- Digital currencies are exceptionally volatile Probably the first thing you'll notice if you've been following cryptocurrencies is that they're exceptionally volatile. This derives from the fact that virtual currency trading occurs on various cryptocurrency exchanges rather than a central exchange, leading to increased volatility.
Since the year began, the aggregate market cap of all cryptocurrencies combined has increased by more than 3,200% as of Dec. 18. Nonetheless, bitcoin, the world's most popular cryptocurrency, has undergone four corrections of at least 20% over the past six months. In short, cryptocurrencies aren't for the faint of heart.
- Cryptocurrencies have no fundamental backing Unlike the U.S. dollars in your wallet or any other currency worldwide, digital currencies aren't backed by a central bank or a government.
They also have no tangible fundamental factors with which to help derive an appropriate valuation. Whereas you can look at the earnings history of a publicly trading stock to estimate its worth or the country's economic performance concerning GDP growth to value a currency like a dollar, digital currencies have no direct fundamental ties. This makes valuing cryptocurrencies in a traditional sense especially difficult, if not impossible.
- There are more than 1,300 cryptocurrencies (but bitcoin is king) If you've been following the appreciation of virtual currencies, you've probably heard an awful lot about bitcoin -- and with good reason. It was the first tradable cryptocurrency that was brought to market, and it currently makes up 54% of the aggregate $589 billion market cap of all cryptocurrencies.
However, it's far from alone. More than 1,300 other virtual currencies that investors can buy, over two dozen have a market cap that's more than $1 billion.
- Blockchain is where the real value lies Despite the emphasis on trading virtual currencies, it's actually what underlies cryptocurrencies that could be particularly valuable.
Blockchain technology is the infrastructure that cryptocurrencies like bitcoin are founded on. It's a digital and decentralized ledger that records payment and transfers transactions safely and efficiently. It's also the big reason why big businesses are so excited.
- "Miners" play a critical role However, cryptocurrency transactions need to be verified and the blockchain regularly enlarged to account for new transactions and payments. This job falls to a group of folks known as cryptocurrency miners.
Crypto-mining involves using high-powered computers to solve complex mathematical equations on a competitive basis to verify and log transactions. Being the first to do so often entitles the miner to a reward given in the form of cryptocurrency coins and/or transaction fees associated with a block. Though the hardware and electricity costs can be enormous, mining can also be advantageous. The graphics-card hardware needs of miners have been a big reason why NVIDIA and Advanced Micro Devices have seen a double-digit percentage surge in sales recently.
