If you were following any kind of financial news late last year, you probably heard a lot about Bitcoin prices: namely, that they were climbing at unprecedented rates. Bitcoin wasn’t the only crypto with serious buzz surrounding it, either. Ethereum, Litecoin, and Ripple were just a few other tokens that enjoyed significant attention in the media.
Given the way 2017 ended, a lot of people are predicting even bigger returns for cryptocurrency investors this year. However, all of the excitement has some analysts worried that Bitcoin and other cryptos represent a bubble that is soon to burst.
Why You Can’t Always Take Cryptocurrencies at Face Value
Some of the worry comes from the fact that the price of cryptocurrencies can be easily manipulated. Unlike fiat currencies, most cryptocurrencies are floating currencies, which means that they have no inherent value. Instead, their prices change according to supply and demand. It is therefore possible for a group of investors to coordinate and purchase large amounts of a given cryptocurrency to inflate the price. Doing so can lure in outside investors who see the value of the currency starting to rise—however, when enough insiders sell their shares to these new investors at the higher price, the market value of the currency plummets. Anybody left with the cryptocurrency may lose a significant amount of money.
These so-called “pump-and-dump” schemes are not yet illegal (the way manipulating a currency like the dollar would be). As such, they are extremely common—business insider reported more than five in a single week. Since smaller cryptos are more easy to manipulate than larger ones, this makes investing in newer or less-established cryptocurrencies quite risky.
Other Factors that May Affect Crypto Prices
Larger cryptocurrencies like Bitcoin may be less susceptible to pump-and-dump schemes, but they may face other challenges. The government of China, which had originally been a haven for Bitcoin miners due to its low energy prices, is currently cracking down on cryptocurrency mining operations. The resulting effect on transaction times has the potential to negatively impact the value of Bitcoin on a global scale.
Opportunity Still Exists
Still, existing data makes the promise of cryptocurrency alluring. The price of Bitcoin alone has risen more than $10,000 in three months, and numerous other cryptos seem to be gaining value as well. The biggest problem is that it’s very difficult to tell how much of this value is the result of currency manipulation.
The best thing you can do to invest safely in cryptocurrencies is research. Find organizations that cover cryptocurrency trends in detail, and follow them closely. Doing so may sharpen your instincts and put you ahead of the crypto curve, lowering the likelihood that you will fall victim to a scam or a surprise twist that cripples the market.
So, are cryptocurrencies money makers or serious liabilities? For most people, they have the potential to be both. The more information you have, the more prepared you will be—but remember that no market is completely predictable, and the cryptocurrency market is especially volatile. Study it carefully before investing, and keep your fingers crossed. You’ll need a lot of savvy and at least a little luck to make a killing on cryptos.