Bitcoin, often referred to as, “digital gold”

SO YOU’RE THINKING ABOUT CRYPTOCURRENCIES

Guest post by Michael Kuchar

In the last few months cryptocurrencies have skyrocketed in popularity, with mainstream media paying great attention to the new financial instrument — even Forbes now has a dedicated crypto beat. A digital asset, true cryptocurrency is based on blockchain technology, transferred directly from peer to peer as a store of value via transactions processed and recorded on a distributed ledger.

Skyrocketing in the past few months, cryptocurrencies have hit a level of mania not seen before, causing an explosion in alt-coins (alternative cryptocurrencies to the original, Bitcoin), and of course, the highly discussed initial coin offering (ICO).

Price Development of Bitcoin — Looking Back

Whether Bitcoin is a good investment is really up to you, every cryptocurrency is high risk — the volatility has meant that many people have lost significant amounts of money — but it has proven so far to provide investors with remarkable returns, hitting near $6,000 USD last Friday. BTC started the year off at just under $1,000 USD, according to Coin Desk.

To this point, in 2009 a man in Oslo, Norway named Kristoffer Koch purchased $27 worth of BTC. He forgot about the investment and in 2013 found out that his negligible investment was worth $980k. You can read more about his story, here.

And you might be interested to know that the first ever recorded transaction using Bitcoin was the purchase of two pizzas by Florida-based developer Laszlo Hanyecz. At the time, 2010, the two pizzas cost 10,000 BTC. Today, the digital Bitcoin community celebrates that day, May 22, as “Bitcoin Day.”

Bitcoiners call the currency “digital gold,” and while controversial, there is some truth there; like a resource the currency must be mined to be added to the ecosystem, and like gold, the value of Bitcoin is derived completely by community adoption and sentiment.

But the original cryptocurrency is still highly volatile, and while its community continues to use #hodl across social media (meaning to forever “hold” the currency as part of a strong belief system as well as to hold as an investment), some predict that there is a bear market looming in crypto; the manic bubble has to pop at some point.

Ethereum — Catching Up?

New compared to Bitcoin, Ether, the native token to the Ethereum network, is another cryptocurrency that is making waves and building a solid base of adoption and community integration.

Unlike Bitcoin, which solely provides a method to transact and acts as a protocol token, the Ethereum network was developed to provide a platform for the creation of decentralized apps (dApps), and provides a utility token. Ether provides fuel for the dApps to operate, and anyone can build on top of Ethereum. You could sort of liken it to Wordpress; Ethereum provides you with the platform and the key, you just have to figure out what to do with it and customize it to make it yours. As a result, there are many Ethereum-based projects, which has helped tremendously to encourage the adoption of Ether and to raise its market value.

At the launch of Ether in August 2015, one coin cost approximately $3. This past January, the price bounced past the $10 USD mark and continued to soar to a whopping $390 USD in mid July.

These are unprecedented times.

But as crypto does, it dropped 20% the next day, removing some of the value caused my market hysteria. Such extreme volatility is common with a high risk-to-reward ratio — not something we recommend putting a significant amount of money into.

Our advice if you’re keen to get exposure to the crypto markets? Only invest what you can afford to lose. This stands true for all high-risk investments, but it is particularly true for cryptocurrencies, an asset class yet to be moderated for investor safety.

At the time of writing this, Ether sits at just over $300 USD.

Moving into the Mainstream

Because Bitcoin has become recognized as having purchasing power by mainstream businesses, it is the more pervasive and popular digital currency. A major development for the cryptocurrency community at large, Bitcoin has begun to gain credibility and trustworthiness and the effects will surely spill over.

True utility is based on community adoption; the more people who use cryptocurrencies and believe in them, the more their values will rise.

Regardless of cryptocurrency, where value is ultimately created is in the network that builds around it. True utility is based on community adoption; the more people who use crypto and believe in them, the more their values will rise.

Future of Bitcoin Unknown, Limit of Coins Well-Realized

A tenant of cryptocurrency is finite value; there is a limited number of coins to be mined, thus ensuring that the value is not manipulated by creating more and pushing them into the system, as we see with inflation caused by the influx of printed money.

There are only 21 million Bitcoin in existence, and it is expected that all Bitcoin will be mined by 2140. This day looms, and the community is faced with questioning whether the incentive to secure the network with mining will be lost (miners place transactions on blocks and earn Bitcoin for their work), and whether transaction costs to process Bitcoin transactions will increase in order to continue incentivizing miners to record transactions and thus attach blocks to the chain.

It’s a mystery at this point how the community and market will respond, and what this will mean for the price of Bitcoin. Will the price increase because of scarcity? Or will it fall because the resource has ultimately been fully tapped?

Many spectators liken cryptocurrencies and the underlying blockchain technology to the internet in the 90s in terms of skepticism, rampant development, unsustainable market growth, and longterm adoption. While the mania has attracted shady actors to launch projects not worthy of investors’ money, the nascent technology holds promise that can’t be ignored.

Michael Kuchar is the creator of TradingBeasts. He believes that trading is not about choosing the perfect trading strategy, but rather about constantly cutting the number of losses.

Like what you read? Give Voleo a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.