If you’re a financial news junkie, chances are you’ve probably been hearing about cryptocurrencies. Years ago, Bitcoin was considered nothing more than a passing fad — but now a single Bitcoin goes for over $1,400 a piece. Further, there are other alternative currencies emerging all the time.
What do you need to know about this emerging currency market? And is it a good investment?
What Exactly is a Cryptocurrency?
When we deal with traditional fiat currencies, the value of the currency is generally backed by something tangible. In the case of the U.S. dollar, it is theoretically backed by gold. Cryptocurrency is instead backed by unique algorithms.
Every unit of cryptocurrency has its own unique signifying identification. Cryptocurrency is “mined” by computers, a process by which users perform advanced calculations until new currency is “discovered”.
These calculations progressively become more difficult, slowing the influx of new currency into the market and making cryptocurrency tremendously inflationary. A cryptocurrency will continue increasing in value because of the upper limit of currency that can be practically created.
Bitcoin was the first popular cryptocurrency. Since then, other competitors have been released that all operate in similar ways: Litecoin, Ripple and Ethereum are three of the most common examples.
Because of the nature of cryptocurrency, it has to be stored and transmitted in specific ways. It has to be accessed by a specific client that is designed to access wallets for the specific currency. Cryptocurrency can also be “lost”; if the files are lost and passwords are lost, the currency is lost as well. This also contributes to an inflationary market, because once lost, this currency will likely never be recovered.
As of 2017, Bitcoin currently has a market cap of approximately $25 billion. Comparatively, Ethereum has a market cap of $8 billion, Ripple has a market cap of nearly $5 billion, and Litecoin has a market cap of $1.5 billion. Comparatively, the foreign exchange market trades approximately $4 trillion every single day.
The Advantages of Cryptocurrency as an Investment
For those who enjoy high volatility markets, cryptocurrency can be a dream; it regularly fluctuates in value significantly and in very short periods of time. This offers some tremendous opportunity for reward, for investors who are able to time their investments correctly.
You can purchase very small amounts of cryptocurrency right away. You don’t need to include it in an investment portfolio; in fact, it essentially resides as a text file on your computer.
Whether it is a permanent change or not is the subject of intense debate, but what is undeniable is that Bitcoin and other similar currencies have been growing and expanding for years now, and the market itself does not appear to be in danger of disappearing.
Possible Drawbacks
The same volatility that can be a benefit can also be a hindrance. Because the market is so small and easily influenced, the entire market could be plunged into disarray by a single investor liquidating their assets. A “run on the bank” situation happens fairly frequently with Bitcoin.
There are other certain weaknesses that have been identified and exploited in Bitcoin; for instance, the fact that the currency can undergo a DDoS attack that can effectively shut it down for small periods of time. These weaknesses are often addressed in different types of cryptocurrency, but Bitcoin itself cannot undergo any substantial technological updates because of the nature of the system.
On top of technological mishaps, it can also be difficult for cryptocurrency owners to keep track of their assets. If it is stolen from you or scammed from you, police will find it hard to follow up in any meaningful way. Though bank wire transfers can be traced, Bitcoin and other cryptocurrency transfers are much more tedious.
A lack of regulation also means that very exorbitant fees can be charged by Bitcoin brokers and holders.
Questionable Legality
Different countries are still trying to decide on how they are going to manage cryptocurrency, especially insofar as it can be used in dark markets. New laws could put a damper on the valuation of cryptocurrencies, depending on how strict the laws are.
Ultimately, it needs to be understood that cryptocurrencies are an incredibly high risk investment. With all investments, past performance does not guarantee future performance. But with Bitcoin and other alt coins, the entire arena is unprecedented.
Because the market is entirely unregulated and does not have high liquidity, it is also highly volatile. A very risk tolerant investor may find Bitcoin and other cryptocurrencies an interesting investment, but for many investors it may appear to be more similar to a gamble.
Regards,
Ethan Warrick
Editor
Wealth Authority
