Although the stock market has been the greatest creator of wealth in the past, cryptocurrencies like Bitcoin and Ethereum left traditional assets in the dust in 2017. Bitcoin is up nearly 500% in value since the start of the year, while Ethereum is the second – the largest digital currency by market cap, soaring more than 4,000%. We would have to go back more than three decades to get such broad-based returns S&P 500.
Three reasons why investors are excited about cryptocurrencies
The rally in cryptocurrencies was mainly due to a combination of excitement surrounding blockchain technology, a weaker US dollar and, in some cases, the ability to use digital coins as an alternative payment platform.
Blockchain is the digital and decentralized general ledger that underlies most cryptocurrencies and that does not require a financial intermediary such as a bank. Blockchains are often open source networks, which means that it is almost impossible to change logged data. Hence, the future of blockchain could lead to more secure peer-to-peer and business-to-business payment platforms than they are today.
In relation to a falling US dollar, Bitcoin has become a popular safe haven investment. When the dollar falls, gold usually becomes the asset of choice because it is a finite resource. In other words, what gold is on the planet now is all there will ever be. The same goes for Bitcoin, whose protocols limit the number of coins mined to 21 million.
Ultimately, consumers are enjoying the potential for using digital coins to purchase goods and services. As the most popular cryptocurrency, a handful of branded companies have accepted Bitcoin since 2014, as well as a number of smaller merchants. While Bitcoin would still be challenging to make a living, the mere fact that traders are jumping on board at all is encouraging.
The first branded company to accept Ethereum
Arguably more coveted than Bitcoin for its blockchain technology, Ethereum hasn’t been as lucky as a payment method in attracting merchants. In fact, until recently, there weren’t any branded companies that accepted Ether, Ethereum’s digital currency, as a means of payment. But that changed this summer, as an online retailer Overstock.com (NASDAQ: OSTK) once again became a pioneer in cryptocurrencies and opened its doors to Ethereum owners.
On August 8th, Overstock announced an integration with ShapeShift, a digital asset exchange that will allow it to accept all major cryptocurrencies for its 4 million+ online products. This list of cryptocurrencies includes Bitcoin, Ethereum, and Bitcoin Cash, as well as Litecoin, Dash, and Monero. Users don’t have to set up new accounts or enter personal information. They simply select their preferred cryptocurrency and submit their order before being asked to transfer the required number of coins, just like with any digital wallet transaction. Refunds are issued in Bitcoin by Overstock, which users can then exchange for their preferred cryptocurrency (if it’s not Bitcoin) via ShapeShift.
“Excess inventories are for freedom, including the freedom of individuals, to communicate information about value and scarcity without relying on a medium created by the fiat of unaccountable government mandarins,” said CEO and Founder Patrick Byrne. “Because of this, we were an early proponent and user of cryptocurrencies.”
This move could give Overstock a head start on its ecommerce peers, but it’s also not perfect. For example, Overstock’s second quarter results show that building the Medici t0 blockchain, which is a blockchain-based stock lending system that goes head-to-toe with brokers on Wall Street, saw a $ 3 loss. Caused $ 3 million. Of course, Overstock is ready to take risks by wooing cryptocurrency owners and investors, but it remains to be seen whether this translates into profits for the company.
These concerns cannot be overlooked
Although Ethereum’s blockchain is hugely popular with businesses, there are still major concerns in this area for cryptocurrencies and investors.
Perhaps the biggest concern is that there is virtually no clarity about what blockchain technology could really be worth and whether Ethereum will continue to be the most popular among businesses. The potential for blockchain is undeniable, but for the time being it will mainly be used in pilot and small programs.
Additionally, companies have pooled their resources and wits to develop their own versions of blockchain and / or virtual currency. The barrier to entry for cryptocurrencies is exceptionally low, which is not good news for Ethereum or Bitcoin.
There are also concerns about possible regulatory issues. For example, China and South Korea have both closed the door to initial coin offerings, with China going a step further and announcing the definitive end of domestic cryptocurrency exchanges within the country. Increased regulation could validate these digital currencies in some countries, but also close doors in others.
If my arm were twisted, I think Ethereum would have a better chance of succeeding compared to Bitcoin, as Ethereum’s blockchain contains smart contracts, which are computer protocols that facilitate, review, and enforce the negotiation of a contract . But that doesn’t say much as competition is increasing and a regulatory gray cloud hovers over us.
This article represents the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.