There's little doubt that digital currencies have been among the most newsworthy areas of investment in the past two years. Spurred on by the incredible (and potentially manipulated) growth of bitcoin (BTC), the field of cryptocurrencies has only continued to expand.
New companies and developers are adding dozens of new offerings per month, most of which are now launched via initial coin offerings (ICOs). There is still a sense among many digital currency enthusiasts that, should the right opportunity come along, a new batch of digital currency millionaires (or billionaires) could be born in short order. But for those individuals who have not yet invested in the digital currency space, are there truly compelling reasons to start now? Below, we'll explore some of the considerations to keep in mind before exploring the cryptocurrency universe.
Potential or Speculation?
While many investors hold out hope that digital currency holdings could still reap the benefits of skyrocketing prices, there are prominent voices on the other side of the debate that suggest virtual tokens and coins are not so worthwhile. Investment leaders like JPMorgan's Jamie Dimon have gone so far as to criticize digital currencies for being nothing more than speculation driven or even to claim that they are a bubble disaster waiting to happen.
Of course, even with speculation, one can find hordes of investors willing to take the risk. Look no further than any of the recent prominent ICOs to see just how much investors are willing to commit to new digital offerings, even now. EOS, one of the latest and most popular launches, has been plagued with bugs and issues getting during its efforts to get off the ground. Even as the EOS community, left virtually unaided by the digital currency's development team, has been able to sort out just how the EOS ecosystem will work, the "decentralized" currency is largely dominated by a small percentage of investors who hold a large majority of the tokens. Nonetheless, in spite of these many and varied challenges and concerns, EOS earned an unbelievable $4 billion over the course of a yearlong ICO.
Regardless of the speculative nature of cryptocurrencies, there remain prominent supporters in the community willing to make bets on their future success. While it may be somewhat less often that famous analysts now predict six-figure valuations for tokens like BTC and ether, the mentality surrounding these forecasts remains among many in the broader investor base.
Another major concern over the potential of digital currencies has to do with widespread adoption in the mainstream financial and business worlds. While the industry has made inroads toward this goal, most in the community would agree that it has yet to truly break through. Whether one views this as a tremendous opportunity waiting to happen or as a sign that cryptocurrencies may never actually break into the mainstream depends upon your viewpoint and level of optimism.
It's widely known that digital currencies experience high (and sometimes extreme) levels of volatility. Nonetheless, it can be comforting to look to the record highs achieved across the industry in the final days of 2017 as an indication of the growth potential of the space. Perhaps that will change among cryptocurrency investors now that a study has suggested that bitcoin's epic climb toward $20,000 may have been the result of currency manipulation. In the time since that extreme high, BTC has sloughed off about two thirds of its value. It has spent weeks in a gradual decline, with some analysts now making predictions as to just how low it can go. Other cryptocurrencies have tended to follow bitcoin's lead; it is not uncommon for the entire digital currency space to drop billions of dollars in market cap in just a few hours.
One of the most impressive and unique aspects of cryptocurrency is also a significant liability. Owing to their decentralized nature, cryptocurrencies offer users both unprecedented levels of privacy and autonomy as well as new risks having to do with security. Experts have calculated that millions of dollars in digital tokens are stolen every day, on average. Even as the cryptocurrency space continues to develop with new offerings, hacks and fraudulent activity remain rampant. Those investors who choose to explore the digital currency space should be aware that a number of special security measures are absolutely necessary, and that even those measures may not sufficiently protect holdings against hackers working constantly to refine their techniques.
While it's clear there are many reasons to be skeptical of digital currencies as a group, digital currency supporters have also offered a perspective that many traditional investors have also found compelling. The digital currency space is frequently referred to as a transformational industry, with the potential to disrupt the world in the same way that the internet did in the 1990s. Yes, the internet brought about the dotcom bubble, but it has also proven to have a far-reaching impact on virtually every area of public life. Supporters of digital currencies may be willing to ride out the equivalent bubbles and issues with the nascent cryptocurrency universe on the bet that it will ultimately have the same type of effect. If you subscribe to this belief, there's no time like the present to get involved in digital currency investments.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.