Cryptocurrencies: A Look at Bitcoin and Ethereum – Introduction
Cryptocurrencies have become a modern-day goldmine. They have become so popular that many people from around the world are hoarding them. They have also made a few people multi-millionaires. For example, if you bought bitcoins worth $1000 in 2010, you would now be a multi-millionaire. This year alone, bitcoin has gained from a low of $1000 to a high of $3000. On the other hand, Ethereum has gone from less than $70 to a high of $400. In the recent past, the two currencies have corrected, falling by more than 50%. They have become the most volatile ‘asset classes’ in the market. Last week, Bloomberg had an article on the unknown trader who had amassed a fortune of more than $200 million as a bitcoin trader.
- Trade and Don’t Invest
Many experts have declared that cryptocurrencies are the future of finance. IBM has even started a new blockchain department that helps global companies on different areas. Big banks like Goldman Sachs and Morgan Stanley have published articles supporting cryptocurrencies. While the future might be this technology, the fact is that we are in a bubble territory.
A bubble is a period where prices of items go up without having an intrinsic value. For example, before the recession, the prices of homes in the United States went up fueled by cheap credit. People bought the houses with borrowed money expecting to exit at a big profit. The price of houses nosedived when people could not afford the houses.
The same concept is true of the dot com bubble when many worthless companies held their IPO. Some of these companies had no revenues. Some only added the dot com value in their name. When the time of reckoning came, people who had bought the stocks had no one to sell to. Billions of dollars ‘evaporated’.
This is the same thing with the cryptocurrencies. Most of the people who own them don’t know what to do with them. They even don’t understand the underlying technology. They buy them because of the hype.
Therefore, I recommend that you trade these currencies. You should not hold the temptation of buying and holding them forever. Doing this will expose you to a lot of risks.
- Acceptance remains low
A common challenge for the cryptocurrencies is that many retailers have stopped accepting them. When the concept of cryptocurrency came up, many retailers accepted them. People could buy and pay for their products using the currencies. Today, the number is not growing and chances are that this will continue. Therefore, if retailers will not accept bitcoin, holding it might be worthless. In addition, fraud in the market remains high. A week ago, a dark market called Alpha Bay shut down with the owners of the website going away with bitcoins worth millions of dollars. The level of fraud is increasing in the bitcoin related market.
- Caution ahead
For traders and long-term bitcoin and other cryptocurrency holders, a lot of caution is required as we go into the future. On August 1, there will be the ‘civil war’ in the bitcoin scene. This day, two factions that control the bitcoin market will know whether to adopt a new software update or not. If this fails, the bitcoin could be split into two. This move could lead to significant volatility in the market. There have been calls for regulation in the cryptocurrency market. These moves could lead to significant volatility in the market.