The Bitcoin boom was the big financial story of 2017 as the price soared into the stratosphere – though many experts dubbed it the Bitcoin bubble, convinced a crash is just around the corner.
So will 2018 be the year cryptocurrencies came of age? Are they a safe investment, or an investment car crash waiting to happen?
That’s a vital question, with new research suggesting as many as one in three millennials will have invested in cryptocurrency by the end of this year.
First a quick recap on the momentous events of last year. On 2 January 2017, the price of Bitcoin stood at $985. By 17 December it had reached an all-time high of $19,086 – that’s a mind-boggling 1,837% increase, although the price has now fallen back to $14,124.
Ethereum – the second biggest cryptocurrency by market capitalisation – started 2017 at just $8.16; today it is trading at $1,240. That’s an even more spectacular rise, in percentage terms, of 15,400%.
How cryptocurrencies work
First, it’s important to understand how digital currencies work. Everyone is familiar with the concept of a hard currency such as the dollar or the pound, issued by a central government.
All cryptocurrencies make use of what is called distributed ledger technology, or ‘blockchain’ – a database of transactions stored in the cloud that is continuously updated and certified.
Each new transaction creates a ‘block’ of data that is completely tamper-proof thanks to complex cryptographic algorithms that give the currency its name.
Currencies such as Bitcoin and ethereum are generated by an opensource, peer-to-peer network.
New bitcoins and ether tokens are ‘mined’ using special software, with rival teams competing to solve complex mathematical problems. They are paid with new bitcoins, generating new currency that has an intrinsic value – the financial effort put into producing it.
Other ditigal currencies, such as Ripple, are simply created by the company that owns them.
It’s easy to think of cryptocurrencies as a two or three horse race, but that’s far from being the case.
There are actually more than 700 different cryptocurrencies in existence – although many have been launched specifically to fund new business startups; a sort of alternative share issue.
Back in September 2017 I wrote that only a dozen digital currencies had a market capitalisation in excess of $1bn, with Bitcoin’s market cap then roughly $70bn, ethereum in second place at $28bn, followed by Ripple at $8.2bn, Litecoin at $3.4bn and Dash at $2.4bn.
41 $1bn-plus currencies
Just look at the situation now. As of today (12 January 2018) there are an astonishing 41 cryptocurrencies with a market cap in excess of $1bn – a real indication of just how deep this market is.
The top three are the same (although Ripple did briefly edge out ethereum for second spot) – but look at the market caps of the top six contenders. Bitcoin stands at $237.3bn, ethereum at $120.5bn, Ripple at $79.7bn, Bitcoin Cash at $43.4bn, Cardano at $19.5bn, and Litecoin at $13.2bn.
The total market cap of the top 100 cryptocurrencies is $710bn.
Obviously market cap is dependent on price, but even if you argue that Bitcoin is way overpriced, which it probably is, there is plenty of other meat out there for those keen to sink their teeth into some serious cryptocurrency investment.
Here to stay
There is no doubting that cryptocurrencies are here to stay. Let’s go back to that report that said one in three millenials will have invested in a digital currency by the end of the year.
The study by Opinium for new cryptocurrency exchange London Block Exchange (LBX) shows 5% of under-35s have already invested cash in a cryptocurrency (and 25% wish they had).
A further 11% are definitely planning to invest this year, while 17% are seriously considering investing by the end of 2018.
By comparison, 57% of over-55s said they would not be investing in cryptocurrencies in 2018.