Dummies guide to crypto
‘Don’t buy it unless you have a super computer for algorithms’
AN economist has revealed why he’d never invest in cryptocurrency and warns those interested in buying virtual currency to weigh up the risks.
Griffith University Professor of Economics Fabrizio Carmignani said the price of cryptocurrency was volatile and a risky investment.
He said people were attracted to cryptocurrency because they assumed it was an easy way to make money but warned it wasn’t without risk.
Prof Carmignani shared his thoughts on cryptocurrency and why he doesn’t invest in it.
WHAT IS CRYPTOCURRENCY?
It is a digital or a virtual currency. So it is a currency but it doesn’t exist in physical terms. It’s created through a network of computers and it’s traded online. They way in which this currency is created is technically very complex. It’s a process based on very complex algorithms but the notion is quite simple.
It’s essentially a virtual digital currency that is issued, not by a central bank or government, but through a network of computers based on an algorithm.
WHY ARE SOME PEOPLE ATTRACTED TO IT?
Everyone wants to get rich with cryptocurrency. Some people are very attracted to cryptocurrency for two reasons. The first one is because they do believe it’s relatively easy to make money.
They think, ‘OK, I’ll buy cryptocurrency, yes the price is volatile but it will eventually increase, in a sense it’s like an investment opportunity that will eventually pay off’.
The second reason why they’re attracted to it is probably because they think it’s an easy way to make payments.
Some who are psychologically more aware might think it’s a way to make payments without having to comply with the interferences of a government or a central bank.
These are essentially the reasons why I believe people are so attracted by cryptocurrencies and these are legitimate reasons.
There are also some very relevant risks and disadvantages that at the moment it seems to me the conversation tends to be neglected.
People clearly see the advantages and benefits of cryptocurrency but they seem to be forgetting or neglecting the risks and the disadvantages.
DO YOU INVEST?
I don’t invest in cryptocurrencies and I try to be open and neutral. I see reasons why some people would want to do it, and if they want to do it, I would keep in mind the need for diversification.
But personally, I don’t buy cryptocurrencies and I’m not planning to, to a large extent because I am not a risky investor. I don’t like risk. I am very happy with using dollars and credit card for payment.
I am not ideologically against national currencies. I don’t fear the manipulation of interference by the government so I don’t have a reason to dislike national currencies.
I could maybe one day for the fun of it go to the website and buy some fraction of Bitcoin just as an experience to see what it looks like.
There’s nothing that I find attractive in cryptocurrency.
WHEN CAN I USE IT?
You can use it right now. Anyone can go to a website and buy some cryptocurrency and use them for payment with other people or companies that accept cryptocurrency.
If you owe me $100 but I don’t believe in cryptocurrency, you can’t pay me in cryptocurrency.
But if you go online and you want to buy something from an online retailer and they give you the option to pay with cryptocurrencies then obviously you can do that. You pay for real goods and services with cryptocurrencies.
Cryptocurrency differs from legal currency like the dollar … everyone has to accept dollars for payment, but no one has to accept Bitcoin if they don’t want to.
The number of companies and businesses that are accepting cryptocurrencies is growing and anyone can do that, you just need to go online and follow the instructions to buy some cryptocurrency.
WHAT DOES IT MEAN WHEN YOU MINE IT?
There are other ways of earning cryptocurrency and that’s by mining it. So essentially you can become part of the network of computers that create cryptocurrencies.
But this is not easy at all because it is said the creation of cryptocurrency is based on extremely difficult algorithms, so in order to be able to mine crypto, you need to have a very sophisticated computer system that allows you to solve very high-level mathematical problems.
Not everyone can mine cryptocurrency but almost everyone can buy cryptocurrency through the website.
My advice for someone who is thinking about mining for cryptocurrency is to think about it twice because it is an extremely competitive process which requires strong antecedence and a very sophisticated computer system. And you need to invest a lot of energy and a lot of electricity, the power from the grid, because those computer systems can absorb a lot of energy. Essentially mining is about you becoming part of the process, part of the algorithm, through which new cryptocurrencies are created.
So you’re not just buying cryptocurrencies, you are creating it. Obviously, if this was easy, everyone would be doing it and the price of crypto would drop and would have no reason to exist.
The way in which cryptocurrencies are designed is extremely complex.
The algorithms that are used to create cryptocurrencies are solving mathematical problems of an extremely high level and as a reward, you are given a token.
I SEE REASONS WHY SOME PEOPLE WOULD WANT TO DO IT, AND IF THEY WANT TO DO IT, I WOULD KEEP IN MIND THE NEED FOR DIVERSIFICATION GRIFFITH UNIVERSITY PROFESSOR OF ECONOMICS FABRIZIO CARMIGNANI
WHY IS BITCOIN VALUABLE?
The value of a Bitcoin relative to dollars changes. The exchange rate between crypto
currencies and dollars is different for different cryptocurrencies. A single unit of Bitcoin today is worth about $47,000. So if you want to buy an apartment that’s worth $500,000, you’ll need approximately 10 Bitcoins.
That’s because there are very few Bitcoins around and therefore in this sense it’s like any other commodity.
Why is 1g of gold so expensive? Why is 1g of platinum so expensive? It has to do with the relatively scarcity of the commodity.
SHOULD I INVEST?
For any investment it’s important not to put all your eggs into a single basket. I always diversify my investment strategy.
Respective of how much money you have that you want to invest it’s always a good idea to diversify, don’t put all of your life savings into cryptocurrency.
The second thing is to be prepared to face some risk. Often we as human beings are attracted to very high returns and forget that it’s an
almost inevitable law of financial investment that when you expect a very large return, the risk is very large.
It doesn’t take much to change the price of cryptocurrencies. We’ve seen this. All it takes is a couple of tweaks by a major financial tycoon to affect the price of crypto.
In a sense, if you do invest in cryptocurrency you should be aware of the risks.
The third thing I would suggest is that because there are very different reasons why you want to buy cryptocurrency,
make sure you’re buying it knowing what the purpose of what the purchase is going to be.
If you’re buying cryptocurrencies too for the purpose of investment then maybe you need to be prepared as I said to buy, sell and face the risk.
If you buy cryptocurrency and you’re primarily using crypto as a means of payment then you might want to be a bit more patient irrespective of the volatility of the price.
I would say these are common sense type of considerations I would make before buying cryptocurrencies.
WHAT ARE THE DOWNSIDES?
Cryptocurrencies in general, maybe not Bitcoin, but other cryptocurrencies, because they are anonymous and difficult to trace, they could potentially be used for illegal transaction. And that’s something we need to be aware of.
Some cryptocurrencies are particularly difficult to trace and it’s a known fact that they could be easily used for illegal transactions.
As we grow the uno cryptocurrencies, these are issues we need to look at. There are issues around regulation and registration and how to make sure cryptocurrency do not become the currency of crime.
I find the process of mining cryptocurrency bad for the environment. The more people who get into this business and start mining cryptocurrencies the more consumption of energy we will have.
And so I am a bit concerned about the possible macro impact of cryptocurrency on the environment in terms of energy.
I’m sure at some point the technology will evolve, but right now, the equipment and time that is required to mine cryptocurrency, this is all energy from the grid that has to be used and absorbed and so there is some environmental impact.