Cryptocurrencies: Everything you need to know before investing in them

bitcoin investmentWhat are they? What can you buy with them? Why do their prices rise and fall so quickly? Discover the keys to understanding this new form of money led by bitcoin.

Bitcoin, the most popular cryptocurrency, is on a crazy roller coaster ride. It has recently gone from touching record highs, up to $61,000, six times higher than in the previous year, to falling to $53,000 a week later. All is mystery surrounding a product that no one has seen and no one has been able to touch. But despite the vertigo of the ups and downs and the general lack of knowledge, many people and companies are betting on cryptocurrencies.

DUX Internacional de Madrid, a soccer club that competes in the Second Division B, made its first cybercurrency signing on January 15, and more and more businesses are accepting it as a means of payment. What do we know about bitcoin and other cryptocurrencies? Can we trust them? These are some of the questions investors are asking themselves.

Bitcoin was one of the first cryptocurrencies to appear on the market. It was created by the Japanese Satoshi Nakamoto after the 2008 financial crisis. A mysterious character whose identity is unknown, it is even suspected that he could be the name of a collective. That year he published an article on bitcoin and generated a debate that led to the creation of a software for transactions.

The idea was to create a decentralized digital currency, i.e. without a central bank to control it, without commissions on its transactions and without any elite group making decisions on its use or value.

How many different cryptocurrencies are there on the market?
There are more than 7,000 types of cryptocurrencies, according to data from CoinMarketCap, a website that shows their market capitalization. Five are the most widespread: bitcoin, ethereum, litecoin, dash and ripple. Bitcoin dominates the cryptocurrency market, followed by ethereum.

What are cryptocurrencies used for?

Investment is one of their strengths, but they were created as a means of payment. Some FinTech companies are planning to launch a debit card and a payment gateway in bitcoins for more than 10,000 hotels and for certain supermarket chains. Learn more on http://www.cryptodebitcards.com/.

There are real estate companies that allow paying for homes in bitcoins, and in November last year PayPal announced that it would allow payments with this type of currency in 2021.

On January 15, moreover, the first signing of a soccer player with cryptocurrencies took place: David Barral, former Real Madrid Club de Fútbol, Real Sporting de Gijón and Real Racing Club de Santander, signed at the age of 37 by DUX Internacional de Madrid, a Second Division B soccer club, of which Criptan is a sponsor. The amount has not yet been disclosed.

How and where can cryptocurrencies be purchased?

To access them the options are to buy them, accept them as payment or create them. The system is designed for so-called miners to solve mathematical problems with which more cryptocurrencies are generated. Their work is remunerated with this same currency.

Large computer teams controlled by powerful economic groups, which are known as whales, are the main producers. “There are real computer farms dedicated to this work,” recognizes Jesús Pérez, founder of Crypto Plaza, a center that functions as an ecosystem of entrepreneurs on encryption and finance, and director of the consulting firm Digital Assets Institute.

Another safer and easier way is to do it through a purchase platform or a financial intermediary. They can also be purchased at ATMs created exclusively for this purpose. Before doing so, it is advisable to read the conditions, since each entity charges different commissions. Once purchased, they are assigned a unique and personal password, which should be kept safe.

What is the value of the most popular cryptocurrency: bitcoin?

It does not have a unique or stable value, as it fluctuates according to supply and demand. For example, at the beginning of 2020, bitcoin was trading at just over $7,000 (€5,760) and at the beginning of 2021 it set an all-time high of $41,000 while, in the week of January 18, bitcoin had lost up to 30% of its value, trading at just under $29,000 (€24,000). On Friday the 22nd, however, it staged a recovery to $31,000 (25,500 euros). To find out the value of each cryptocurrency at any given moment, it is advisable to consult specialized websites such as Coinmarketcap.

Can I invest in cryptocurrencies?

Yes, but it is a risky and speculative market where it is possible to gain and lose large amounts in a short time. The most profitable and least dangerous are, according to experts, bitcoin and ethereum.

Bitcoin is currently the seventh most capitalized asset in the world, around 700 billion dollars (almost 575 billion euros), behind Amazon and Google. It is important to bear in mind the saying that circulates in the stock market: past performance does not guarantee future performance.

Where are cryptocurrencies stored?

They are stored in so-called wallets that have to be created specifically, of which, according to Statista, there are some 64 million worldwide. They are software that can be stored on a computer, cell phone or any other digital device, but the most convenient way is to leave them in custody in a cryptocurrency bank.

Is there a regulation for cryptocurrencies?

No, but since 2015 the European Union (EU) considers bitcoin and other cryptocurrencies as a form of payment, with the same validity as the euro. Despite this, Christine Lagarde, the president of the European Central Bank (ECB), shows her reluctance and has stated that regulation of bitcoin is necessary because it is “a very speculative asset”.

The ECB has announced the creation of a digital euro, an electronic form of money that Europeans could use to make their daily payments as a complement to cash. This would not be a new currency or cryptocurrency, but a digital euro would have the same value as a cash euro.

The model will focus on testing the creation of tokens, which digitally represent money, and their sectoral distribution by banks to their customers through the i-network, a controlled test environment already available. The aim is to experiment with the practical aspects and possible design options, analyzing their possible impact on the sector, in addition to fostering innovation in payments and the digitization of the economy, preparing new digital services based on programmable and smart digital money.

This test comes as a continuation of the Smart Payments programmable payments sector initiative also carried out by large Spanish entities, such as Banco Sabadell, which was successfully completed in July 2020, and which allowed validating the feasibility of initiating immediate programmed transfers in smart contracts from blockchain networks, through its connection with the National Electronic Clearing System (SNCE). In this way, it was possible to complete more than 20,000 immediate transfers.

In Spain, any expense or income derived from trading operations with cryptocurrencies must be included in the income tax return. In October 2020, the Draft Law on Measures to Prevent and Combat Tax Fraud was published, introducing the obligation to provide information on balances and holders of cryptocurrencies and purchase operations, collections, payments, transfers, among other transactions.

Outside the EU, as its use spreads, it is regulated. The canton of Zug, in Switzerland, will accept payment of taxes with bitcoins as of February. Japan has also recognized this currency as a means of payment, the United States (US) has opened a futures market (where speculation in commodities, currencies…) for bitcoins and in China they bet more on the digital yuan than on cryptocurrencies, except in Hong Kong where the use of bitcoins is common.

What are the advantages of cryptocurrencies?

For Jesús Pérez, from Crypto Plaza, the main benefits are decentralization, they do not depend on any bank – “only the buyer has the password to access” -, fast and free shipping to any part of the world and the impossibility of counterfeiting.

Scarcity is another advantage, as the cryptocurrency is not subject to inflation. In fact, bitcoin (not so the rest) is limited to 21 million (about 18.6 million have been issued so far) and it is estimated that the cap will be reached in 2140, the date set by the creator. The little more than two million bitcoins remaining will be mined at a much slower rate than so far.

What are the risks involved in investing in cryptocurrencies?

The main risk is volatility (sharp rises and falls in value) which can lead to large losses within hours. “Although there are also stable cryptocurrencies that have parity with the dollar or the euro such as the USD Coin (USDC) or the DAI”, they assure from Criptan.

Another non-negligible one is the loss of the wallet key. “It is unrecoverable,” Perez points out. According to data from Chainalysis, a blockchain expert company, between 17% and 23% of bitcoins are lost. Several cases have been reported in the press.

The most recent is that of a programmer from San Francisco (USA) who lost the paper where he had written down the password of the wallet where he stored 7,002 bitcoins, which today amount to more than 220 million euros.

Although it is not a risk, it should be noted that transactions are fixed, i.e., if a transfer is made to another person, it cannot be stopped or undone. The risk of scams associated with cryptocurrencies should also be taken into account: according to a report by the company Cipher Trace, dedicated to the development, security and tracking of digital currencies, cybercriminals have pocketed more than $4.26 billion (€3.501 billion) in 2020.