The past couple of months have been extremely eventful in the realm of cryptocurrencies. We have seen a meteoric rise in the price of Bitcoin during 2017 to a peak of close to USD 20 000, which had many seasoned investors, speculators and, dare I say it, gamblers excited for its future. Then, just as the “winnings” seemed too good to be true, panic started creeping in and Bitcoin dropped to roughly USD 7000. For many investors this caused some emotional and financial strain and a lot of uncertainty, with everyone pondering the following questions:
Why is the price of cryptocurrencies so volatile?
Although the blockchain technology that powers the vast majority of cryptocurrencies (or cryptos for short) is already almost a decade old (with Bitcoin being the first to be released on 9 January 2009) the mainstream acceptance thereof only really gained traction during 2017. Due to this the technology is still very misunderstood by the general public and those looking to pour their savings into some alternative forms of investing.
Currently a very significant portion of the total available Bitcoin is held by only a relatively small number of players. Because cryptos (as with most investment shares) operate on a principle of supply and demand a large sell-off by any number of these whales normally leads to a noticeable drop in prices.
Several countries and financial institutions have also started to regulate the purchase and trade of cryptocurrencies in an attempt to curb the mentioned price volatility as well as to decrease the risk of illegal transactions (made possible by the anonymous nature of cryptos). It is however partially due to this anonymous nature that Bitcoin initially started gaining popularity.
Taking into account all the above factors, the fact that Bitcoin signifies the first foray into the world of investing for many and the prospect of making a fortune, cryptos still tend to be very much an emotional investment.
Why do cryptocurrencies have value?
Cryptos, as with any other asset or item, is only worth as much as the value attached to it by its users. One may then ask why anyone would give a second thought to something which cannot be seen, touched, experienced or, as is sometimes the case with fiat currency, shown off. Why can a crypto be considered a resource? And the answer is, in a general sense at least, quite simple.
Because it has both scarcity and utility. Due to the way in which cryptocurrencies are mined there is only a finite amount of Bitcoin, Ethereum, Ripple, Litecoin etc. available for purchase at any given time. Hence, the inability to freely purchase an item adds to the increased perception of value.
Utility however is a whole different discussion. Although cryptos aren’t yet as widely accepted a form of payment as one would have liked to see by now it is still seen as a value store by many. The underlying technology provides so many uses outside of just being seen as a digital currency that the steep price increase almost seems fathomable. Uses extend from supply chain management to energy supply to perhaps its most used form, peer-to-peer global transactions.
The question begs, is blockchain technology the future? That is yet to be answered, however I can’t see blockchain and its various uses being abandoned very soon.
Should I still get involved in cryptocurrencies or have I missed the boat?
To be fair, cryptocurrencies were not intended to be used as a get-rich-quick scheme, but to be used as an add-on to diversify your investment portfolio. If crypto is your cup of tea, please ensure that you don’t put all your eggs into one basket.
It is important to understand that Bitcoin is an older cryptocurrency, so it will have some limitations when compared to the newer kids on the block. For instance, Ethereum has faster transaction speeds and lower fees. Ripple even more so. In some instances people are losing out because of the general volatility of cryptocurrencies, but more frequently to the slower transaction speeds and higher fees associated with Bitcoin.
Bitcoin will be great when the market has settled, but for now your best bet would be to invest in the newer cryptocurrencies. Do your research and make sure you understand the technology behind your currency of choice. If you already have some money invested in this new market treat it like you would any good long term investment. Set your thresholds for how much you are willing to lose and cut your losses when you get there or keep going while you are making profits.
Remember: It is almost never a good idea to borrow money in order to make any investment.
How can a South African citizen invest in cryptocurrencies?
Although there are several options available to South Africans, Luno is still proving to be the most convenient (through the use of their app). They offer South Africans the option to invest in either Bitcoin or Ethereum at the moment and the process of depositing money into your wallet has proven to be relatively painless.
* Cryptocurrencies are very volatile, and Priavis Business Solutions cannot be held liable for financial losses by users.
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