Is it worth investing in cryptocurrency

Over the past few decades, the world has been rapidly moving from fiat money to digital money. Our settlement means are not unique metal disks with stamped portraits, and not paper rectangles with watermarks and unique numbers. Today, the means of settlement in transactions is a set of zeros and ones stored in a certain memory cell on the bank's server. At the same time, two main parameters are preserved: each digital ruble/dollar/yuan is unique and can be identified and accounted for, and there is a high level of trust in the electronic settlement system of settlement participants, since it is regulated by governments, federal systems and central banks.

The emergence of blockchain technology, a decentralized continuous sequential chain of blocks with unique data in each, made it possible to create digital units that meet the requirements for monetary signs regarding the uniqueness of each unit. They are created using a special cryptographic cipher, therefore they are called a cryptocurrency. Their main difference from other digital money is that their "issuer" can be not banks authorized by the Government, but almost everyone. The question of trust in such money, and, therefore, the final acceptance of it as money or recognition of it as a big fake of our time, has been solved right before our eyes over the past few years. Many analysts say that cryptocurrency is the currency of the future. The only question is when exactly this future will come. The first Bitcoin crypto coin already has in its history periods of enchanting take-off, and no less loud falls. In this article, we will try to understand the main questions that investors need to know the answers to when making a decision to invest in cryptocurrency or not:

• Blockchain technology and how it is used in cryptocurrencies.
• Pros and cons of cryptocurrencies.
• Trends and prospects of cryptocurrency.
• Ways to invest in cryptocurrencies.
• How to invest in cryptocurrency on the stock market.

Blockchain technology and how it is used in cryptocurrencies

Blockchain is a decentralized database that is designed to store sequentially connected blocks with a set of characteristics (version, creation date, information about previous actions in the network). A simplified example of such a structure is a metal chain in which you can not break or swap the links, you can only add one new one to it; then another, and another, ad infinitum. It is important that the links are added one by one and always have the "imprint" of the previous link, the one to which they are attached. Also, the blockchain chain can be represented as a book with the ability to add pages, but without the ability to delete or change existing ones.

Movement in such a system, or calculations, occur through transactions. In this case, the transaction, despite the similarity of the terms, is not what is meant by a simple money transfer. When we make payments using a bank card, information is received from the data warehouse of one bank to the storage of another – such and such a person has enough funds in his account and is currently performing a transfer operation of a certain amount. At the same time, physical paper money confirming the possibility of such a transfer should lie in the vault of the first bank and at some point move to the vault of the second. During a transaction, a special script is executed in the blockchain system, a certain note with data is written, information is processed inside the network. As if on the last page of our book, at the moment of writing, the following information appeared sequentially: "Mike transferred to Nick 70 euro"; "John transferred to Joanna 25 cents"... Several thousand such records can be stored within one block. When the memory in a block runs out, it is closed, signed and transferred to a new block in the form of a hash or "fingerprint". A hash is a certain set of characters that carries a unique fingerprint. It is formed based on what transactions and in what quantity each block stores in itself. During each transaction, the system checks the entire sequence of hashes for their integrity and immutability. After going through the entire chain, the system returns to the final block and confirms the correctness of the data so that this block can also be closed.

The chain data is stored simultaneously on a large number of individual computers and is checked by the system during transactions for identity. If someone wants to make changes to the cell by adding an additional couple of hundred coins to themselves, then the other participants of the system will not confirm such a block change, and the data will simply not be recorded. And since the number of users in these systems is several million, even if you agree with a couple of hundred of them, you will not be able to make changes. You can only change the block that is written here and now; no postings are "retroactively" possible.

At any given time, hundreds, if not thousands of people participate in the process of buying and selling crypto coins. A special miner program on one of the computers analyzes the applications in the queue, processes them and writes them to the block. In order for this data to be accepted by the system, the miner sends the final decision, that is, the calculated hashes, to the network, where the result is checked and confirmed by other miners. If the calculations are accepted by the majority, the block receives a mark confirming its correctness.

Since the basis of the reliability of the blockchain system is a cryptographic cipher, cryptographic keys are required for conducting transactions. These are unique sets of characters and numbers that the system will generate independently and present to any participant of the blockchain at the time of registration. Each participant has a public key and a private key. The public key allows all network participants to see data that is not private. By analogy with digital payments, this is like the number of a digital wallet or a bank account that everyone can know. In this case, the private key is similar to the password from the wallet or from the online banking system, according to which all actions are performed with the account or wallet.

It is worth noting that blockchain is a technology that was created not only for use in cryptocurrencies.Cryptocurrency and transactions with it are just one of the ways to use it, but its possibilities are much wider.

Read more: What are Altcoins

Pros and cons of cryptocurrencies

Despite the fact that crypto coins are not coins in the literal sense of the word – they simply do not have a material embodiment, they still have "two sides of the coin". Let's start with the advantages:

• Anonymity. When crediting money to a bank account, any user provides the bank and all related systems with a lot of information about himself, without which the account simply will not be opened, and the money will not be credited.  When making calculations, the banking structure analyzes a lot of information about us: passport data, registration address, family composition, sources of our income, the presence of debts… We provide this data ourselves by signing an agreement on the processing of personal data. Then our data gets into the database, and leaks often occur from there. In addition, a number of bank employees have access to the database, which is not pleasant for everyone. There is no such thing in cryptocurrency. All that is known about the participant of the chain is the digits of its public key. No personal data is transferred anywhere, and it is not requested; there is simply no need for them. This quality of the crypt is very valuable in our age, when information has become the "oil of the 21st century".
• No intermediaries in transactions. Since all data changes are made programmatically, no bank employees, employees of depositories and other "third parties" are required in the process. Unlike, say, bank transfers: when transferring money, the client should not blindly rely on the quality of the banking system and the integrity of all participants; it does not take a long time for the process itself (with bank transfers, sometimes the crediting period is 3-5 working days due to verification procedures). You do not need to open additional accounts for transfers to other countries; calculations in cryptocurrency have no boundaries.
• The impossibility of falsification and theft. The simultaneous storage of data on many computers in different parts of the world and the transparency of exchange operations makes it impossible for any forgeries, as well as transfers without confirmation by all participants. Moreover, the more participants are involved in the process, the more reliable the system becomes; such a "snake biting its tail": the more reliable the coin, the more users it attracts, the more reliable it becomes.
• The issue limit. There are two limiters here. The first, simple, is set by the author of the coin, and can be changed only by agreement of the majority of network participants. For example, Bitcoin has an issue limit of 21 million units. This information is also contained in the block data. But there are coins without a preset limit. For example, the currently popular Ethereum does not have a certain release limit. However, for any crypto coin, there is a release limit associated with the computing power of the network. As follows from the process of adding blocks to the chain described above (and the appearance of a new volume of coins is carried out in the same way), it takes quite a lot of energy and a certain period of time. As the chain grows, each subsequent block takes longer and more difficult to form. By the way, this aspect indirectly affects the increase in the value of coins with a large number of participants. In addition, for the "extraction" of each subsequent coin, a higher computing power of the equipment is required, which means that the financial costs for its acquisition are higher.
• Decentralization. The process of the emergence of cryptocurrencies is not regulated by any banks, reserve systems or governments. Even the creators themselves cannot control this process. A lot of people included in the chain issue and manage the movement of crypto coins. In such a situation, it is impossible to introduce restrictions on the distribution of coins. The absence of a single central data custodian (for example, a central server in a bank) also excludes a situation in which one accident will disable the entire payment system.

But crypto also has its drawbacks

• The absence of "responsible persons" and the possibility of insurance. When opening a bank deposit, you can insure it. If your funds in the bank account are attacked by intruders, the banking security system will be responsible for your funds. This is impossible with cryptocurrency. De-personification of stored data automatically makes it impossible to recover digital keys; if the owner of the key (and the cryptocurrency) did not hide the key carefully enough, or, on the contrary, too carefully and eventually lost it himself, it is impossible to restore the key.All coins belonging to this owner will automatically disappear from circulation. It is also impossible to cancel transactions carried out by scammers who have gained access to the private key. Full responsibility for the safety of funds lies only with the owner.
• High volatility. The chart below shows the four most popular cryptocurrencies in comparison with the S&P 500 index. The exchange rate of each of the currencies is influenced by a lot of factors that do not matter for the rates of major currencies or, for example, securities ("What affects the value of shares"). A new company or even the smallest state that has announced the possibility of settlements in a particular cryptocurrency raises quotes up with the speed of a rocket. Negative news drops them down with the same speed. We can say that the main factor of any money – the degree of trust in it by those who actually use it-is being formed right now, before our eyes. The statements of media personalities, authors of literary bestsellers, financial gurus-everything affects the change of course. One of the most popular "crypto trolls" has recently become Elon Musk. As a result of one of his tweets in January of this year, the exchange rate of the coin jumped by almost 20%.A few months after Tesla promised to start accepting tokens as payment, the company abruptly abandoned this idea. Elon Musk wrote about this decision on his page in mid-May, and this brought down the bitcoin exchange rate by 15%.
• Lack of a legal basis. This is probably the "weakest point" of all cryptocurrencies. At the moment, there are a number of positive facts: in Germany, bitcoins are recognized as a settlement currency, in Japan, Bitcoin is a legal tender with a purchase tax. Switzerland is subject to the same rules for cryptocurrencies as for foreign currencies, and this country is one of the most favorable jurisdictions for Bitcoin startups. The Singapore authorities consider cryptocurrency as a cross between an exchange-traded asset and ordinary money; crypto coins can be exchanged for goods and services, activities with them are taxed on a par with investment instruments. Cryptocurrency has also been legalized in the United States; as follows from the conclusion of the Supreme Court of 2016, "Bitcoin is money in the literal sense of this term.". It would seem that global trends support the development of the crypto market. But recent events in China have shown the fragility of the current position of “people's” money. By one legislative act, the Chinese government banned banks and financial organizations from dealing with cryptocurrency, citing its high volatility and unpredictability, and therefore a danger to large financial structures. Negative statements were made at the beginning of 2021 from other governments, including the United States and Canada. The instability and inability to influence the exchange rate of digital coins cause concern for the safety of the well-being of people investing in them. There was talk of creating internal crypto coins at the state level. If this happens, there is a high probability of banning the "people's" crypt at all levels in support of the "state" crypt.

Read more: Blockchain technology: how it works and where it is used

Cryptocurrency trends and prospects

At the moment, cryptocurrencies obey the standard laws of the market and are regulated by the simple impact of supply and demand on them. The number of participants in the crypto market has long exceeded the limit of a million people, so this market cannot simply disappear in the near future. Looking at what is happening now in this market, we can identify the main trends for the near future:

Increase in the number of users. With the increase in the number of manufacturers accepting bitcoin and altcoins as a means of payment, the number of users who are ready to try the new currency both as a settlement tool and as an investment option, at least in small, cautious volumes, is also increasing;

Tightening of regulation of the cryptocurrency market by states. Similar bills are being prepared now in many countries, including those who were leaders in the adoption of cryptocurrency as a means of payment: Canada, the United States, Switzerland;

An increase in the number of cryptocurrencies, the development of "young" cryptocoins and the expansion of infrastructure opportunities due to competition. Technologies in the modern world are developing at an insane speed. Blockchain technology is no different from the rest; and already today, the system on which the "old man" Bitcoin was founded and continues to develop is significantly inferior to the newly emerging coins in terms of security, transparency and infrastructure convenience. This situation, coupled with a large number of coins on the crypto market, will sooner or later lead to increased competition between systems and, consequently, to the modernization and expansion of the capabilities of the systems themselves, as well as to a decrease in the level of transaction fees.

Ways to invest in cryptocurrencies

It is possible to invest in the crypto market both directly, by buying cryptocoins directly, and indirectly in various ways: by purchasing ETFs (ETF funds), buying futures contracts for Bitcoin, or by purchasing shares of companies related to cryptocurrencies. Both direct and indirect investments have their advantages and disadvantages.

Read more: What are futures: types, features, advantages and risks

The advantages of direct investment include the following:

• By buying Bitcoin or another crypto coin, an investor acquires a kind of currency that has solvency in the market. In other words, having a cryptocoin in your wallet, in a number of countries you can purchase goods or pay for services with these units, without exchanging them for fiat money;
• As an object of investment, most of the cryptocoins, especially if you choose the most popular ones for investment, have high liquidity. Even if there is no possibility of direct payment for goods and services, you can exchange the crypt and get electronic money into your wallet in a very short time;
• Given the high volatility of cryptocoins, a good entry point can provide an investor with a very high level of income. In this case, it is important not to miss the right exit point for fixing this income.

Among the disadvantages of directly buying cryptocurrency as an investment, the following should be noted:

• The low level of the possibility of forecasts. Given the large number of factors affecting the crypt, it is very difficult to assess the probability of a coin rising and falling; the risk level is close to the banal casino;
• The possibility of losing all invested funds. If the world governments still come to the conclusion about the rejection of the "people's currency" as a settlement tool and decide to ban it as a financial settlement tool, there are risks that all the funds invested by investors will turn into zero;
• The complexity of choosing an investment cryptocoin. Bitcoin and Ethereum, due to their high popularity, are approaching the limit of their possible profitability. Those who did not have time to buy them at the start, now they can no longer count on serious profits. Other, less popular coins still retain this possibility. However, it is very, very difficult to understand this variety and guess which of them will "work";
• The need to enter specialized exchanges to buy an asset and create special wallets for storing it. A high level of digital security is required to ensure the safety of;

Among the disadvantages of directly buying cryptocurrency as an investment, the following should be noted:

• The low level of the possibility of forecasts. Given the large number of factors affecting the crypt, it is very difficult to assess the probability of a coin rising and falling; the risk level is close to the banal casino;
• The possibility of losing all invested funds. If the world governments still come to the conclusion about the rejection of the "people's currency" as a settlement tool and decide to ban it as a financial settlement tool, there are risks that all the funds invested by investors will turn into zero;
• The complexity of choosing an investment crypto coin. Bitcoin and Ethereum, due to their high popularity, are approaching the limit of their possible profitability. Those who did not have time to buy them at the start, now they can no longer count on serious profits. Other, less popular coins still retain this possibility. However, it is very, very difficult to understand this variety and guess which of them will "work";
• The need to enter specialized exchanges to buy an asset and create special wallets for storing it. A high level of digital security is required to ensure the safety of;
• The presence of a spread between the purchase price and the sale price and the commission for the purchase. To make a profit, you need to wait for the sale price for the volume available in the wallet to exceed both of these cost factors.

Investments in ETFs, ETP and ETN on bitcoin have the following advantages:

• The volatility of such funds is somewhat lower than the volatility of the coin itself. Diversification of assets within funds somewhat smooths out price fluctuations;
• When buying fund units, the investor avoids the issues of purchasing and storing cryptocoins, issues of spreads and commissions. The only additional expenditure component in this case will be the commission of the fund itself. For different funds, the commission is from 0.4 to 2.5%;
• A number of funds (but not all) have insurance against risks.

Read more: Exchange Trade Funds (ETF)

Unfortunately, there are more disadvantages:

• All traded funds are quite young, and most of them appeared on the markets only a year or two ago, so they do not have historical returns, based on which it would be possible to assess their investment prospects;
• At the time of writing, there are only four ETF funds for cryptocurrency on the world markets; the remaining funds are of the ETN type. ETN funds, having similarities with ETFs, have a different internal essence; they are not backed by physical assets, and are debt obligations issued by a large bank or other financial institution. In the event of an ETF bankruptcy, the fund's management has the opportunity to sell off assets and return some of the funds to investors; in the event of an ETN bankruptcy, the investor completely loses his investments;
• A number of funds, in addition to the management fee, take a premium for profitability, sometimes reaching 20%;
• The composition of the funds is not determined by the investor. When buying shares of the fund, it is necessary, along with assets in which there is a desire to invest, to acquire other assets in which there may be great doubts.

How to invest in cryptocurrency on the stock market

Another type of indirect investment in cryptocurrency is the purchase of shares of companies related to cryptocurrency. This type is devoid of the disadvantages of direct investment, since the procedures for buying and storing shares are long-established and understandable, and the volatility of stock prices of companies associated with the crypto market is not as high as that of the cryptocurrency itself, since these companies are engaged in the production of products and services of various types, and therefore are to some extent stabilized by these additional goods and services. Shares can be selected point-by-point, and no additional commissions are required for their purchase. Therefore, there are also no disadvantages of investments that are typical for cryptocurrency ETFs in this type of investment.

A precise selection of high-quality assets allows a competent investor, on the one hand, to invest in such a highly interesting market as cryptocurrencies, and on the other, a careful choice of specific stocks will allow avoiding the huge risks associated with the world of tokenized money.

Coinbase (COIN)

Coinbase Global is one of the leading providers of complex financial infrastructure and technologies for the crypto market, and at the time of writing, it owns one of the first crypto platforms created that allow customers to store their savings in a wide range of crypto assets – more than 50 types of crypto coins. The company is the leader in trading volumes among American exchanges that trade crypto: $3.33 billion worth of cryptocurrency is sold and bought on Coinbase per day. The platform ranks eighth among the world's cryptocurrency exchanges. This is the first cryptocurrency exchange traded on the stock market. Coinbase was founded in 2012, went public on April 14 of this year with a share price of $ 250; in a short time, the price soared by 70% to$ 429, and then fell to the level of $ 228 per share and remains approximately at this level for several months. Meanwhile, the company's financial indicators are excellent. In the first quarter of 2021, the exchange's revenue soared 9.5 times compared to the same quarter last year — from $190 million to $1.8 billion. The result exceeded the entire revenue of Coinbase for 2020 ($1.14 billion). Net profit was $730-800 million, which is also much higher than earnings for the whole of 2020 ($322 million). In the first quarter of 2021 alone, Coinbase attracted 13 million users. Despite the fact that the company currently has 56 million customers in total. Monthly users  that is, those who performed at least one operation during the month were 6.1 million people in the first quarter, twice as many as in the previous quarter (2.8 million). The P/E multiplier is about 9 times higher than the average for the sector, but at the same time the PEG is only 0.6, which indicates not overheated growth.

Read more: The history of the Coinbase exchange

Square (SQ)

Square is an American company of the technology sector, founded in 2009 and developing equipment and software for receiving and processing electronic payments. The company was one of the first to actively develop and implement specialized applications for payments and cryptocurrency trading. By the end of 2020, more than half of the company's revenue was generated from the direction of cryptocurrencies. This company earns both on the growth of cryptocurrency prices, when a large number of investors buy it, and on the fall, when many sell their assets. The company's financial indicators are growing from quarter to quarter. Similar to the previous company, the P/E of the shares is quite high and is 309, which is about 8.8 times higher than the average for the sector, but the growth of the shares is provided by a more rapid growth in revenue and profit, as a result of which the PEG multiplier of 0.7 indicates a non-overheated growth in the share price.

Advanced Micro Device (AMD)

Advanced Micro Devices is engaged in the development, production and sale of microprocessors, chipsets, chipset motherboards, discrete and integrated graphics processors, etc. In particular, it produces a line of high-performance video cards that are designed directly for mining cryptocurrencies. The company has been operating since 1969. The production of products is completely carried out by third-party contractors located in different countries of the world. The growth in the number of cryptocurrency miners, among other things, affects a significant increase in the demand for the company's products; its chips and video cards. At the time of writing, the company holds a 29% share of the video card market. The company's financial indicators are steadily growing. The P/E multiplier corresponds to the market value.

PayPal Holding Company (PYPL)

PayPal Holdings is an American company that manages a worldwide online payment system. PayPal Holdings operates almost all over the world, the operation of the payment system allows customers to send, receive and store funds in 25 currencies of the world. PayPal Holdings competes with all forms of payment: cash and checks; payment platforms for electronic, mobile and e-commerce; blockchain technologies and digital currencies. The competitive advantages of PayPal are the global scale of its activities, the ability to make uninterrupted transactions in different markets and in different networks, the reliability of the system and data security, the ease of integration into mobile applications and operating systems. The payment system provided access to cryptocurrency back in November 2020, and in April of this year, the Checkout with Crypto Service was launched, allowing users to pay with cryptocurrency around the world. Now it is possible to convert bitcoins, ether, bitcoin cash and litecoins into fiat currencies for making purchases without a commission from the company, as well as without paying for storing cryptomonets. At the same time, the company itself has existed since 2002 and has long held a strong position on the stock market. The stable growth of indicators, which cannot be affected even by serious crises, speaks for itself.

From the point of view of investment valuation, the company is valued significantly more expensive than the average sector level. However, in the current situation, this should be regarded as a persistent expectation of participants for a significant increase in revenue and profit of the company.

Conclusion

Newly emerging technologies in the stock market cause a stir among investors. Each novelty that has attracted enough attention and received a credit of trust from market participants can soar high in a short time and create a couple of dozen new millionaires and billionaires. At the same time, a reasonable investor is far from the "casino principle" and understands that creating a serious state and preserving it requires deliberate steps and investments in truly promising technologies for a long period.

Observing the newly appeared and so far extremely unstable cryptocurrency in its trend, for the current day it seems that the safest investments are in those instruments that will grow both on the wave of rising interest in the crypt, and during periods of recession and "sell-off". These are shares of companies that are somehow connected with the crypto market, but thanks to the wide diversification of activities, they are able to maintain their financial stability even in the event of a failure of the "crypto idea".

In addition, the crypto market is an area that is already at the stage of overheating, so there is a risk that investments in this area in the short term will not bring investors super profits similar to those received by investors who became owners of cryptocurrency a year or more ago. However, this is not the only area that opens up wide opportunities for investors. But the list of industries that can radically change our lives tomorrow is far from being limited to those considered. In addition, we must always remember that the prospects of the industry does not directly determine the prospects of all the companies that form it. The investment value of a company is determined, in addition to the activity profile, by fundamental factors that can be identified only on the basis of an in-depth analysis.