While the crypto revolution is on, does it make sense to invest all your life savings in them?

In mid-May, the Chinese government warned investors of speculative crypto trading and banned banks and payment firms from suspending services related to cryptocurrency transactions. This warning led to investors dumping their currency.

Soon after, Elon Musk announced that the electric vehicle maker Tesla would not accept Bitcoin as a form of payment for car purchases. While the markets have been over-sensitive to Musk's tweets, these unparallel events brought the cryptocurrency market plummeting down in losses of over $1.3 trillion. Unfortunately, many people did not see this coming, and their entire life savings were wiped out as a direct consequence.

Is Elon Musk or China solely responsible for the spiralling of the crypto market?

In the 1929 stock market crash that led to the great depression, optimistic investors played a significant role in the rise in stock prices by 20% year on year. Finally, when the markets crashed, the stocks lost 90% of their value.

As the price of an asset rises rapidly, it is very likely to crash at some point. Thus, volatility has always been an essential characteristic of the stock markets.

While most people believe that the markets are rational, it is a proven theory that stock markets are anything but rational. They are driven by emotions and hence very difficult to predict. While Elon and China have had a significant impact on the cryptocurrency market, a single individual cannot be held solely responsible for the volatility caused by investor's buying and selling behaviour.

So, what are cryptocurrencies?

Cryptocurrencies are digital money or virtual currency. You use the money to buy the currency via an online account, and the records of ownership are held online in a digital wallet.

These currencies are not governed by banks or governments, or even a central body. They don't use physical currency notes or coins either. Instead, it's all based on a token assigned to a transaction between the buyer and the seller.

Every time a transaction is made using the currency, it needs to be confirmed by the sender, the buyer, and the third party. While it all seems relatively straightforward, double spending is one common problem because there isn't a central authority that verifies every transaction made.

The Indian government recently asked companies to disclose all cryptocurrency dealings in their financial statements. While this might be an optimistic step towards regulating cryptocurrencies, it does not change the fact that cryptos are highly irregulated and excluded by the monetary policies of governments from different countries.

Therefore, this makes cryptocurrencies extremely vulnerable to hackers and scammers, and the people investing their money have no protection from a financial ombudsman. Worse, this encourages money laundering on a large scale.

How are cryptocurrencies traded?

Buying and selling of cryptocurrencies are done via an exchange. These exchanges allow you to open an account and transact using dollars to crypto or crypto to crypto to buy and sell currencies.

These currencies are used to make purchases where they're accepted. While the popularity is still evolving, you will find almost every sector, industry, and big brands have adapted to this growing trend of buying crypto.

While it all seems straightforward, this can be extremely daunting for a first-time investor. First, there is always the fear of losing your investment entirely.

How does cryptocurrency work?

Blockchain is the technology that bolsters cryptocurrencies. In 2008, Satoshi Nakamoto created Bitcoin using Blockchain technology, making it extremely hard to change or cheat the system. This is due to the information is not centrally stored in one location. Instead, it is spread across a network of peer-to-peer computers, and the data is stored in blocks.

The blocks hold information of the sender, the receiver, and the number of coins owned. In addition, it will include a hash of the current block and the previous block.

A hash is a unique digital signature that can be compared to a fingerprint. If the contents of a block change, the hash will change too. This helps detect any changes or fraudulent activities to a block.

When a new block is added, this information is sent to all nodes on the network. The nodes validate information based on the hash and either accept or reject a block. If blocks are tampered with, the nodes on the network will reject the block.

To tamper with a block will mean you will need to tamper with all the blocks on the chain, redo all the proof of work for each block, and take control of the peer-to-peer network.

Most blockchains can now attach a smart contract to their blocks. However, once the contract is created, it can never be changed, and the output in the contract will need to be validated by everyone on the network, making it extremely hard to hack.

What is the best cryptocurrency on the market today?

Bitcoin remains a market leader even after the tumble it had a few weeks ago, owning 45% of the market share.

While there are many contenders, Ethereum is considered the next best alternative as the second-largest cryptocurrency. Its technology supports smart contracts. It also intends to replace servers with a worldwide system of nodes.

Bitcoin Cash makes transactions faster with lower transaction fees and is considered to be a much scalable option. Thus, making it a more affordable cryptocurrency.

Litecoin and Dogecoin are the other popular ones on the list.

So, is this risk worth taking?

In today's fast-paced world, it's tough to say 'no' when there's an opportunity to make a quick buck. Inexperienced investors like homemakers and students are drawn to the stock market excites relatively quickly without understanding the risks involved.

While inexperienced investors are easily swayed with fresh and new ways to make more money, the more sophisticated investors fear the currency's risk in terms of transparency, trust, and theft.

Cryptocurrencies are worth the investment if you are willing to take on the risk that comes along with them. Unfortunately, there is a chance you could lose your money. Unlike deposits and saving accounts, cryptocurrencies are high-risk, high-return investments.

What to watch out for?

Volatility and the sharp rise and fall are a significant part of the cryptocurrency market. This makes it inevitable to track and learn every aspect of the currency you wish to invest in for a continuous period of time before you invest.

Make sure facts and not hypes drive your investment decisions. Bear in mind your goals before you invest.

Watch out for scams! Fraudsters these days have become extremely smart and innovative in the ways they scam people. So, if you're not careful enough, there is a chance you would fall into their trap.

I believe that crypto is the currency of the future and the emergence of 'Finance 2.0'. But, like every other investment decision you make, it needs to be made with caution and clarity. It's essential to understand what you're investing in, the potential risks it holds, and the factors that impact its volatility. Due diligence and making informed decisions are key factors.

So don't pin your future by investing everything you have! Instead, make your investment decisions wisely.