- 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.
- Cryptocurrencies have no fundamental backing
Unlike the U.S. dollars in your wallet, or any other currency around the world, 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 economic performance of a country with regard to GDP growth to value a currency like the 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)
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."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.Blockchain technology is being tested by a number of brand-name businesses
Despite these disadvantages, few would argue that blockchain isn't a potentially game-changing technology. A number of big businesses have partnered with cryptocurrency-backed blockchains in small-scale and pilot projects.Most people still have limited knowledge of what cryptocurrencies are, or if they're legal
Truth be told, most folks don't have the slightest clue of what makes cryptocurrencies tick. Though a September poll conducted by student loan refinancing market LendEDU found that nearly 79% of Americans were aware of bitcoin, a more recent poll found that just 32% were aware of Ethereum, the second-largest cryptocurrency by market cap. Additionally, 75% of folks had never heard of initial coin offerings, which are akin to initial public offerings, but for virtual currencies.