Bitcoin, Ethereum And Other Cryptocurrencies: Should You Invest?
What are the main types of cryptocurrencies?
Bitcoin is the most well known, but as of July 2017 there are over 900 different cryptocurrencies.
This number is growing rapidly. Just like the dot.com boom from 1995 to 2001, there are new developments every day.
Bitcoin and Ethereum are getting the most press right now, and together make up more than half of the $100 billion global cryptocurrency maket.
- Bitcoin was invented in 2008 by an unknown person (or group of people…) using the name Satoshi Nakamoto.
- Bitcoins can be ‘mined’ by anyone with the computer power and software to do so. Miners use special ‘mining software’ to solve maths problems, and receive a certain number of bitcoins in exchange.
- The maths problems get harder with time so they need progressively more computing power.
- Per Satoshi’s Bitcoin algorithim, only 21 million bitcoins can ever be mined. Each bitcoin, however, can be divided into 100 million different parts.
- Unlike paper money, central banks can’t print Bitcoins into infinity, which makes them good for inflation protection.
- You can use Bitcoins to buy things without paying transaction fees. Transactions are logged using Blockchain technology.
The graph below shows the price changes of Bitcoin over the last year, going from about $500 to over $4,000 per coin at the time of writing.
- Ethereum was first introduced in July 2015.
- Ethereum coins are called Ethers.
- Like Bitcoin, Ethereum uses Blockchain technology to limit its supply and secure each transaction.
- However unlike Bitcoin, Ethereum’s blockchain uses smart contracts, which can represent anything from virtual shares to golf club memberships.
- Smart contracts allow transactions to be programmed. Your money could be programmed to invest, save and spend all on its own!
Is there more upside to come?
The global market cap (total market value) of all the different cryptocurrencies now stands at roughly $100 billion. Of this, around $40 billion are Bitcoins and around $30 billion are Ethers.
Most funds are prohibited from investing in cryptocurrencies because they are still considered too risky by their investors. This is likely to change with time, as the cryptocurrency market grows in size and more people start using digital currencies in their everyday lives.
Even if a few large fund managers were to start investing just 0.1% of their funds into cryptos, the market would grow to astronomical levels.
In fact, some hedge funds – who have more power to invest as they please than regular funds do – have already started investing in crytocurrencies. Given the graphs above, most of these hedge funds have done rather well.
Should you invest in cryptocurrencies?
Despite the risks, there’s enormous long-term growth potential for this new and exciting market. That said, you should only invest with the spare change you have lying around that you could easily afford to lose.
One of Warren Buffetts rules in investing is that you “shouldn’t invest in anything that you don’t understand”.
So if you’re going to invest in this area, you need to learn about it from someone who really knows what they’re talking about.
Siam Kidd at the Realistic Trader does a good online course on Cryptocurrencies.
If you would like to learn more about cryptos, check out Siam’s introduction video here to see if its for you.