What is the best cryptocurrency investment? That’s a good question. George Gilder and a number of other of the digerati elite think cryptocurrencies and the blockchain technology on which they are based are poised to revolutionize the internet and the world of money.
And who is George Gilder? Only the technology pundit who loudly predicted the rise of the personal computers, the rise of the internet economy, and companies like Amazon, Google, and Facebook.
On the other hand, he also made predictions about various other technologies that did not come to fruition. And let’s put aside for the moment his other favorite topics such as supply-side trickle-down economics and intelligent design and instead focus on blockchain and cryptocurrencies.
What are cryptocurrencies?
Cryptocurrencies are a ledger of transactions coded into a blockchain which is a large computer algorithm that many computers all across the internet work on constantly.
What does that mean? Well, imagine a large chunk of computer code that is shared by many servers or nodes that constantly conduct self-replicating computations on the code. The data it contains lives a bit like a constantly self-feeding organic code creature in cyberspace.
In crypto-speak, what all those computers calculating and recalculating the blockchain are doing is called mining. Each cryptocurrency transaction is coded across the whole of the code. It is somewhat like DNA replicating itself. Another analogy would be how holographic images are recorded into each small particle of the material that holds the image.
Cryptocurrencies are also sometimes loosely called digital currencies but the important feature of cryptocurrencies is the use of blockchain technology to encrypt and protect the integrity of the information. Whereas a digital currency may use other means of encryption and protection.
So – for the logically minded – cryptocurrencies are a special case of digital currencies and frankly for the moment the only ones worth bothering with. But all that clever technical stuff can be left to the geeks. The questions for the investor and trader are whether they are worth investing in and how should you do it.
Bitcoin vs Ethereum
Bitcoin is the best-known cryptocurrency while Ethereum is a close second. If you are considering launching yourself into cryptocurrency investing or trading it is worth understanding some of the story, purpose, and features of each of these two main players. There are other cryptocurrencies that do different things but these are the two main ones to consider.
Where did Bitcoin come from and where is it going?
Bitcoin was launched in January 2009 when Satoshi Nakamoto announced in a white paper:
“the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.”
Mr. Nakamoto – the generally accepted theory is that it was a guy – then went on to explain how Bitcoin could only issue 21 million coins and this limitation was built into the algorithm, locked away deep in the blockchain. Another limitation was that Bitcoin is self-programmed that the last bitcoin would be mined in the year 2140.
Because of the way Bitcoin was set up, every four years or so the rate at which new Bitcoins are mined and created is halved.
The term “mining” is no mistake. The intention of Bitcoin is to replace the traditional function of gold as a store of value and a medium of exchange. I am referring here to the gold standard which has been used to peg a currency to the value of gold by various countries at different times in history. So like gold is mined out of the earth, Bitcoin is constantly mined into existence.
And in case you were wondering how big is the Bitcoin blockchain, in April 2020 it reached 280GB and continues to grow.
Nobody ever saw Mr. Nakamoto in person, he just sent emails and posted messages to the forum on the Bitcoin website. The last known message from him was an email to another blockchain pioneer Gavin Andresen in April 2011, and the elusive Satoshi Nakamoto has not been heard from since.
When Bitcoin was launched each coin cost factions of a US cent. In July 2010 it jumped to 8 cents. It traded in low volume in a range from about $50 to a few hundred for some years and then in early 2017, it took off.
The price hit a peak of just under $20,000 in early 2018, dropped to around $6,000 in early 2019, dropped, and climbed again into early 2020 until it took a dive again in February and March when all markets tumbled with Conoravirus fears. Right now in June 2020, it is testing the $10,000 level but frankly, it could go anywhere from here.
Bitcoin created and was the first to use blockchain technology. Bitcoin uses its blockchain to record transactions so that it functions as a medium of exchange replacing money, hence a cryptocurrency.
The clever part about blockchain technology is because it is decentralized across hundreds or thousands of nodes it is very difficult to hack or defraud. This makes it inherently secure and at the same time transparent. It is secure because nobody can hack all the nodes at the same time and it is transparent because everyone can see and has a record of what the transactions are.
This is what allows Bitcoin to behave as a medium of exchange without the need for a national bank to act as an issuing authority or other banks or entities like PayPal or Visa as trusted intermediaries for transactions.
Once created, the advantages of blockchain technology became apparent and other developers started to wonder what applications other than just money could use the innate secure, decentralized, and transparent features of blockchain.
And then came Ethereum.
What is Ethereum?
Ethereum is quite different from Bitcoin. The purpose of Ethereum is to provide a software platform for coding smart contracts using open source code. The smart contracts can be used to buy and sell products and services between two parties without the need for a third party middleman and can apply terms and conditions to the contracts, hence smart contracts. Ethereum is actually the software platform that, like Bitcoin runs on numerous computers all over the world also called nodes mining the code. The nodes are rewarded with Ether, the cryptocurrency for the Ethereum network, and the Ethereum network of computers is called the Ethereum Virtual Machine, or EVM.
Ethereum was created by Vitalik Buterin and Gavin Wood and launched in July 2015. Both of these founders are real people who appear physically in public and on videos on the internet.
There are a great deal more technicalities to Ethereum and what developers are doing using Ethereum. A number of large and powerful corporations have also signed up for an organization called the Enterprise Ethereum Alliance to develop decentralized applications, called dapps on Ethereum.
So, if Bitcoin becomes a new gold standard could Ethereum become the world’s new secure and trusted supercomputer?
As these two charts show, both Bitcoin and Ether the Ethereum currency fluctuate massively in price to the US dollar, far more than the usual gyrations you see in stock prices. The symbol for Bitcoin is BTC and the symbol for Ether is ETH. 1)The data for the charts is from Yahoo Finance, the charts were created by badinvesmentsadvice.com
On a typical day to day basis, Bitcoin or BTC can vary between 5 and 10 percent in value. Ether was also very volatile when it hit its peak in late 2017 climbing as much as 60 percent in a week. In comparison, a stock may vary in market value by 1 or 2 percent in an active trading day.
How do you invest in cryptocurrencies?
There are a number of ways of investing in cryptocurrencies. You can:
In other words, buy and hold and try not to get distracted by the massive daily price fluctuations. This may be an OK strategy if you are willing to hold for some years and hope for the best.
This involves looking for patterns in price movements to predict where the price is heading much like many Forex or stock day traders. This approach makes use of technical analysis, discussed here.
Invest in an ICO
An ICO is an Initial Coin Offering. An ICO is a bit like an IPO, Initial Public Offering but without all the regulations and rules. Companies, or even loosely linked groups of people announce a plan to launch a new cryptocurrency or blockchain venture and invite the investing public to subscribe to a share of the outcome or to prepay for products or services. This is a specific sort of crowdsourcing.
Investing in ICO’s is probably the riskiest way of trying to invest in cryptocurrencies. Some ICOs have been so successful that the founders just made off with all the money they raised and never bothered to proceed with the proposed venture. Even if they do agree to go ahead there are no guarantees that the proposed venture will succeed or not be subject to some other fraud or debacle.
Invest in companies launching cryptocurrencies or working with blockchain
This could either be through investing in the stocks of the companies or through Exchange Traded Funds, ETFs aimed at this new industry. This might be attractive and it does carry a certain logic if you get bitten by the cryptocurrency bug and are convinced that decentralized currency and decentralized everything is going to dominate our futures.
On the other hand, the fact that there are now ETFs aimed at funneling investment dollars into blockchain and cryptocurrencies might be a sign you might already be late to the party. This also goes against the advice of many great masters of investment, as explained here. If there is any industry in today’s world that would qualify as a fad industry it would be cryptocurrencies and possibly blockchain.
Is it legal to invest in cryptocurrencies?
This was a problem for a while in many countries, then in February 2020 major cryptocurrencies including Bitcoin and Ether became legal in the US, UK, European Union, Japan, and most other developed countries.
However, it is still either illegal to buy most cryptocurrencies or banks are not allowed to handle then in Russia, China, India, Brazil, and other countries. If you are in doubt check in your country.
Where can you buy cryptocurrencies
There are cryptocurrency exchanges, such as Coinbank which trades nearly all cryptocurrencies and will transfer to and from fiat currencies. Fiat currencies are all the major currencies we are used to hearing about such as US dollar, Euros, Yen, etc.
If you are only interested in the main cryptocurrencies, many major brokerage firms now allow you to trade them. This table shows you which ones.
The risks involved in buying cryptocurrencies
There is a lot of debate and disagreement about many of the merits or otherwise of cryptocurrencies, but on one aspect everyone agrees. They are very risky.
Firstly they are risky in as far as the price fluctuates wildly and if you buy at one price you might have bought at a peak. You could be waiting for the price to climb back for a long time. Secondly, because of what they are cryptocurrencies have other risks.
Your title of ownership to cryptocurrency is coded into the blockchain and you access your currency through codes that have to be kept secure. Hackers are constantly trying to break in and steal cryptocurrencies. While that may be difficult once ownership is recorded in the blockchains the cryptocurrency exchanges where they are traded and exchanged for fiat currencies can be very vulnerable to attack.
There have been some highly publicized cases of cryptocurrency exchanges either being hacked and losing currencies or being fraudulent in themselves and the founders disappearing with the goods. Mt Gox is a famous case of a Bitcoin exchange that lost $450 million dollars worth of customers Bitcoins that it said were stolen and had to close up shop declaring bankruptcy in early 2014. For more on the Mt. Gox story, check here.
And if you did put some of your hard-earned money into an ICO hoping for the best, I suggest that you keep hoping but don’t hold your breath.
Because there is no bank holding your cryptocurrencies, there is also no insurance in the event of any loss. This means that if you make a mistake in a transaction there is nobody you can go to for help. Also, if someone does hack into your coins they are gone and that’s it.
Storing cryptocurrency on an exchange can be very risky as noted before, they are under constant hack attack.
You also have the option to store your cryptocurrencies in what is called a cold wallet. That is code that you keep offline, on a memory stick for example. But to make that safe there are all kinds of precautions you have to take securing your passwords, your means of identification which could mean a smartphone and all the verification steps you have to go through to authenticate yourself to access your cryptocurrencies. Effectively you have to become your own bank.
Once you have built a fortress around your codes and passwords and email account and phone number, what then if something happens to you and a family member has to access your cryptocurrencies if you are incapacitated for whatever reason.
Grim stuff I know but there have been cases of people disappearing or passing away and their closest family members were unable to get at their Bitcoins for example. So this is something to consider.
Are cryptocurrencies a bad or a good investment?
This has to be the 64,000 Bitcoin question. I would just say there are a number of things to consider.
It does seem that some big institutions, corporations, and wealthy individuals are building positions in major cryptocurrencies like Bitcoin.
When stocks have tottered into bear markets, there has sometimes been a rush into Bitcoin.
Whatever the fortunes of Bitcoin and Ethereum may be, blockchain is an exciting technology with many applications wherever data needs to be handled securely and used by many people all over the world and where transparency and trust are key.
So whether the suggestion to buy cryptocurrencies is good or bad investment advice, to be honest, you have to judge for yourself.
Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as investment advice, good or bad
I hope you found this brief introduction to cryptocurrencies interesting and useful. Do leave me a comment, a question, an opinion or a suggestion and I will reply soonest. And if you are really inclined to do me a favor, scroll down a bit and click on one of the social media buttons and share it with your friends. They may just thank you for it.
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|↑1||The data for the charts is from Yahoo Finance, the charts were created by badinvesmentsadvice.com|