Investing in Cryptocurrencies (Part 5/5 tutorial for beginners)
Often news show that people got rich with cryptocurrencies. This is one of the main reasons why a big interest is drawn. In 2017 virtually all better known cryptocurrencies have risen by 5-70x, some even more. How and why does it make sense to invest now?
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Let's take a look at the most famous cryptocurrency, Bitcoin as an example. As of December 31, 2016, the price of one Bitcoin (BTC) was $963.74 (USD). Exactly one year later, on 31.12.2017. The value of 1 BTC was $14156.40 (USD). So the value has increased almost 15x. In other words, if you changed 1000$ into bitcoin at the end of 2016, a year later you would have almost 15,000$.
LETS TAKE A LOOK BACK
To clarify why cryptocurrencies grow so much, let's look at the graphs for the whole time of growth for some of the most famous cryptocurrencies. The prices are expressed in US Dollars (USD).
BITCOIN
As you can see, in the first half of 2017, the price seemed to be stable. But it's actually a price move between $1,000 - $2,000, so rising for full 100%. On August 2017 the price starts to grow rapidly, according to $3,000, and soon after it goes over $5,000, and in December $10,000 and up to its $ 19,000 maximum. The value of Bitcoin increased by 19x.
DASH
DASH has been worth around $11 in 2017, and at the end of the year reached $1013. Which means that it has increased by as much as 92x.
ETHEREUM
Ethereum was at the beginning of 2017 worth around 10$, and at the end of 2017 the price has risen to around $740. It went up by 74x.
Similarities and differences
If you look at the graphs displayed, you will notice a few similarities. When Bitcoin began to grow, the others followed it, especially in August / September 2017. Why? Though cryptocurrencies have achieved great growth over the past year, many people still didn't know about them. Basically it is written about the most famous cryptocurrency, Bitcoin. As people find out about Bitcoin and decide to invest, ie change some amount into Bitcoin, they learn about other cryptocurrencies, which brings new investments in other non-Bitcoin (the so-called altcoin) cryptocurrencies.
In tutorial 4/5 I noted that it is possible to buy only a few of the most famous currencies (BTC, ETH, LTC) directly with EUR / USD. To buy any other cryptocurrency you must first buy one of the listed ones and exchange it on a crypto exchange website in the desired cryptocurrency - for example: DASH. Because the "way" to most cryptocurrencies is most commonly via Bitcoin, most of the graphs of other, lesser-known, cryptocurrencies will resemble the Bitcoin graph.
As I have explained before, the price of cryptocurrency is determined solely by its market capital, ie the amount of money invested in it. The price of any cryptocurrency is primarily indirectly affected by 2 things: technological innovation and so called pump & dump phenomenon.
Technological innovations in cryptocurrencies clearly lead to improvements and various enhancements, which leads to increased trust by investors, leading to price increases. This is the expected phenomenon.
PUMP & DUMP
The name for the common cycle seen in cryptocurrencies. Typically, a large investor buys a large amount of cryptocurrency, causing a huge increase in the price (pump), this increase pulls the desire of others to dig into this cryptocurrency while rising, further raising the price, and then the same investor sells the cryptocurrency at a higher price (dump) - and the price then falls significantly - all others end up losing.
The above two terms explain price developments in the world of cryptocurrencies. At pump & dump you often see sudden leaps in prices ("overnight"), followed by a "stabilization" of cost-drop. When leaps are due to major technological innovations, then this growth is usually more time-consuming with less "stabilization". Both phenomena lead to a gradual increase in cryptocurrencies prices with strong technical potential.
HOW FAR WILL CRYPTOCURRENCIES GROW?
Short answer: no one knows. We can only evaluate based on existing data. The market capital of all cryptocurrencies at the time of writing the article was $298 billion. The market value of gold is $ 8 trillion. The market value of all shares on all stock exchanges is about $ 60 trillion. If the value of the cryptocurrencies would be at the value of the gold market, and say that the ratio of all cryptocurrencies remains the same, their value would have increased by almost 11x. If the cryptocurrencies live up to their expected future, that figure should be far greater. But these are just assumptions and no one can safely say what is the ultimate range of cryptocurrencies.
Is the growth trend of cryptocurrencies expected in 2018?
Very likely, since much of the world's population is not familiar with cryptocurrencies. Almost every day new projects are launched and new ideas that enable different technological advances. Cryptocurrencies are not just a substitute for existing money. These are new technological principles that stretch across a range of industries, such as healthcare, charitable activities, transport industry, application markets, and even agriculture. So with cryptocurrencies we expect an even greater momentum in 2018.
Some cryptocurrencies will drastically lose value, some will disappear, new ones will appear, but what will we use for payments? Who knows, that will show time. Cryptocurrencies are more technology than the currency, and some will become standards for certain activities. How many of them will eventually exist and we will use it on a daily basis, which will only serve as protocols in background applications - no one can say with certainty. But one thing is for sure. Critique, a gift of anonymous people - it's the technology that brings a revolution in our lives, changing the world we know today.
