Everyone’s talking about cryptocurrencies, even if they don’t fully understand them. Some people are even investing in them. Joining the craze is only getting easier. Apps like RobinHood and exchanges like CoinBase make investing in bitcoin, ether and a dizzying number of other digital currencies as simple as pointing and clicking. Even banks and brokerages are cashing in.
Although some people get rich, many more do not. That’s because cryptocurrencies are so volatile that a chart of their value looks like an EKG printout. The price of bitcoin rose more than 2,000% in 2017 to a record $20,000, but by early 2018, it had fallen more than 50%. Bitcoin is now trading at just under 3,600.
The roller coaster nature arises from sudden changes in the perceived value of a given cryptocurrency. Although their prices are, like traditional stocks, determined by supply and demand, hype also plays a role. News coverage can influence prices, too. Any mention of someone hacking a cryptocurrency exchange sends prices plummeting, for example, while even the rumor of greater regulation reassures investors and drives up prices.
Adding to the uncertainty, the space is largely unregulated and bad actors abound. While companies face many regulatory hurdles before an initial public offering, launching an initial coin offering is much easier as the space is so unregulated. That makes it easy to place ill-fated investments in poorly conceived or dubious companies that haven’t been vetted, let alone required to meet any financial, accounting, or ethical standards. That leads some people to argue that no one truly invests in cryptocurrencies, they only speculate on it.
“Their only value is in the belief that someone later will pay more,” says Nicholas Weaver, a senior researcher at The International Computer Science Institute. None of this leaves people any less eager to bet on bitcoin and its ilk.
But anyone thinking of doing so should think twice. And perhaps think twice again.