Crypto-currencies are digital-only currencies the methodology used for encrypting and registering it is used to monitor and regulate the generation of the monetary unit, and this is not under the purview of any banking entity. The methodology is called blockchain.
Blockchains use data structures using an anonymous network to help carry the transactions by securely altering the structure, and they do this without the support of any third party, unlike the banking operations which are connected to a centralized network. The algorithm which helps the blockchain eliminates the need for people to verify the transactions because the blockchain database fetches the input values and molds them into a block.
Each such block is chained to another block using a cryptographic signature. This can be accessed by anyone who has the permission to do so and hence this eliminates the third party which in the conventional sense is the central banking network. The advantage around this system is the security it offers along with the anonymity and freedom from banking fees and transaction charges.
Market Reactions to Digital Currencies
Markets have seen crypto-currencies like Bitcoin and Ethereum scale new peaks and reach all-time high prices. Digital Currency is highly volatile and whenever there are extreme price movements, it triggers a “fear of missing out” syndrome in investors, and they are in a dilemma whether to invest in it or not.Traditional investors might completely restrain themselves from moving into unchartered territories, and there might be a fear of participation even in the bold investors.
One method to reduce your risks and exposure to fluctuating prices is making your investment for a longer duration which is commonly called dollar cost averaging.Assume that you are investing fixed amounts of dollars at a predetermined frequency. If prices are low, you will buy more units, and when prices are high, you get a lower quantum of units. With this periodic buying, investors need not worry about when to invest or not and this method averages out your risk.
Assessment of the historical performance Bitcoin was introduced in 2009, and ethereum tokens were added for a crowd-sale in 2014. Although it’s hard to assess the future performance of an asset based on its historical trends, yet it gives a fair idea to the stability of the investment, and this is also different for different asset classes. Let us try to gauge how well the various digital currencies have performed historically.
Investing $100 a week for the past year till now on Bitcoin would have meant shelling out $5200, but your investments would have a current value of $11,541. That is a whopping 122% increase in your original investment.
Investing $100 a week in Ethereum from the past year till now would have yielded you an unlikely figure of $36755 as against your investment of $5,200. That is an increase of 606%.
Investing $100 a week in Litecoin from the past year till now would have made you an owner of $28,915, increasing the value of your investment by 456%.
Judging by its history, digital currencies have experienced volatility, and they are not part of the mainstream regulatory mechanism. Although people are cautious over the lack of a regulatory umbrella, many banks are coming up with their digital currencies and voices are being raised to regulate the transactions of these currencies. A Danish bank is toying with the idea of introducing e-krones, their crypto-currency, Deutsche Bank is also experimenting with digital currency and so is China.
Investing as per the strategy proposed above, people can invest in these crypto-currencies without the fear of losing out their capital or spending a big amount of money at one go. The quantum of currency bought can also be adjusted, and market fluctuations will be accommodated. As of June 2017, Ether’s value in the market was close to USD 32 billion and more people are opening up to the idea of investing in this asset class.