As if money hasn’t reigned over society the past millennia, the dawn of cryptocurrency only proves that the mighty green — regardless of form — makes the world go round. And with the rise of virtual currency, many investors are wondering if cryptocurrency is the best venture for their investments today or if it’s another technology designed for failure.
Sadly, the answer to this isn’t the easiest to find.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us,” US Senator Thomas Carper noted during a Senate hearing on digital currencies.
Nonetheless, as the market expands, this might be the best time to look into the ups and downs of investing in cryptocurrency.
Which cryptocurrencies should you consider?
Much like fiat currency, each cryptocurrency has its own corresponding exchange rate with its value dependent on its trading market. And because there’s only a finite number of digital coins available, the supply and demand chain usually gives this currency higher value.
Currently, Bitcoin is the most famous and trusted digital currency. It is at an impressive, unprecedented rise. As of this writing, the value of the first-ever decentralized cryptocurrency is already at US$18,000 a coin — the highest it’s ever been. At the start of the year, it was trading at $960. Today, it’s trading at over $18,200 — an increase of more than 18 times.
In the last seven days, its value has soared by 83%, according to coinmarketcap. The continuous rise in value of Bitcoin has enticed many businesses to review options of integrating the currency system. Notably, CME Group and the Chicago Board Options Exchange will already begin trading the digital currency after receiving approval from the Commodity Futures Trading Commission.
Ethereum is another cryptocurrency gathering steam among investors. Although slightly different than Bitcoin which solely operates as a peer-to-peer digital currencies, the Ethereum platform uses Ether as the transaction currency within the network. Sadly, ETH isn’t doing as great as its predecessor. Trading at around $430 a coin, with over 90,000,000 coins in circulation, its value has been on a stagnant, give or take a few percentage points movement the past six months. It had a significant rise around May and another this December, but nothing too drastic to cheer about.
Bitcoin Cash, currently second in per-coin value at $1,300, is also experiencing inching down. Although it did see a surge in value early in November from $630, its been on a slow down cycle the past weeks.
Risk Factors in Investing in Cryptocurrency
Looking at the cryptocurrency value market, it seems investing on this Financial Technology now is a great move. However, there are big risks accompanying this investment that should make you think twice before jumping in.
“Investing on bitcoin, ethereum, or any other cryptocurrency entails a leap of faith,” said Ubiatar CEO, Maria Elena Gritto. “While the returns make investing so attractive, cryptocurrency’s turbulence is something to take into account. You could either be a big winner or a huge loser at the end.”
The reason price for Bitcoins are so high is because there are only about 16 million bitcoins in circulation right now. With the demand for more and a finite supply, as with basic marketing, its value shoots up, The Washington Post noted. With fewer and fewer coins left to be distributed, these become harder to mine, increasing the inflation rate. However, as more and more cryptocurrencies join the market, promising better services, Bitcoin and other leading digital currencies could become less attractive. Less demand equals lower value.
A perfect example would be just last November, Bitcoin’s value plummeted by 20% after Bitcoin Cash entered the market promising faster transactions. While the drop didn’t last long, and Bitcoin continued to soar since then, situations like this could arise in the future. If the issue isn’t mitigated quickly, investors may find yourself losing millions overnight.
Cryptocurrencies depend on the technology of blockchain — a digital public ledger available where each cryptocurrency transaction is recorded. Once a transaction has been verified and a block is added to the chain, it cannot be changed or tampered with. All confirmed transactions cannot be undone. This makes transactions of cryptocurrency very safe. Or so people think.
According to Harvard Business Review, since the blockchains are decentralized and available to the public, it has led to the proliferation in the black market. Since “mining”, or the process of decrypting computational puzzles for bitcoins, is energy consuming, many have started operating in countries that offer cheap electricity.
“Leading to network centralization and the possibility of collusion, and making the network vulnerable to changes in policy on electricity subsidies,” the article revealed.
Fortune also noted that, “some commentators believe traditional currencies could someday adopt blockchain-like characteristics, which would cut into cryptocurrencies’ mainstream acceptance—potentially crushing their value.”
Aside from the blockchain technology’s safety, there is also the safety from third-party services that offer support for cryptocurrency. Just this week, cryptocurrency mining marketplace NiceHash announced that their payment system has been hacked resulting in the loss of over US$64 million worth of Bitcoins. This is not the first time a heist has been done on digital currency services, as over US$15 billion worth of coins have been stolen over the course of six years.
“More than 980,000 bitcoins have been stolen from exchanges, which would be worth more than [US]$15 billion at current exchange rates. Few have been recovered, leaving some investors without any compensation,” Reuters reported.
Are there cryptocurrency success stories?
When the then unknown (and still unknown) Satoshi Nakamoto announced the Bitcoin in 2009, it was met with cynicism by the wide public. Most didn’t know what it was, while the rest thought it was bound to fail one way or another.
Fast forward to eight years later, and while the road might have been rough, cryptocurrency —specifically Nakamoto’s — is on the rise and is currently at an all-time high. Moreover, the cryptocurrency has just crowned its first billionaires.
Earlier this month, with prices jumping to US$11,500 a coin, Cameron and Tyler Winklevoss were unofficially proclaimed as digital billionaires. The twins who rose to fame after claiming that the Facebook idea was stolen from them by Mark Zuckerberg have become Bitcoin kings. After investing US$11 million in April 2013, when Bitcoin was at US$120 a coin, their combined Bitcoin value is now over US$1 billion with the per-coin value now at over US$18,000. An outstanding return on investment after just four years.
Early Bitcoin investor Roger Ver is also a digital billionaire. According to CNBC, the investor dubbed as “Bitcoin Jesus” bought 300,000 bitcoins early in the currency’s lifespan. With a value of US$18,000 a coin, Ver’s value is now at about US$5.4 billion.
Cryptocurrency may be a rising trend in investment but the risks are enormous as well.
As entrepreneur and Dallas Mavericks owner Mark Cuban would put it, “If you’re a true adventurer and you really want to throw the Hail Mary, you might take 10% [of your savings] and put it in bitcoin or ethereum. But, if you do that, you’ve got to pretend you’ve already lost your money.”
Editor’s note: e27 publishes relevant guest contributions from the community. Share your honest opinions and expert knowledge by submitting your content here.
Featured Image Copyright: 123RF