Should you invest in cryptocurrency? | CNBC Explains

If you bought $1,000 worth of bitcoin back in August 2010 that money would now be worth an estimated $50 million. For many investors and Wall Street sharks those returns are too tempting to ignore. But bitcoin is not the only cryptocurrency attracting excited 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? The financial crisis back in 2008 exposed the imperfect system the 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 are then verified by several users and their computers. All while your identity remains hidden. But while blockchain is being celebrated 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. And earlier this year, the second biggest cryptocurrency ethereum, did just that. Its value collapsed from $317 a coin, to ten cents a coin, in just one day.
Although Bitcoin had a more than 100% return on investment in 2016 it’s also five times more volatile than the S&P 500. Many investors are spooked by that kind of instability knowing that if something were to go wrong. You’d have no support. Digital currencies are also known as a ‘fool’s asset’ like art or wine, meaning they don’t provide regular returns on your investments the way rental income through a property or dividends from shares in a company would.
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, its price having more than doubled in 2017.
But many analysts believe the bitcoin gravy train has left the station and that the real profits are to be made in the smaller coins. The price of NEM coins, dash coins, lite coins, and more, have 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 is now referred to as core. While a second currency, bitcoin cash, was created alongside it. It provides quicker transactions and is the fourth biggest cryptocurrency, now worth over $5 billion.
Like most virtual currencies, it is extremely volatile and 24 hours after bitcoin cash was created, its 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 exchange 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 whose government has restricted movement of capital outside of the country.
Digital currencies present an attractive alternative to traditional currency and investments. Its rising popularity in these countries is part of the reason behind bitcoin’s recent surge. So should you invest in a cryptocurrency? Well that’s up to you. One thing is for sure though, regardless of its ups and downs, the technology behind it, particularly blockchain, is the real game changer. And not just for cryptocurrencies.
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