What are the pros and cons?

There were over 85 million wallets for cryptocurrencies worldwide in 2022. That has Grand View Research calculated. And the number of investors is expected to continue to rise. While the bankruptcy of the popular crypto exchange FTX last year deterred interested parties, others see the falling prices for cryptocurrencies as a good entry point. “A lot of people are afraid of missing out. That’s why they get on,” says Hartmut Walz, financial economist at the Ludwigshafen University of Applied Sciences, to the dpa.

Investing in the crypto market involves a high level of risk: Investors not only have to be able to withstand the strong price fluctuations. The handling of the tokens also differs greatly from other investments such as shares or index funds.

So what are the pros and cons of investing in cryptocurrencies? We took a closer look at some of the arguments and asked experts. From our topic special “New Finance”.

“Cryptocurrencies are a new asset class with potential, especially when it comes to using this technology in other areas,” says market analyst and blockchain expert Timo Emden from Emden Research. If you look at the past, you can see what price opportunities there are.

In fact, blockchain technology is not only suitable for payments and as a means of storing value, as we know from government currencies. The technology behind digital currencies manages and processes data. Many usage scenarios that are already in use today can be derived from this simple definition.

These include digital identities, patient records and insurance services. Electronic options for elections, intelligent contracts (smart contracts), protection of intellectual property, automation of business processes or transparent and fast supply chain management. In addition, we are already seeing the trend to tokenize real assets such as real estate or luxury goods, i.e. to map them on a blockchain.

It is still unclear which of these possible applications will ultimately prevail and which new ones will be added. Although the technology can be used in many ways, it is not always necessary or efficient.

The cryptocurrency market is new and disruptive. However, it is also still very young and far from mass adaptation. Economist Hartmut Walz therefore warns: “It is a fatal signal that buying digital currencies is becoming easier and easier. This is aimed at the wrong target groups.” Experience with the asset class is still sparse. And those who want to invest should ignore the fact that many coins have long since been discontinued.

“Nobody can really assess the risks” – financial economist Hartmut Walz

So many investors ignored the dangers of a purchase. “Nobody can really assess the risks, especially not small investors. Even the basics of the technology behind the currencies are difficult to understand,” says Walz. One principle applies to investing: You should only buy investment products that you understand. Only then does an investor know where his money is.

Since there are no real values ​​behind the digital currencies, they can disappear from the market at any time or be replaced by other currencies. In such a case, the money invested would be wasted. Investors should keep that in mind.

A single tweet from Tesla founder Elon Musk can be enough to set bitcoin prices in motion. For example, when the entrepreneur announced in 2021 that customers could also pay for their e-cars with crypto money in the future. This was then revised again shortly afterwards. “Profits in digital currencies are pure luck. Nobody can predict how the market will develop in the long term,” says Hartmut Walz.

“Volatility is a natural part of the market” – crypto investor Susanne Fromm

Susanne Fromm, CEO of the crypto investment company Coin-IX, probably doesn’t have a crystal ball either. However, she and her team believe in the crypto market for the long term. “Volatility is a natural part of the very young market,” she says. “We crypto investors are already familiar with such short-term price slumps. Like many other investors, we use price slumps as an entry opportunity and top up our positions at low prices,” says Fromm.

She sees the on-chain signals as very positive towards cryptocurrencies in the long term. For example, the number of wallets and the amount of crypto assets held on them is constantly increasing. Cryptocurrencies represent a large growth market for them, from which investors with a long investment horizon in particular can benefit. She told t3n in an interview.

In times of crisis, many stock portfolios slip into the red. Investors long for a safe haven for their assets. But is Bitcoin really a crisis currency? Proponents would argue that cryptocurrencies are not controlled by any central bank and are therefore not directly influenced by government monetary policies.

“The ‘safe haven’ narrative is and remains a myth” – market analyst Timo Emden

But due to the high volatility alone, market analyst Emden distances itself from cryptocurrencies as a safe haven. At least in the short term, Bitcoin is not a suitable store of value, he explains in more detail in the t3n interview. Emden warns the dpa: “Crypto currencies offer no protection in market phases characterized by uncertainty, as they act as a high-risk asset class and are usually abandoned quickly when uncertainties arise. The ‘safe haven’ narrative is and will remain a myth.”

Bitcoin as digital gold? This comparison is often made when it comes to cryptocurrencies in times of crisis. The oldest of all cryptocurrencies is also compared to the precious metal because of its limited availability. Similar to precious metals, which are not endlessly available in the earth, bitcoin is also finite. 21 million Bitcoin can be mined, then it’s over. State central banks, on the other hand, can fire up their printing presses at will, which can fuel inflation, but is a popular tool especially in crises and when debt is high.

Not only every single transaction, but above all the mining of some cryptocurrencies consumes a lot of electricity. Whether this energy consumption is harmful to the environment depends on the countries in which it occurs and how sustainably the energy is generated there. In an ideal world, the electricity miners use comes from surplus energy and renewable energy. However, we are not living in this world yet.

For example, the Ethereum network recognized this and in September, with a major upgrade, switched to the proof-of-stake mechanism, which is significantly less energy-hungry. Because the reason for the high energy consumption of the largest cryptocurrency Bitcoin is its consensus mechanism: Proof-of-Work.

Cryptocurrencies based on this mechanism were almost banned by the European Union. Corresponding plans are off the table in Brussels, but China, for example, is taking action against the distribution of the coins.

Sources: dpa, own research