Cryptocurrencies gained more fame in 2017 as Bitcoin rocketed from $600 per coin at the end of August 2016 to over $4,700 at the end of August 2017. With a 6x return on investment in a year, investors from all backgrounds started taking notice. Bitcoin eventually reached over $19,000 in December 2017 but is now back down to about $9,700 per bitcoin.
You may be wondering though: If you missed out on the Bitcoin explosion, are you too late to the game? Let’s take a look at Bitcoin and other cryptocurrencies and their viability for a strong investment return.
- Cryptocurrencies are digital currencies that can be used for some online money transfers and purchases and a few offline purchases.
- Bitcoin is the most famous cryptocurrency; other noteworthy coins include Ethereum and Litecoin.
- Cryptocurrencies are “mined” by large networks of computers that run around the clock completing complex equations.
- Because Bitcoin is not backed by a major government or asset, its value is based solely on others' willingness to use it.
What Are Cryptocurrencies?
Cryptocurrencies are digital currencies that can be used for some online money transfers and purchases and a few rare offline purchases. Bitcoin is the most noteworthy cryptocurrency, but it is not alone in this new frontier.
Other noteworthy coins include Ethereum, which trades around $250 per coin, and Litecoin, which trades around $47 per coin. While they are less known, they work almost identically to Bitcoin and Bitcoin Cash, the latter of which was created from a Bitcoin fork on August 1, 2017.
Cryptocurrencies vary in price compared to the U.S. dollar, just like other currencies, and like other currencies can be readily traded into euros, pounds, and other international currencies. However, some regulations limit Bitcoin.
Where Does Bitcoin Come From?
It is easy to understand the history of the U.S. dollar. It was originally tied to the value of silver and gold. Since 1971, the dollar is backed by the “full faith and credit” of the U.S. government.
Bitcoin and other cryptocurrencies come about through a different means. Cryptocurrencies are “mined” by computers, sometimes very large networks of computers. These networks run around the clock completing complex equations and tasks that keep Bitcoin running. New Bitcoin is issued to these computer owners as a reward for their participation.
This means the total number of bitcoins available slowly and steadily grows.
Cryptocurrencies Are Incredibly Risky Investments
Bitcoin is not backed by a major government or asset, so the value is based on others' willingness to use and trade the currency. While it grew by over 600% in 2017, it can easily fall, and it can come crashing down quickly. For this reason, it is important for Bitcoin investors to only put in what they are willing to lose.
Since its height in December 2017, Bitcoin has fallen to about half the price, proving how risky of an investment it can be. JPMorgan Chase CEO Jamie Dimon has even stated that he believes Bitcoin and other digital currencies are a fraud. “It’s just not a real thing,” he said at the 2017 Delivering Alpha conference presented by CNBC and Institutional Investor. “Eventually it will be closed.”
Is It Too Late to Profit From Bitcoin?
Like with the stock market, you would need a crystal ball to answer this question for sure, but many skeptics say Bitcoin may be past its peak. However, big fans of digital currencies say Bitcoin could increase tremendously over time.
If you look around and see people bragging about their huge profits in Bitcoin, are you too late to the game? The answer is maybe. We don’t know if Bitcoin will go up or down, and other investments are probably safer.
However, if you drank the Kool-Aid and think cryptocurrencies are the wave of the future, you have several cryptocurrency options to review. Ethereum and Litecoin are the most stable Bitcoin alternatives, but there are more than 4,400 cryptocurrencies traded today.
- Ethereum is a cryptocurrency that works similarly to Bitcoin. It uses the same Blockchain system to track the currency’s value and owners around the world. Launched in 2015, this is the most successful alternative to Bitcoin.
- Litecoin was released in October 2011 and works on a nearly identical system to Bitcoin. This is another of the more stable and well-known cryptocurrencies.
Other currencies include Monero, Ripple, YbCoin, Dogecoin, Dash, MaidSafeCoin, Lisk, SiaCoin, and Counterparty, but they all hold a far lower market value than Bitcoin, Ethereum, and Litecoin.
Some investors believe that even if they missed the Bitcoin bandwagon that these other currencies will follow suit and offer massive returns. This is possible but unlikely. Other currencies will likely follow the trend of the biggest leaders, as is common in the stock market. If Google, Amazon, or Apple go up or down, other technology stocks tend to follow. The same can be expected in the cryptocurrency markets.
There May Be Money to Make, But Not Without Risk
It is possible that Bitcoin will double in price, but it is also possible it will fall to zero. Because they are not backed by a government or asset, Bitcoin and its cousins do not really represent anything. They are only worth what someone is willing to pay for them.
Some could have made $1,000 in Bitcoin after an early $100 investment, but when the recent charts started to look a lot like the start of a stock market bubble, many probably took their money and ran. Knowing the risks, people may feel better with $1,000 in the bank than in Bitcoin. Whatever you do, do not invest more than you can afford to lose. Cryptocurrencies are a risky place to invest, and you never know what tomorrow will bring.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.