The influx of cryptocurrencies to the market has made them one of the most disruptive technologies that most people will see in their lifetimes. These coins and the underlying blockchain technology could alter the way that we invest, pay for goods, and transfer money with peer-to-peer lending.
It’s the nature of these digital tokens that makes them a sought after investment, with more and more people exchanging their fiat dollars for cryptocurrencies.
But there are some things that people should understand about these tokens first before putting any money into them, ranked from most important to least.
Digital Currencies Are Exceptionally Volatile
The first thing you’ve probably realized is that the price of cryptocurrencies is very volatile. This means that the price can change from day to day, with even huge variations each hour being possible. Part of the reason for why these coins are so volatile is due to how they are traded, as the coins are bought and sold on various exchanges as opposed to a central location.
Since the beginning of the year, the market capitalization for all of these coins increased by more than 3000%. However, Bitcoin, which is the world’s most popular cryptocurrency, went through 4 severe price corrections for 20% of its value over the last 6 months. To put it simply, cryptocurrencies are not for your conservative investor.
2. Cryptocurrencies Lack Backing
Different from the dollars that you keep in your wallet or bank account – or any currency that is traded around the world, cryptocurrencies are not backed or regulated by a central bank or government.
These coins are also intangible, which means they lack the fundamental factors that derive its valuation. While you might be able to view the earnings of a particular stock as it is traded to estimate its worth, or track the GDP growth of a country to valuate a currency like the dollar, cryptocurrencies have no physical ties. This makes the process of evaluating the worth of these coins difficult, if not almost impossible.
3. There Are Over 1,300 Cryptocurrencies
If you have been following the rise of cryptocurrencies, then it’s certain that you have read and heard a lot about Bitcoin. Bitcoin was the first cryptocurrency that was traded on the market. And it brought a lot of value with its inception. At the moment, the coin makes up 54% of the $500bn market capitalization of all cryptocurrencies.
However, Bitcoin is just one of the many virtual coins available for purchase. There are more than 1,300 other tokens on the market, all of which customers can buy and sell. 24 of those coins have a market capitalization of more than $1 billion dollars
4. Blockchain Is Where The Value lies
Despite the frenzy surrounding trading these tokens, the underlying technology that empowers these coins is what is truly valuable.
The blockchain technology is the network that all cryptocurrencies (such as Bitcoin) is founded on. This network is a digital ledger and is decentralized from other computers. This is what allows the recording of payments and transactions in a private and secure manner. It’s also a key reason for why companies and developers are so excited about this technology.
5. Miners Play A Pivotal Role
Each transaction on the blockchain needs to be verified first in order for the network to operate. Also, the blockchain is getting larger as the amount of transactions that pass through the network expands. This role of enlarging the blockchain and making sure that every transaction is accounted for is handled by a team known as the cryptocurrency miners.
Cryptocurrency mining involves using powerful computers to solve complex equations in a competitive setting. The miners are rewarded with virtual tokens for completing each transaction and logging its footprint. Other rewards may include the transaction fees that are associated with each block, with more expensive (and profitable) fees paid out for larger trades.
Mining and verifying transactions on the blockchain can use enormous amounts of electricity and other resources. To fill this demand in the market, manufacturers such as NVIDIA have released Advanced Micro Devices that can help miners process transactions faster.
6. Decentralization Is At The Heart Of Cryptocurrencies
Part of why the blockchain is such an interesting idea is the fact that it is decentralized. This means that there is no point of failure for where information is stored, and no data center where criminals can attack and gain control of the network.
Instead of relying on an individual server, or group of servers, a decentralized network of computer and storage facilities are spread across the globe. Each of these units contains bits of information about a blockchain network, but not enough to put the blockchain danger if the information would fall into the wrong hands. This is what makes the blockchain secure, which is why companies and large corporations have shown interest in its implementation.
7. Blockchain Has Other Benefits, Too
Besides decentralization, there is more to the blockchain as well. Miners work 24 hours a day to verify transactions, which means that they can be settled far quicker than through the traditional banking model. Banks close on the weekends and only operate during business hours, plus they are known to hold onto their customers funds for a few days at the least. Another benefit is that without these intermediaries of a bank or other institutions, fees and transaction costs can be reduced.
Also, the blockchain offers increased control and transparency for its users. Instead of allowing a third party to dictate the future of a cryptocurrencies’ blockchain, the users of the community vote and agree on the direction of the network.
8. But The Blockchain Is Imperfect
Despite the optimism that surrounds the blockchain, the platform is not without its limitations. For example, most of the technology that underlies it is still being worked on, which can cause lag times in development and unexpected outages. These problems can slow down the speed of transactions and verifications, which are both critical services to medium and large enterprises.
There are also some concerns when it comes to implementing the technology. Although the network could make for faster transactions and enhance security for banks and other financial institutions, its’ operations are not guaranteed.
9. Blockchain Technology Is Being Tested By A Number Of Brand-Name Businesses
The blockchain still has awhile to go before it will fully penetrate the mainstream services we use today. And even if developers are successful in getting it off the ground, some speculate that its impact could be overblown. Despite this skepticism, a number of large businesses are in the process of testing the use of blockchains to streamline their operations. Some of which have made joint ventures with small scale pilot projects.
One example of this venture is the 200 odd organizations that signed up to the Ethereum Alliance to test the Ethereum blockchain. Some of the largest brands in the world have joined this initiative, including Microsoft and MasterCard. The two major cryptocurrencies Ripple and IOTA have launched their own blockchain projects at the same time.
10. The Barrier To Entry Is Relatively Low
It should be noted that there is little to no barriers to entry for financial services companies to use a blockchain. The amount of time, money and expertise needed to launch a new cryptocurrency or decentralized application is getting cheaper every day. These low overheads are what spurred that ICO craze of 2017.
So, if it’s relatively inexpensive to setup and start a new cryptocurrency, what does this mean for the big names like Bitcoin and Ethereum? In July of last year, there were only 1,000 tokens in the market. And by December, that total rose to more than 1,364. It’s estimated that there is anywhere between 50 to 100 new cryptocurrencies being released every month, all leveraging cheap blockchain technology. Any of these new entrants to the market could threaten to dominance of these major coins and their networks.
11. Retail Investors Have Stayed Cautious (Until Now)
Traditional investing usually involves buying equities in a stock or business, as this is an instrument of estimating the value of an enterprise. Due to the price of cryptocurrencies lacking this vital metric, and based on intangible factors such as speculation, the retail investment market has largely steered away from cryptocurrencies – until now. The coin’s lack of regulation was one of the key reasons that made people hesitate to enter the market, but that is changing as the laws try to keep up with the pace of cryptocurrency investing. This means that most people are behind in the game when it comes to understanding how the crypto market works, which can lead to emotional, short-term investment decisions spurred by the fear of missing out.
Investing in cryptocurrencies is beginning to change, with CBOE Global Markets’ announcement of Bitcoin futures trading in December. The CME Group made a similar announcement a month later. Futures trading allows investors to speculate on the movement of the currency without buying a single Bitcoin. This way, investors can make money if the coin drops in value.
12. Not Everyone Believes In Cryptocurrencies
But as you probably could guess, not every person is excited about the craze of cryptocurrencies. Warren Buffed stated in a 2014 interview with CNBC that Bitcoin was nothing more than a “mirage” and a bubble that will soon collapse in value. Additionally, Buffet stated that the idea of Bitcoin having intrinsic value is a joke.
Warren Buffet was not the only person to voice his concerns over Bitcoin. Jamie Dimon, who is the CEO of JPMorgan Chase, described Bitcoin as a “Fraud” and that it was worse than tulip bulbs. He went on to say that investing in Bitcoin will not end well for retail and institutional investors.
13. A Number Of Countries Have Outlawed Cryptocurrencies
Cryptocurrencies may have captured the minds and captivation of investment markets, but have they still yet to be accepted by governments worldwide. Nations wary of these coins, which are due to their unregulated and decentralized nature. This has prompted some nations to ban the trade and use of these coins for public safety.
Half a dozen countries have banned cryptocurrencies, including Bolivia, Bangladesh, Nepal, Morocco, Ecuador and Kyrgyzstan. It is likely that the number of countries to outlaw digital currencies will grow, which includes Russia, which has considered banning Bitcoin and its derivatives for some time.
Trading in cryptocurrencies, making payments in virtual currencies, or buying goods and services in digital currencies, are illegal in a half-dozen countries: Bolivia, Bangladesh, Nepal, Morocco, Kyrgyzstan, and Ecuador. And there's the genuine possibility that this list may grow. For example, Russia has been considering banning payments made in cryptocurrencies for some time.
14. Investors Have A Long History Of Overestimating The Uptake Of New Technology
Something else worth mentioning is that retail investors can be overly optimistic about the adoption of cryptocurrencies, especially when it comes to new entrants to the market. Over the last twenty years, we have seen people inflate the worth of internet companies, 3D printing firms, and genome decoding stocks. These companies attracted a large amount of funding by investors, which led to a bubble a short time later. While it’s not true that these companies failed in a commercial sense, they did fail to live up to their customer’s unrealistic expectations.
Cryptocurrencies today have a market capitalization of 2000% since 2017, which was spurred by the belief that the blockchain will be the way of the future for large businesses. But if these businesses refuse to adopt the technology soon, we could see another incident of a bubble bursting.
15. Most People Are Still Unaware About Cryptocurrencies
Most people don’t have a foundational understanding about cryptocurrencies, how they work, or what their potential could be. In a survey conducted in 2017 by LendEDU, it found that 80% of American students were unaware of Bitcoin. Another poll found that only 30% of people were aware of Ethereum, which is the second-largest digital currency by market capitalization. Also, 74% of people had never heard of initial coin offerings, which set the investment world on fire in 2017.
Interestingly, LendEDU also asked its respondents if they thought that owning Bitcoin was illegal in the United States. About half of those interviewed stated that the coin was legal, with the rest either being unsure of its legality or said that it was illegal to possess.
16. Governments Want To Tax Cryptocurrencies
Finally, just because cryptocurrencies are not yet regulated, this does not mean that investors can simply pocket whatever profits they make from their portfolios. The IRS in America demands that people pay extra taxes on your gains, and it’s making strides to ensure that this happens.
In November of 2017, the IRS won a lawsuit against Coinbase, one of the largest cryptocurrency exchanges in the world. This required Coinbase to surrender its database of contact information for more than 14,300 users who invested an excess of $20,000 between the years of 2013 and 215. Less than 7% of users were reporting their gains to the IRS, which suggests that people were intentionally hiding their money from the government.