Beijing recently implemented a ban that left cryptocurrency exchanges in a scramble to drop Chinese clients. It is a ban on all cryptocurrency trading and mining. Let’s take a look at what this means for the crypto economy, as well as other associated disadvantages that will have you thinking twice about whether this is a good option for you.
China’s Ban on Trading Cryptocurrencies
This ban by China is the most drastic action taken against cryptocurrency to date. It comes after regulations had been put in place which resulted in many companies shifting their cryptocurrency offshore, though this has been the nail in the coffin for crypto firms in the country, while others have moved over to Singapore.
Furthermore, government bodies have stated that they will be monitoring for any illegal activities now that overseas exchanges with mainland investors via the internet have been barred. Investors may still declare ownership over their crypto assets, but they are now required to leave the country if they wish to buy or sell them.
While a number of crypto exchanges originated in China, the authorities have taken a stance on these as speculative and lacking in value. Speculative bubbles in finance refer to high-risk trading on competitively low prices - essentially, the trader seeks to take advantage of market changes. This comes after China was once the world’s largest center for bitcoin mining and trading.
So, what is next for the country? China is developing an official digital currency instead.
This begs the question as to whether or not this will become the norm for other countries, as well as the impact the lack of Chinese investors will have on the market.
Elon Musk recently named the world’s richest person, noted that China’s move may be due to the country’s electricity shortages since crypto mining uses a significant amount of power. He also said: “I suppose cryptocurrency is fundamentally aimed at reducing the power of a centralized government. They don’t like that.”
While Musk has largely been in favor of cryptocurrencies, Warren Buffett has not. He has repeatedly criticized crypto over the years, saying: “I can say almost with certainty that they will come to a bad ending.” He has also highlighted one of the biggest disadvantages of cryptocurrency, stating:
“Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero.”
The Disadvantages of Cryptocurrency
There are a number of drawbacks when it comes to cryptocurrency trading that everyone should familiarise themselves with. Let’s take a look...
- The speed and scale of transactions are on the slower side, as the infrastructure to match currency trading has not yet been reached.
- Being a digital technology puts cryptocurrencies at risk of cybersecurity breaches. Added and enhanced security measures are therefore a necessity.
- Digital coins lack an inherent value which can result in speculative pricing and market volatility. To combat this, investors are linking cryptocurrency value to tangible and intangible assets.
- Regulations or the lack thereof - each country and region is subject to specific regulations relating to cryptocurrencies. It is also not regulated by a bank, which makes it risky as there are no firm rules in place. For some, this decentralization is an advantage.
- Investors are at risk of losing or deleting their digital wallets.
- The value of cryptocurrencies changes significantly, and if people or countries stop using them, your investment can lose value or become worthless.
- Several bitcoin transactions have been linked to illegal activity.
The Advantages of Cryptocurrency
There are many advantages when it comes to cryptocurrencies as well, such as:
- Blockchain technology records every transaction in a public list, which stops people from undoing transactions, making copies, or spending coins that they do not own.
- The transaction process of transferring coins from one wallet to another is simple and requires a digital device.
- No intermediaries or marketplaces mean there are no processing fees involved in transferring coins.
- Cryptocurrencies are widely adopted, making it possible to use this currency for a range of purchases.
Related: How to Make, Buy and Sell NFTs?
In other crypto-related news, Amazon is set to accept bitcoin payments by the end of the year. Once this is running, it will expand its acceptance of other cryptocurrencies. It is also rumored to be planning its own token in 2022.
For some investors, the disadvantages and risks do not outweigh the benefits of trading cryptocurrencies. For others, they prefer to err on the side of tradition when it comes to investing. Whatever your stance, we’d love to hear your thoughts.