Drivers and risks of cryptocurrency boom

By:Vandita Jadeja 2017-11-30

The rising prices of cryptocurrencies are prompting volatility starved investors to examine different ways to join the biggest boom in a long time. Bitcoin has broken the $10,000 milestone this week and has taken the market by storm.  Cryptocurrencies are a creation of 21st century and a mixture of digital assets.  Cryptocurrencies are secured against hacking by the use of cryptography and can also be converted into real world money anonymously. Due to this feature, it has attracted some criminal elements which have been emphasized by regulators. There are also other cryptocurrencies which have risen in the year, including Dash, Ripple, Litecoin and Ethereum. Each one has a different characteristic which allows the users to treat them differently.

Bitcoin can be sold as an alternative to central bank currency, while Ethereum as a crypto fuel which cannot be used as a currency. Ripple is a software which is aimed at financial markets like foreign exchange. The reason behind the rise in prices is a mixture of enthusiasm, scarcity and the fear of missing out among the investors. According to data from Chain analysis, there are 16.7 million bitcoins in circulation which has brought the bitcoin market capitalization to $167bn. Out of the ones in circulation, 37 percent have been spent in the past year and 22 percent are being held by investors. Various semi institutional names and hedge funds have invested in cryptocurrency projects.

The surge in the price of bitcoin has prompted some of the biggest markets in the world to explore ways for the customers to trade the market using more traditional investment instruments like futures or contracts.  There are various risks associated with bitcoins. National regulators have warned investors on the dangers surrounding a market which is unregulated, illiquid and prone to big swings in price which limits its use as a currency for transactions. The higher prices mean that the holders of the currency are more lucrative target for the hackers. IG Group, the largest online trading platform in the world has suspended the trading of some of the bitcoin derivatives citing the increasing security risk which is associated with offering the products.

Exiting the market is also a crucial factor. Some platforms and exchanges take the risk of a trade on their books and pay the customers from their own funds, until they sell the currency in the market. There are also real world problems, like mining of bitcoins has consumed more energy than average electricity consumption annually by 159 nations.

Experts argue that if price stability has been achieved, bitcoins can be feasible as a currency to denominate a transaction rather than for speculative gains. There is a specific infrastructure coming in to deal with this but it will take about 10 to 15 years. Critics warn that bitcoin cannot be used as a medium of exchange like central bank backed money. Many fear the bubble could burst and cause upheaval in the market. What happens now, only time will tell.

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