Why cryptocurrencies are transforming the financial world

In recent years, the financial world has experienced an unprecedented pace of change, and one innovation in particular, namely cryptocurrencies, has attracted a lot of attention. These assets, based on cryptographic principles and decentralized networks, have ushered in a new chapter in the history of money. Cryptocurrencies such as Bitcoin, Ethereum and many others have evolved from niche products into a global phenomenon and an attractive option for investors, companies and private investors. But why are cryptocurrencies revolutionizing the financial world and what opportunities and risks do they bring?

Technological innovation and smart contracts

Due to their decentralized structure, cryptocurrencies enable transactions and the exchange of values directly between users with no control exerted by a central authority or institution. However, blockchain technology is not only finding opportunities in the financial world. It can increase efficiency, reduce fraud and enable new business models in areas such as supply chain management, healthcare, identity management and copyright.

Some cryptocurrencies such as Ethereum also enable the creation and execution of smart contracts. Smart contracts are self-executing contracts that automate the actions required in an agreement or contract. Once agreed, transactions are traceable and irrevocable. This technology opens up opportunities for more efficient and transparent business processes in various industries.

Return on investment

Cryptocurrencies have undergone considerable value appreciation in the past, and they are one of the asset classes with the highest returns in recent years. One example is Bitcoin, with an exchange rate of around 0.08 centimes per Bitcoin in 2010, reaching an all-time high of almost 60,000 Swiss francs in November 2021. The potentially high returns make cryptocurrencies an attractive investment option. Furthermore, many see them as an opportunity to invest in innovative technologies and projects. But the opportunity for higher profits usually also means increased risk and greater price fluctuations. Particularly with cryptocurrencies, these negative factors should not be underestimated.

Diversification impact and low correlation

As an alternative asset class to “traditional” investments such as shares, bonds or commodities, cryptocurrencies are suitable for diversifying a portfolio. By adding cryptocurrencies to a portfolio, investors can diversify their risk and benefit from the returns opportunities of this emerging asset class. Cryptocurrencies often also have a lower correlation with traditional capital investments. This means that they can perform independently of other assets, which can contribute to positive diversification of the portfolio.

Accessible worldwide

In theory, cryptocurrencies enable people all over the world to access financial services, including in regions where traditional banking infrastructures are not sufficiently developed. This is particularly advantageous in developing countries, where people often do not have access to bank accounts or other financial services. With cryptocurrencies, it is possible to send, receive or store money even without having a bank account. In practice, however, cryptocurrencies are not yet a sufficiently widespread means of payment – both online and offline.

What are the risks associated with cryptocurrencies

Despite their technological novelty and advantages, the risks associated with cryptocurrencies should not be underestimated. As with other asset classes, it is important to be thoroughly informed, assess the risks and exercise caution before investing. We will tell you about the most common potential risks.

Price fluctuations

As previously mentioned, cryptocurrencies provide an opportunity for high returns. The other side of the coin however is high price fluctuations – probably one of the greatest risks of cryptocurrencies. Bitcoin is also the best-known example in this instance: In November 2021, the value of the Bitcoin was 60,000 Swiss francs and fell to almost half that value less than three months later. These price fluctuations can be due to various factors such as market speculation or regulatory decisions.

Technical risks

Another risk of cryptocurrencies lies in the safekeeping of the access data. If the access data for the cryptocurrencies are not stored at a bank or in a crypto exchange, they are usually stored in a wallet. A wallet is a digital wallet in which the personal digital key (called the private key) is secured. If the key is lost, the cryptocurrencies can no longer be used and are irrevocably lost. There is no central authority that can help restore access.

Fraud

If sufficient security measures are not taken, cryptocurrencies are vulnerable to hacking attacks, phishing attempts and other security breaches. This means that criminals may access private keys and wallets, and steal cryptocurrencies. Sometimes, fraudulent projects and Ponzi schemes are set up that can result in losses. It is therefore important to use secure wallets or to delegate safekeeping to a trusted partner. Each individual must also independently and carefully assess the projects in which they invest.

Lack of investor protection

In the event of losses or fraud, there is often no recourse to a central authority or insurance company when investing in cryptocurrencies. Users must therefore ensure the security of their wallets for themselves and should inform themselves about potential risks and possible fraudulent activity.

Regulatory uncertainty

The legal status of cryptocurrencies and their regulation varies from country to country. Governments and authorities around the world are only slowly developing legal frameworks for cryptocurrencies. This creates uncertainty for companies and investors, as regulations can change quickly. In this country, investors can sleep more soundly because Switzerland is taking on a pioneering role in the area of crypto regulation and is making an important contribution to the further development of this asset class and investor confidence.

Minimize the risks associated with cryptocurrencies with these five tips

Working with cryptocurrencies involves risks. But there are ways to minimize these risks.

It is important to be aware that trading in cryptocurrencies is always associated with risks, despite all precautionary measures. The same general investment wisdom also applies to crypto: only invest as much money as you’re prepared to lose.

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