The introduction of cryptocurrencies had created quite a wave throughout the globe.
It was the first time that a currency was introduced which had no physical existence and was independent of any monetary policies or mediation.
These were both advantages and disadvantages for the currency and investors. For delving into the world of cryptos it is elementary to know both its advantages and limitations.
The popularity of cryptocurrencies is primarily because of their depoliticization. No central bank or government can issue it or remove it.
No one has the authority to demand or freeze the currencies. It is completely based on ‘peer to peer’ networking. Trust is the primary basis of transaction and investment.
Limitations of Cryptocurrencies
- Volatile Value: Since there is no regulatory board or policies for the Bitcoin Code, they rise and fall rapidly. The market forces of demand and supply are the only determinants of the value of cryptocurrencies. No regulatory forces lead to no ceiling or floor values for cryptocurrencies. Investment in these currencies becomes highly risky most of the time. Investors also have to be very alert and on the toe about the rapid rise and fall in prices. One can make huge profits as well as incur huge losses. Selling at the right time, correct prediction and anticipation are primary skills one needs to pick up before investing large sums in cryptocurrencies
- High Risk: The risk of incurring a loss are multifarious in the case of cryptocurrencies. The value of cryptocurrencies might fall due to decrease in demand. Since there are no regulatory forces for negotiating a floor value, one might incur massive losses. If there is a technical error in the wallet of an investor, no amount of money can bring back the orphaned cryptocurrencies. Those currencies are lost forever. The value of those currencies are also lost and no recoveries can be made. The only way this can be avoided is having a phrase code as backup. This can redeem the coins lost due to technical or human error.
- No Consumer Protection: If there is any loss incurred or any glitch in the network there is no place to register a complaint. Since there are no regulatory or governing bodies for cryptocurrencies, there can be no registered complaint. It is very difficult to sort out issues in the network, especially if they are technical issues. It is like buying a gadget with no service center or customer care. This causes a lot of investors to back out of investing in this currency.
- Lack of Cyber Security: Since the entire transaction is held online, it is very important that personal information including bank details of investors remain secured. Although most cryptocurrencies use secured networks for transactions, there are always chances of hackers to steal information and privacy from a network. If there is a system, there is also a counter system. Since there are no regulatory boards or consumer security policies, people are often reluctant to invest in the same for security issues.
- In-built Deflation: Cryptocurrencies are capped at a maximum of 21 millions. As more bitcoins are traded, the supply is reducing, increasing the value of bitcoins by tremendous rates. Investors are confused about when to sell the currencies, leading to an automatic deflation. It is better for early buyers or investors only.
In spite of all the limitations and disadvantages of the cryptocurrencies, they have become highly popular and gained ground globally. It is important to understand and delve into the details of both advantages and limitations of the currencies before investing in them. Judicious decisions are necessary for greater outcomes.