If you bought $1,000 worth of Bitcoin back in February 2010, that money would be worth an estimated $50 million dollars. For many investors and Wall Street sharks, those returns are too tempting to ignore. But Bitcoin is not the only cryptocurrency attracting exciting investors.
Ethereum, Ripple, Litecoin and Dash are some of the other thousand or so digital currencies that have been created so far. But are they a safe bet for your hard earned money? And can the growth continue?
Should You Invest In Cryptocurrency?
The financial crises back in 2008 exposed the imperfect system that banks are run on. Every time we make an online payment or transfer our dollars from one account to another, we’re placing our trust in big corporations and banks that are vulnerable to digital fraud and bankruptcy.
Virtual currencies however, are exchanged on a decentralized peer to peer network. Analysts believe this new payment network, not run by profit-driven companies is more revolutionary than the currencies themselves. All transactions occur on a shared public register called a blockchain, which is then verified by several users and their computers. All while your identity remains hidden.
But while blockchain is being celebrated by amongst industry experts, cryptocurrencies themselves continue to divide opinion. Normally, governments and central banks keep an eye on a country’s currency. They have the ability to take a number of measures that could either increase or decrease its value, and although that might not always work, there is at least someone held accountable.
With cryptocurrencies there is no institution or person protecting their value. That means prices are based solely on what people think they’re worth and if something undermines that belief, they can go into free fall. Although Bitcoin had a 2000% return on investment in 2017, it’s also 5x more volatile than the S&P 500.
Many investors are spooked by that kind of instability, knowing that if something were going to go wrong, you’d have no support. Digital currencies are also known as a “new asset class” like art or wine, meaning they don’t provide regular returns on your investments, the way rental income, a property or dividends from shares in a company would.
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The only way to make money through virtual currency trading is to find someone who will pay you an even higher price than you did originally. But based on current trends, chances are you will. Especially if you pick a winner like Bitcoin, it’s price increasing 20x just last year alone.
Many analysts believe the Bitcoin gravy train hasn’t even left the station and that the real profits are to be made as a long-term investor. There are also smaller coins like NEM, Dash, Litecoin and Ethereum have also all soared this year.
Digital currency transactions though are still reliant on human intervention. That’s because each transaction has to be checked and registered by multiple people which can result in trades being slow to process. Additionally, the people doing the checking aren’t necessarily interested in your transaction and may want to keep prices high if they’re holding onto Bitcoins or Ethereum themselves.
So as Bitcoin users demanded quicker transactions, this was at odds with the people mining Bitcoins. Fears were growing that this was going to become a huge problem. That led to a split in the Bitcoin currency in August 2017. The original Bitcoin, the only Bitcoin is referred to as core. While a second currency called Bitcoin Cash was created alongside of it. It provides quicker transactions and is the fourth biggest cryptocurrency now worth over $5 billion dollars.
Like most cryptocurrencies it is extremely volatile and 24 hours after Bitcoin Cash was created, it’s price fell by more than half. This revealed a weakness in the system, whereby the people using the currencies are still reliant on an entirely different group of people to make that official.
Yet for many countries and their citizens, digital currencies provide a lifeline. Take for example Venezuela, which is plagued with a shortage of cash and the highest inflation rate in the world, or China who has restricted movement of capital outside of the country. Digital currencies present an attractive alternative to traditional currency and investments. It’s rising popularity in these countries is part of the reason behind Bitcoins recent surge.