Cryptocurrency investments: the risks and opportunities of digital currency | FinReview
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6 May 2022

Cryptocurrency investments: the risks and opportunities of digital currency

The market capitalization of the cryptocurrency industry has reached 2 trillion USD, with bitcoin, the most valuable cryptocurrency, trading at around 37,000 USD. Even though some nations have recognised cryptocurrencies as a legitimate means of payment, others are drafting legislation to regulate the fast expanding cryptocurrency business.

Despite widespread criticism and mistrust, the cryptocurrency market continues to expand and evolve at a rapid pace. Consider this: in 2009, the first bitcoin arrived, at a price of less than one US dollar; today, one such coin sells for 37,000 USD. Of course, as the crypto market grew and developed, many who were first sceptical began to become interested in and invest in cryptocurrencies.

FinReview.info analysts worked out how the cryptocurrency market works, where to start investing, and how to avoid unforeseen losses. Gimran Abdrakhmanov, the chief business development manager of QUANTDART and an expert in the crypto market, expressed his professional view on the evolution of the crypto industry.

The market capitalization of cryptocurrencies has reached 2 trillion USD

In terms of capitalization, the cryptocurrency industry has surpassed corporations like as Apple (2.6 trillion USD) and Microsoft (2.03 trillion USD). There are approximately 19 thousand different types of cryptocurrencies in the globe. Bitcoin and Ethereum account for more than half of the crypto market valuation. Tether, BNB, USD Coin, Solana, XRP, Terra, Cardano, and Avalanche are also in the top 10 currencies in terms of volume and reliability of financial instruments.

In barely 13 years, the bitcoin sector has attained such indicators. Many traders who saw their advantages began to invest their money. Purchase and sale activities on cryptocurrency exchanges are carried out in the same way as they are carried out on traditional financial instruments like as stocks, bonds, bonds, notes, and so on. Furthermore, the entire procedure involved with stock market operations has almost entirely shifted to an electronic format. Furthermore, it is now accessible to the vast majority of network users. And now, regardless of their level of experience or initial funds, anyone may become a crypto trader.

Cryptocurrency exchanges function similarly to trading platforms such as Forex. Each participant who invests real money has the right to perform rate analysis operations, receive signals, and engage in the sale and exchange of bitcoins and other popular types of currencies for real money.

Cryptocurrencies, on the other hand, are high-risk investments. This is attributable to the following characteristics:

Firstly, there is the potential of a crypto exchange being hacked or going bankrupt

As a result, before investing your money, you should thoroughly investigate and examine the crypto exchange. This is how you keep your assets safe. It is very important to pay attention to evaluations about the exchange, trading volumes and the number of players, commission and deposit and withdrawal criteria.

Binance leads the way in terms of daily trading volume, with 69 billion USD. There are also exchanges like Bybit, Coinbase, and FTX.

After selecting an exchange, it is critical to investigate the purchased cryptocurrency from all angles: for example, you should look into the coin’s capitalization and the team that worked on it. Behind “serious” cryptocurrencies, there is usually a large group of people working on upgrading the coin, attempting to solve blockchain challenges such as transaction speed and cybersecurity.

Gimran Abdrakhmanov says: “There are garbage coins that are at very high risk. They have a small market share”. They are dangerous due to the fact that such digital assets are new. However, it is not ruled out that a new coin will be more profitable.

Secondly, due to the decentralised nature of the market, traders are not shielded from unexpected losses

The unregulated nature of cryptocurrencies poses a considerable danger for many traders. Interest in blockchain technology has developed in tandem with the development of the crypto market, allowing market players to engage without the use of intermediaries. To make a transfer, the client does not need to wait for bank business days. Money can be moved in as little as a few minutes. This is how cryptocurrencies operate via blockchain. As a result, the decentralised character of these digital assets is frequently discussed. This has both advantages and disadvantages. On the one hand, a transfer network is available 24/7. On the other hand, there is a risk of losing digital assets. There is no one to turn to if something goes wrong, like as entering an incorrect address or selecting an untrustworthy network.

All of the world’s financial institutions are concerned about this unregulated characteristic. While some countries have banned cryptocurrencies, others are seriously contemplating accepting it as a payment option. El Salvador and the Central African Republic, for example.

Thirdly, cryptocurrencies are highly volatile

The regular swings in the value of cryptocurrencies are driven by a number of variables, including demand for them, speculation, and the global geopolitical situation. Bitcoin, as the world’s largest cryptocurrency, influences the prices of other coins. When the price of bitcoin falls, the price of other cryptocoins lowers as well.

For example, when Japan recognised bitcoin in 2017, the price increased by +300%. The price of bitcoin increased by +200 percent when the Chicago Stock Exchange announced the debut of bitcoin futures.

The decline of cryptocurrencies is typically caused by legislative constraints, technical problems (hacks and hacker attacks), and the rejection of bitcoin by significant market participants. When China banned financial organisations from utilising bitcoin in 2013, the price dropped by 30%. After South Korea threatened to prohibit cryptocurrency exchanges, the price fell by 25%.

Non-fundamental events such as the posting of tweets, memes, and various posts are examples of speculative variables impacting the price. Bitcoin prices declined by 6% in June 2021 as a result of Elon Musk’s Twitter post. Despite the fact that it was merely a broken heart emoji with the hashtag #bitcoin.

There are numerous examples of a dramatic drop or rise in the price of cryptocurrencies; simply look at the growth chart of bitcoin, which shows its extreme volatility. At first look, it may appear that long-term analysis and development dynamics are unachievable, and that cryptocurrency values do not follow any particular logic. As a result, many investors who invest in traditional, well-known products like equities and bonds are sceptical about cryptocurrencies. However, as experience has shown, it is easy to identify the primary elements influencing bitcoin prices. These are typically fundamental, speculative, and macroeconomic indicators.

The high volatility of cryptocurrencies has its advantages

The major advantage of investing in bitcoin is the price increase, which can occur in a pretty wide range – 20% -30%. Stocks, on the other hand, rarely climb more than 20%.

It is also critical to consider the timing of purchase while purchasing cryptocurrencies. You should avoid entering the market when demand is too high. When you buy coins, you either become a trader or a hodler.

Those that buy and sell in the short term are known as traders. Hodlers who buy and forget about these assets, on the other hand, are thought to be the most effective. Many people have become billionaires by purchasing bitcoin when it was worth only a few tens of dollars.

Emotional stability is the most important unsaid guideline for traders. A stop loss is required to equalise the risks. In order to mitigate his losses, a trader or investor prepares an application in which he specifies acceptable price limits.

“If we talk about whether it is worth investing in cryptocurrency now, they won’t be able to give you an exact answer and any guarantees. No one knows in which direction bitcoin will move tomorrow or the day after tomorrow. Due to the fact that many countries have decided to thoroughly regulate or ban the circulation and production of cryptocurrencies, the price can plummet. Various technical analyzes carried out by traders cannot guarantee whether the movement will go up or down,” Gimran Abdrakhmanov counts.

Bitcoin and Ethereum, the two most important cryptocurrencies, can now be purchased in parts, for example, for 50-100 USD. Because bitcoin is divided into 100 million satoshis, it offers a fantastic opportunity to invest in a currency with a price of over 37 thousand USD.

Kazakhstan earned 190 million USD from mining

Remember that bitcoin is not only purchased and traded, but it is also mined. And, if the decentralised character of the cryptosphere piqued everyone’s interest, the manufacture of cryptocoins is already a more global and large-scale issue. Industrial cryptocurrency mining consumes a lot of energy and has a negative impact on the environment. Continuous use of electricity is required for coin extraction. Some mining farms can consume as much energy as an entire town.

Despite the environmental impact, cryptocurrency mining remains an extremely profitable sector, outpacing oil production in terms of monetary receipts. As a result, the authorities must settle this issue in a way that benefits both the state and the miners.

President K.-J. Tokayev has directed that a law imposing numerous increases in mining taxes be drafted by early April. Although “grey” miners have been detected, there have been no additional tariffs imposed on crypto miners. At the moment, 55 mining farms throughout the country have ceased operations.

In mid-April, the Minister of National Economy stated that the tax on miners should be linked to the price of bitcoin. The specifics are yet unknown, but the logic behind this strategy is clear. Expert Gimran Abdrakhmanov also speaks on the subject:

“The government must create its own crypto-wallet and tax cryptocurrency miners accordingly. Due to the extreme volatility of bitcoin, taxation in tenge will become unprofitable and inefficient”.

Currently, cryptocurrency in Kazakhstan is regulated only on the basis of the AIFC, as unsecured digital assets (bitcoins and altcoins) are not permitted for circulation in Kazakhstani jurisdiction. And there is a potential to regulate digital assets within the financial centre ecosystem. They are classified as a sort of investment in this context.

Kazakhstan has made 190 million USD from cryptocurrency mining, according to the most recent figures. Furthermore, the amount of taxes that a government can earn from cryptocurrency turnover is expected to be 26.5 billion KZT every year.

Because cryptocurrency will continue to expand and improve, many experts predict that it will become a full participant in financial activities. Recognizing the market’s potential, the AIFC devised a simple method for allowing investors to participate in the most expensive cryptocurrency – Bitcoin. The ProShares Bitcoin Strategy ETF, an exchange-traded note (ETN) containing the underlying asset, has been added to the Tabys app for individual investors. Any Kazakhstani person can now purchase a cryptocurrency exchange note.

How much will the cryptocurrency rise in price by the end of the year?

The cryptosphere’s growth is unavoidable, since the number of users grows year after year. According to CrypoCompare, an analytics firm, the main crypto exchanges’ market share grew to 96 percent in February 2022. Cryptocurrencies are being used by over 300 million individuals worldwide. And there is little doubt that the growing trend of users on highly rated exchanges will continue.

Of course, a rise in bitcoin users and investments will have an impact on the price, because the total quantity of bitcoins is restricted to 21 million. This means that if the total network capitalization is 1 trillion USD and there are 20 million bitcoins in circulation, the price per coin is 50,000 USD. With a big flood of users and, as a result, a capitalization of 2 trillion USD, the price of bitcoin will rise to 100,000 USD.

According to this calculation, several investment funds forecast that the price of bitcoin would climb to 1.3 million USD by 2030, with a capitalisation of 28 trillion USD.

Such calculations are based on the assumption that an unstable traditional financial system only increases interest in alternative assets that are unconnected and uncontrolled by a certain state or company. In addition, the insecurity of national currencies in poorer countries stimulates the usage of cryptocurrencies. For example, Panama, like El Salvador and the Central African Republic, passed legislation to regulate cryptocurrency.

And Goldman Sachs, one of the world’s major investment banks, which initially refused to accept cryptocurrency as an asset, has now not only reversed its position, but has also issued the first loan secured by bitcoin on April 30 of this year.

As a result of this, we observe a growing tendency in the crypto market, as well as interest in such assets on the part of financial regulators. However, despite the increase in the capitalization of the crypto market, bitcoin and other crypto coins remain high-risk assets, so one should not depend on forecasts blindly and invest their “last” money.