Over the past few months, there has been an increased wave of euphoria surrounding cryptocurrencies, the most notable of which is Bitcoin (BTC). Cryptocurrency is simply a digital currency which can be exchanged and traded as each transaction is encrypted and then verified independently of any centralized system or bank. BTC is the largest available digital currency by current market capitalization. The second largest is an alternate coin known as Ethereum (ETH).
Both of these digital currencies are supported by the blockchain technology. The blockchain technology is simply a distributed ledger (or database) that tracks and verifies all digital transactions. When a transaction occurs, it is grouped together in a “block” with other transactions that have occurred on the network within a short period of time. The validation of each transaction happens when a miner is able to utilize a computer to solve a complex problem. This enables the transaction to be verified and added to the chain as the ledger is then updated and distributed back across the network.
BTC vs ETH
Some of the differences between BTC and ETH are simple and easy to identify. These include the origin of the coins, the creators the support them, and other inherent characteristics such as the price as well as the total circulated supply. Currently, the price of BTC is around $5,600 whereas ETH is closer to $300. The circulated supply for BTC is just above 16 million, compared to over 95 million for ETH. The actual details of the blockchain system that support each currency are also different when you dig into the details of ethereum vs bitcoin. ETH aims to complete block transactions closer to 12 seconds per block, with BTC approaching over 10 minutes. The mining of each coin is also different. BTC miners have already exhausted over two-thirds of the available coins to mine. This fraction is much less for Ethereum. It also employs the use of smart contracts within its blockchain system, which is claimed to have a greater level of security, reducing the level of associated fraudulent activity.
In order to understand the associated risks, it is important to look at the global picture. The Russian Central Bank had recently declared that it will be shutting down digital currency exchanges. Sergei Shetsov, of the Russian Central Bank, had stated that websites of exchanges that are selling digital currency will now be blocked. The Chinese government had a similar reaction very recently. This is in part because of the wide range of corruption that occurs with the fluid and international exchange of digital coins. Many investors have piled into digital currency expecting more of the large returns that have resulted over the past few months. But this raises the question of why all the central banks and governments don’t support digital currency? Japan had a very different response than that of Russia and China as it declared digital currency as a legalized tender. While the Japanese government is still facing much of the similar corruption that other countries are, the government has understood that value of the technology behind it. The response from the United States has been mixed, as there are rumors that Goldman Sachs may be joining the digital currency investment market in 2018. However, the CEO of JPMorgan Chase, Jamie Dimon, has indicated his strong opposition declaring that Bitcoin is a fraud and that anyone caught trading the digital currency will be fired. Amazon has been rumored to begin accepting Bitcoin as payment, as many investors will be tuning in to their next quarterly report for this news. This could send the digital currency market soaring.
The simple lure of the huge gains that have occurred over the past year (over 800% for BTC and over 2,000% for ETH) make the investment prospectus very intriguing. There is clearly an early opportunity for investors to get a piece of the innovative blockchain technology, but it’s not free of associated risks. The price of BTC fluctuated by over $600 yesterday alone, a level of volatility that many investors should flee from. If a bubble is forming over the cryptocurrency market, its collapse may have severe effects. However, if the currency is adopted globally as acceptable tender, an investment today could see incredibly year over year returns.
Articles for reference:
CNBC, September 9th, 2017
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