Risks and rewards of cryptocurrency

This article is part of
Guide to bitcoin and blockchain

Risks and rewards of cryptocurrency

Cryptocurrencies are new, and because of this there is often a great deal of scepticism: people do not like change.

Just because bitcoin, Etherium, DentaCoin and others are new, does not necessarily mean they are bad. Just because these are traded and 'mined' online does not mean this form of transaction is anathema maranatha. 

Financial advisers are, naturally, sceptical in the main about internet-based transactions, especially when the intrinsic value is hard to discern and nobody even knows whether the Father of Bitcoin, Satoshi Nakamoto, even exists. 

In fact, even those advocating the use of blockchain to increase productivity in several industries are also sounding a note of caution. One such person is Clem Chambers, chief executive of stocks and shares website ADVFN, who says: "Be extremely sceptical".

The majority of Britons seem to feel the same way. In January, a survey from bridging lender Market Financial Solutions (MFS) revealed 53 per cent of UK adults, based on a representative survey carried out among more than 2,000 individuals, would rather invest in traditional asset classes in 2018 than in newer ones, such as cryptocurrencies.

At the time, Paresh Raja, chief executive of MFS, commented: "Despite the hype surrounding new asset classes such as cryptocurrency, the majority of investors are still placing traditional investments, such as property, at the top of their list in 2018."

Virtual reality 

Some commentators to this guide have suggested it is not so much the neological nature of cryptocurrency and the lexicon springing up around it that is driving people's aversion to crypto, but the fact few people really understand how cryptocurrency works.

It is a standalone 'asset class' in its own right and not bound by external forces. This makes it very attractive for people who want the freedom that online currency transactions can bring. 

Mr Chambers comments: "Cryptocurrencies are not shares, nor bonds, options or commodities. Bitcoin and all the other cryptocurrencies are their own ecosystem and obey rules that no-one fully understands.

"This is where high risk gets to equal high reward. The opportunities are vast in potential scope and we are only just at the beginning. Cryptocurrency is just the tip of the spear."

However, some would also point out that cryptocurrency is not even a currency.

As a result of its newness, its uniqueness and its 'uncontrollable' freedom, commentators have highlighted other inherent risks with cryptocurrency, over and above the usual risk/reward ratio on the basis of which most people invest. 

Matthias Kroner, co-founder and chief executive of financial entrepreneurial business Fidor, sums up the difference between speculators thinking the cybercurrency is an investment - these are the "speculators" - and those companies using cryptocurrency to fund special projects. 

With the difference in outlook between these two groups as to what the real use of this virtual asset class can be, comes the inherent risks.