Are cryptocurrencies safe?
The constant evolution of technology and the global economic system has given rise to contactless payments systems. The manifestation of contactless payments systems was first seen during the golden age of capitalism post World War II when there was global acceptance of Visa and MasterCard as payment systems. Today, with the COVID 19 pandemic putting a halt to air travel and human interaction globally, we have seen cryptocurrencies gaining popularity especially with the ‘Bitcoin’ craze, and get rich quick schemes by ‘investing in cryptocurrencies. For most individuals, cryptocurrency means Bitcoin. However, it should be noted that there are more than about 4,000 different kinds of cryptocurrencies that are being circulated today in the blockchain (a database that stores chronological data to validate a transaction) that cryptocurrencies utilise to transfer coins to one another. In this article, we will simplify the concept of cryptocurrencies so that consumers are well informed on the risks involved whenever purchasing them and if it is worthwhile to even take up personal loans in Singapore to buy cryptocurrencies to make money.
What are cryptocurrencies?
Cryptocurrencies are digital currencies that are stored by individuals in electronic wallets that enable them to send and receive payments to one another, without relying on a bank to validate the transaction. In the case of Bitcoin, using blockchain technology decentralises it to prevent financial institutions or governments from regulating its circulation, hence the value of a Bitcoin is dependent purely on market forces of supply and demand. This mod gives its users and consumers the complete control and opportunity to fairly evaluate the price of each coin.
What is a blockchain?
It is impossible to completely understand cryptocurrencies without understanding the mechanics of blockchain technology. Just as how financial institutions store and keep financial data, a blockchain is a record-keeping technology behind Bitcoin. It stores and validates data in a sequential manner using cryptography and then the data is kept in the form of a ‘chain’.
Risks involved with cryptocurrencies
The risks involved with cryptocurrencies are mainly similar to risks involved with many other financial products. The existence of any product in digital form exposes itself to technical glitches and also to the dark side of the internet world, controlled by criminal organisations and hackers. We have seen countless attacks on the technology surrounding cryptocurrencies as wherever there is money to be made, it is almost certain that we would encounter such acts.
Is it safe to take a personal loan to buy cryptocurrencies?
It is common to hear ‘rags to riches’ stories of individuals becoming multi-millionaires with their investments in cryptocurrencies. It should always be noted that if we have any doubts over buying a product or if we do not understand the actual reason supporting the increase in price for any product, then we should avoid investing in those financial products, let alone applying for a personal loan with a definite loss of the interest payable, without any definite or certain returns from our investment. Investments should provide us with a definite return of at least 3% per annum to beat the average yearly inflation rate at least. We have seen cryptocurrencies fluctuate between 10%-20% daily. This does not make it a favourable investment product.
Personal loans in Singapore generally have interest rates of 5-10% per annum
We should avoid investing in any financial product if we have to resort to a personal loan in order to finance it. Investments should be done with our excess funds after allocating towards our monthly financial obligations and expenses.
With the complexities surrounding cryptocurrencies and blockchain technology, it is almost inevitable to consider cryptocurrencies as probably one of the safest forms of the monetary system that we have ever encountered. However, this is purely based on its existence as a global currency and not as a commodity. Commodities are goods that are traded frequently to make a profit from their buy and sell pricing. Traders and investors will always look for opportunities to gain from any given financial products that have such high volatility. That’s exactly why we should avoid looking to make money by trading cryptocurrencies but rather buy those currencies with strong supporting blockchain technology as that would be, in a way, investing in value rather than just speculation.
Lastly, we should not intertwine the concept of cryptocurrencies and investments as their functions are completely different. As a currency, cryptocurrencies are almost as good as it gets as it prevents itself from external manipulation such as expansionary monetary policy which may cause excessive printing that may devalue the given currency. These factors should always be considered whenever evaluating the role of cryptocurrencies in our global economy.