further by about $4,000 (Dh14,692) at the start of 2021.

Bitcoin proved its extremely volatile nature yet again after falling nearly as much on Monday, just days after it spiked. On Wednesday, the price jumped to another all-time high as extreme swings continued to buffet the world's largest cryptocurrency. The famously volatile digital coin advanced as much as 6 per cent to $35,842 (Dh131,648), surpassing the previous high set January 3. It had plunged as much as 17 per cent on Monday.

While it isn’t recommended to put emergency savings in cryptocurrency, many see it as part of an overall mix that might help boost your returns in today’s low-rate environment. Multiple portfolio managers see Bitcoin particularly appetising for younger investors who have a time horizon of 25-30 years and a penchant for digital finance.

Why such volatility?

The reason for volatility have been widely attributed to the public perception of cryptocurrencies still being quite dichotomous – given that there have always been as many number of proponents as there have been sceptics – and the fact that crypto has had smaller market sizes as compared to established forms of currency.

Despite this, the question still remains whether it’s worth buying the widely-watched cryptocurrency given its price rose four-fold in 2020.

No shortage of skepticism

Although there is no shortage of financial scepticism regarding its future, keep in mind that Bitcoin had been worth only hundreds in 2016 and mere pennies in 2008. Despite its colossal fall, it had stabilised at a price that would still make early adopters unbelievable profits.

However, this time around people are not expecting a crash. In fact, both enthusiastic and cautious investors are predicting significant gains for Bitcoin in the next two years. Estimates vary wildly as to where the price of Bitcoin will land. Some say that it may reach $60,000 (Dh220,380) this year, others believe it might even break $100,000 (367,301).

This doesn’t negate the fact that Bitcoin is still a very volatile asset that’s likely to keep experiencing ebbs and flows and this year we could see fluctuations as big as 20-30 per cent in value, which is seen as highly likely by most experts.

However, a prevailing view among experts that are largely optimistic about the future is that these fluctuations are not going to be enough to slow it down, and that Bitcoin will likely break $50,000 (Dh 183, 650) in 2021.

The market trend is clear. Despite Bitcoin’s variability, new bull (rising trend in markets) cycles see the highs go higher and the lows get higher as well. This is to say that Bitcoin keeps breaking its previous records and stabilising at higher prices after its drops.

Investing with little money

If you have decided to invest, the next question is how to go about it. Moreover, if initially you would want to invest just a nominal amount, considering one Bitcoin is valued at as much as $30,000 (Dh110,190), can you still get a piece of the action? Yes, you can, by buying ‘fractions’ of it.

You can invest as little as a few dirhams into an asset like Bitcoin by buying a few fractions of a Bitcoin up to whatever be the amount and you'll be building your portfolio. However, keep in mind that some platforms may require a minimum deposit amount to purchase Bitcoin.

The first way you can invest in Bitcoin is by purchase a coin or a fraction of a coin via Bitcoin trading apps. In most cases, you'll need to provide personal information to set up an account, then deposit money you'll use to purchase Bitcoin.

You are not actually buying a physical coin, and one can agree that what you are essentially buying is just a number. Depending on how much you want to spend, you can buy one Bitcoin, 10 Bitcoin or a fraction of a Bitcoin. According to its founding protocol, only 21 million will ever be minted.

Because Bitcoin can be divided out to eight decimal places, small fractions of a whole can be purchased. So then, if you bought Dh100 worth of the cryptocurrency when it was trading at around $20,000 (Dh73,460), you’d get roughly 0.0053 of a Bitcoin.

‘Bitcoin Wallet’, a must have

You can’t buy Bitcoin until you have a wallet because this is the address you will give for where the purchased currency is sent. Wallets are what they sound like — places to store currency — only in the case of Bitcoin, they’re virtual. You can access these wallets either on your phone or computer.

In the UAE, Bitex UAE offers software wallets and a secure trading platform for cryptocurrencies like Bitcoin, BitcoinCash, Ethereum and Litecoin. Similarly, BitOasis is another favorite options for UAE cryptocurrency traders.

Bitcoin wallet from Copay is also one of the more popular software wallets out there and the Electrum wallet is one of the oldest Bitcoin wallets. Exodus wallet is another free software wallet that gained some popularity recently. Jaxx is a free software wallet, available in a desktop and a mobile version.

Hardware wallets are places to store your Bitcoin that are completely disconnected from the internet and ensures an extra layer of protection from hackers. While setting up and opening most wallets are free, you will need to pay a minimal fee to move Bitcoin into or out of a wallet.

Bitcoin has a reputation for anonymity and wallets allow for this. You need a wallet to transfer Bitcoin, but you don’t need to link your name or phone number to most of these wallets.

A good way to set up your wallets is to have three things: an exchange account to buy and sell, a hot wallet to hold small to medium amounts of crypto you wish to trade or sell, and a cold hardware wallet to store larger holdings for long-term durations.

How to choose an exchange platform?

To decide what exchange to trade in, one must make sure to check the following:

• Availability – Before you even do anything, first make sure that the exchange is available in your area. Eg. Coinbase, one of the largest exchanges, is not available in the UAE. So before you do anything please check this. In the UAE, global exchanges such as Kraken, Bittrex, and Binance are supported, alongside local options like BitOasis and Bitex UAE.

• Public opinion – Next thing that you need to check is the reputation of the exchange. Are people happy with their services? Has it been hacked recently? How secure is it? Have people complained about it? Twitter and Reddit are good sources for checking this.

• Exchange rates – Different exchanges have their own transaction fees, which may vary. Do your homework here and preferably research 5 to 10 exchanges and their rates.

• Safety – Always choose exchanges which need some sort of ID verification from you. Even though they may take time, they are significantly safer and secure than exchanges that don’t ask for them. At the end of the day, it is your hard earned money. You must take that extra step to keep it secure.

How to choose what cryptocurrency to trade in?

There are several aspects that may help you to get to know any crypto coin better. In the whirling sea of crypto, the real lighthouses are rankings. They can tell a great deal about a coin and navigate your way though. One way to decide is by seeing which are the most popular cryptocurrency and exchanges that are used.

You can take a look at widely-used platforms like CoinMarketCap and Coin360, among others, which regularly monitors the trading volume, market value of different cryptocurrencies, and which exchange sees the most trade.

This is one of the platforms most commonly used by traders to research the latest information on the newest types of coins, study the performance on each coin and exchange.

Basically, market value (market capitalisation or market cap) reflects the size of the currency and the metric is calculated by taking the coin’s price and multiplying it by the total number of coins in circulation.

Example: If there are 1 million coins in circulation and if its current price per coin is $1 (Dh3.67) then its total market cap is $1 million (Dh3.7 million). This value changes as per the trading price of a crypto coin in the market. It also provides insight into the level of risk an investment represents, and this is why it’s important to check a digital asset’s market cap prior to buying.

How do you buy Bitcoin?

As mentioned above, you’ll create an account and enter a payment method. At Bitcoin exchanges you’ll be asked for information such as your bank account details or a debit or credit card. You’ll then need to prove your identity with a driver’s license, ID or passport.

After you’ve been verified, you can start buying Bitcoin with your chosen payment method, transferring it to your personal wallet and monitoring the currency as its price fluctuates.

To know in detail how one should go about each of the above-mentioned steps involving opening a Bitcoin trading account and how to trade in them in the UAE, also read the below stories.

How to trade Bitcoin?

There are two ways to trade Bitcoin: Buy the cryptocurrency itself in the hope of selling it on at a profit, or speculate on its value without ever owning the token.

To trade, when simply put, one first finds a suitable opportunity or price of Bitcoin to trade, takes a position – which generally means to determine whether or not the price will rise or fall, and lastly all that is left is to monitor your trade and take a call whether to buy or sell.

When you trade cryptocurrency, you’re speculating on whether the Bitcoin’s price will go up or down. Increase your exposure to Bitcoin with leverage (using borrowed funds to increase one's trading position) and go long or short on the price – all without the expense of an exchange account.

How to place and close a Bitcoin trade?

To place a trade, you will enter the amount you want to stake on your trade in the ‘deal ticket’. (A deal ticket, commonly known as a trading ticket, is a record of all the terms, conditions, and basic information of a trade agreement.)

You can also define your close conditions: set a stop to close your position when the market moves against you by a certain amount, or a limit for when it moves in your favour. Stops and limits are central to good risk management. If you expect bitcoin to rise in value, you'll then ‘buy’ the market. If you think it will fall, you'll ‘sell.’

To close your position, you simply place the reverse of your original trade. So if you bought in the first instance, you’ll sell the same amount; if you sold, you’ll now buy.