Cryptocurrencies may rise in value, but many investors see them as mere speculations, not real investments. The rationale?
Much like real currencies, cryptocurrencies do not produce any cash flow, so someone has to pay more for the currency than you did for you to benefit.
That’s what investing theory is called “the bigger fool.” Contrast that to a well-managed company, which increases its value over time by increasing the operation’s profitability and cash flow.
Cryptocurrencies like Bitcoin might not be that secure, and some influential figures in the investment community have urged would-be investors to steer clear of these. Of particular note, legendary investor Warren Buffett compared bitcoin to paper checks: “It’s an immensely powerful way to send money, and you can do it anonymously, and all that. A check is a way to move money on as well. Are checks worth a lot of cash? Only so they can move money on. For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be remembered that a currency needs stability so that traders and customers can decide what a fair price is for products.
Bitcoin and other cryptocurrencies have, for most of their existence, been anything but secure. For example, although in December 2017 bitcoin traded at nearly $20,000, its value then fell to as low as about $3,200 a year later. It had been trading around $11,000 in September 2020. The price volatility causes embarrassment.
In the future, if bitcoins will be worth even more, people are less likely to invest and exchange them now, making them less viable as a currency. Why invest a bitcoin when next year’s value could be worth three times?
The rise in popularity in the cryptocurrency space has prompted many to speculate about its long-term sustainability. Some have even compared it to the early dot com boom bubble burst. While several experts have debunked the misconception of it being an incredibly risky investment, some people still have their reservations. In essence, cryptocurrency is simply a type of “digital money,” and it is subject to some of the same economic principles by which fiat currencies function.
Looking at how crypto prices compare to their fiat counterparts, it is possible to relate them to how mined resources are measured, such as gold. This is because Bitcoin, Ethereum, and other cryptocurrencies have fixed set-up numbers, and specialized computers are “mining” them. Furthermore, cryptocurrency is divisible, meaning they can be broken into smaller quantities (example: 0.001 BTC, 0.00001 ETH).
These concepts guide one of the crypto values key determinants: supply and demand; much like fiat money, cryptocurrency supply and demand help to assess its value in comparison to the dollar.
When the idea of Bitcoin started to draw international attention, so did the value of the coin. Other developers began making their coins within less than five years. These coins, like Litecoin, Ethereum, and Monero, have all used blockchain technology to protect value. While these coins used similar technologies, each digital asset was approaching the market differently.
For example, Litecoin aimed to be the silver to the gold of Bitcoin, while Ethereum tried to give developers an alternative to the scripting limitations of Bitcoin. Monero followed a radically different strategy, developing a digital asset that was mainly based on privacy.
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