Why People are Going Crazy Over Bitcoin and Other Digital Currencies

Bitcoin and other virtual currencies are on a tear this year, surpassing the returns seen in stocks, bonds and most other investments.

The price of bitcoin has tripled since the beginning of the year, surging above $3,000 for the first time Sunday before dropping by more than 10 percent the next day. Returns for ethereum — a lesser known but quickly growing cryptocurrency — have been even more dramatic: It’s gained nearly 5,000 percent, touching a record price of $407 Monday before coming down.

Meanwhile, the amount of cash in virtual currencies has ballooned. The market cap for cryptocurrencies is now more than $100 billion, up from about $20 billion at the beginning of the year, according to cryptocurrency tracker CoinMarketCap.com.

So what is going on? Some recent events may have convinced investors that these currencies are here to stay — including a move from the government of Japan to make bitcoin legal. But that only explains part of the rise, cryptocurrency experts say. Investors have been clamoring for a slice of the virtual market based on potential uses that have yet to materialize, says Garrick Hileman, a research fellow at the Cambridge Center for Alternative Finance. For instance, the currencies have the potential to disrupt the way start-ups raise money or how certain financial transactions are handled, experts say. But they’re also known to be volatile.

To give you a better understanding of the digital currency world, we answered some key questions about these tools and highlight some of their perks and risks.

What are cryptocurrencies:

A cryptocurrency is a digital alternative currency. That means it doesn’t have physical bank notes or coins and is not issued by a government.

Bitcoin, one of the best-known cryptocurrencies, was started in 2009 by a software developer using the pseudonym Satoshi Nakamoto. At the start of the year, bitcoin made up 87 percent of the cryptocurrency universe, but that market share has dropped to about 40 percent as other cryptocurrencies have gained traction, according to CoinMarketCap.com.

Bitcoin gained popularity as a way to send money quickly and pretty much anonymously, because transactions don’t need to be linked to a certain identity. Transactions are tracked on an online database called blockchain. People use bitcoin to send money to friends and relatives in other countries. But bitcoin has also been used for illicit transactions, such as to buy and sell drugs or to pay hackers during ransomware attacks.

What is ethereum?

Toronto native Vitalik Buterin developed a younger cryptocurrency called ether in 2013, but most people refer to the digital currency as ethereum, the name for the blockchain it trades on. Ethereum sets itself apart for its ability to incorporate “smart contracts,” or computer-based contracts that only pay parties after certain conditions have been met and verified. (Imagine if you could set up an algorithm that automatically pays your dog walker only after you have evidence that your dog has been walked the agreed-upon distance, Hileman says.)

Investors are excited by the potential for these smart contracts, which could make it easier for start-ups to raise money and for businesses to complete international transactions, says Eric Piscini, a principal at Deloitte Consulting who focuses on cryptocurrencies. One common use for the smart contracts is for companies to raise money through what’s known as an initial coin offering, which give investors a chance to buy a new kind of digital token.

How do you buy cryptocurrencies?

The easiest way for people to buy cryptocurrencies is to use an online platform, such as Coinbase, Blockchain and BitGo, which lets you exchange dollars for digital currencies. Investors can also buy cryptocurrencies from other owners using peer-to-peer networks such as LocalBitcoins.

Investors could soon have other ways to take part in the market. The Securities and Exchange Commission is reconsidering an application from the Winklevoss twins for an exchange-traded fund that invests in bitcoin. Such an ETF would track the price of bitcoin, but investors would be able to buy and sell the fund as easily as a stock. The regulator initially rejected the application in March, citing a lack of regulation in the exchanges that are used to buy and sell bitcoin.

[Read More From The Washington Post]

Posted July 17, 2017 by & filed under E-Commerce, News.