The Future of Bitcoin and Other Cryptocurrencies
The technology industry is arguably the fastest growing segment of the economy and the one industry that can affect all others through innovation and new breakthroughs. IoT (Internet of Things) promises to bring about a new paradigm in the way we live our everyday lives with technologies like self-driving cars and smart tech that can analyze and solve problems before they even become an issue. And, in a world where fiat money is king, the gold standard is gone and banks have the ability to control the money supply, technology has come up with a new way to transact business – cryptocurrencies.
The first and most popular cryptocurrency known as Bitcoin was released in 2009, sending ripples through the banking industry, which didn’t know how to regulate or monitor this new form of currency. Since than, a slew of other cryptocurrencies have been introduced and investors are wondering how they work and whether or not they should be diversifying into them.
The Digital Age of Money
A cryptocurrency is a type of digital currency that uses cryptography for security, making it nearly impossible to counterfeit. It’s also issued independently of a central banking authority, thereby eliminating government manipulation practices. Because of its independent nature, financial transactions between two parties using cryptocurrencies have extremely small processing fees, simplifying the transfer.
The benefits of digital currency that holds an online ledger and comes with a high level of security has caught the attention of major banking institutions, like JPMorgan Chase, who see the benefits of digital currencies and their ability to streamline transaction costs.
But widespread usage of Bitcoin and other cryptocurrencies has yet to take place. Despite the potential, the fact that they behave according to the laws of supply and demand make them extremely volatile. Their radical fluctuations in value have limited their use as a stable store of value, although many merchants, including PayPal and Microsoft, have started to accept Bitcoin as a legitimate means of currency.
The volatility of cryptocurrencies continues to be its greatest weakness, however. According to research done in 2014 by financial analyst Mark Williams, Bitcoin is seven times more volatile than gold and eight times more volatile than the S&P 500.
Diversifying your portfolio by adding some crytocurrencies into the mix could help mitigate systemic market risk and create a new type of safe haven asset outside of gold and silver. However, the unregulated nature of the market leaves it vulnerable to heavy swings in volatility, making it a safe haven asset only in the sense that its value doesn’t correlate with stocks and bonds.
Investors considering adding Bitcoin or other type of cryptocurrency to their portfolio shouldn’t invest more than 5 percent of their total assets, the same rule of thumb for investing in physical gold.