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Dubai: Cryptocurrencies have surged so much that their total value has reached nearly $2.5 trillion, which is bigger than the size of several prominent economies like Canada and Italy, among others. At that size, it's simply too big for the world population and financial establishments to ignore.

Moreover, firms that handle the riches of the world's wealthiest families are increasingly putting some of their fortunes into cryptocurrencies. And going by the adage “follow the money”, all of the world’s money seems to be piling into the world of crypto, so what’s stopping the rest of the world?

Following the money

A movement was launched among the biggest businesses, the richest investors and even countries that see a chance to profit on the fervour around the world of crypto, as a new ecosystem further builds up around it, whether they believe in it or not.

El Salvador made Bitcoin a legal currency, US payment platform PayPal enabled its users to transact in crypto, electric car maker Tesla purchased billions of dollars’ worth of Bitcoin, and Amazon is reportedly investigating digital currencies together with social media giants Facebook and Twitter.

The cryptocurrency is now worth more than $61,200 (Dh225,103), which albeit is less than what it was valued at last week when it broke through the records set in March and April of this year at $66,000. The record price comes after Bitcoin started the month at around $43,000 (Dh15,793), and has gained almost half that price since.

And in the latest milestone for the industry, an easy-to-trade fund tied to Bitcoin was launched in the US recently, a move that’s been awaited for years and what analysts had said could sky-rocket the price of the cryptocurrency as it gave investors access like never before to the world’s largest digital asset.

So like it or not, Bitcoin is becoming more mainstream. But let’s review the science behind this asset and whether it is worth your money.

Stock - Bitcoin
Picture used for illustrative purposes.

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.

Stock Bitcoin
Picture used for illustrative purposes.

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.

To put it in terms of your money, let’s say you invested Dh10,000 in 2017, a couple of years later you would see your investments drop by Dh8,000. However, if you stayed invested then and didn’t retract your money despite witnessing how much you’ve lost, by the end of 2020 your investment would rise by Dh5,000, to Dh15,000.

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.

So while investing in crypto assets is extremely risky, it is also extremely profitable. Cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency.

Stock Bitcoin
Picture used for illustrative purposes.

But is trading in cryptocurrency safe?

Despite the growing popularity of cryptocurrencies, a large number of investors hesitate to put their money in the virtual coin trading space. This is partly due to the fact that the number of cases of cryptocurrency-related hacks, breaches and fraud is on track to break records in 2021.

But how do frauds work? More money flowing through digital exchanges has been creating opportunities for malicious hackers and thieves looking to carry out frauds, scams and theft. But how?

Cryptocurrency is essentially a computer code that allows people to send and receive funds, recording the transactions on a public ledger known as a blockchain, rather than retaining account holder info. Because of the lack of user data, cryptocurrencies like Bitcoin have been hailed as a safe haven for criminal activity.

Fueled by anonymity, the industry allows hackers, tax evaders and other bad actors to launder money secretively, outside of the traditional banking system. There are hundreds, possibly thousands of cryptocurrencies with hundreds of blockchains, which contain a public record of every crypto transaction made.

But blockchains provide limited public user data and the massive documents, supported via a network of servers, require specialised skills and terabytes of computer storage to download and parse through. This allows criminals to hide behind cryptic account numbers and conceal their assets by swiftly moving them or spreading them across a wide array of wallets.

So how do I keep my crypto safe?

Consider dividing your assets into ‘cold’ and ‘hot’ wallets. The cold wallet should store bulk of your funds, while the hot (ready-to-use) wallet is used for routine transactions.

Cold wallets are offline wallets that are designed for storing cryptocurrencies. With cold storage, the digital wallet is stored on a platform without internet connectivity.

This protects the wallet from cyber hacks, unauthorised access, and other vulnerabilities that could be exploited if they were connected to the internet.

Also, to protect yourself from key-related frauds mentioned above always make sure to keep your private keys secure, and consider using a multi-signature wallet.