Cryptocurrencies come, volatility remains - July 09, 2017

Cryptocurrencies come, volatility remains

New cryptocurrencies come and go: the new kid on the block is Ethereum which has great success lately. But as popularity of these coins rise, some started to believe that a bubble is blowing. It sounds bad as volatility is still a huge problem for cryptocurrencies.

Ethereum launched in 2014 and since then it grew a lot. At the beginning, it was around $3 per coin and now it is somewhere near $280. It sounds a really good investment in the era of low bond yields and high stock prices but the situation is not that simple.

A new bubble only

A Hungarian investment company believes that there may be a bubble growing behind the new cryptocurrency craze. The more people realize that there is an important new technology behind these currencies (chainblocks) the more money flows into the market. Therefore – they write – a bubble can grow very much like it did at the end of the 1990s.

This was the famous dot-com bubble which burst at the beginning of the 2000s, leading to a whopping 78% fall in the NASDAQ Composite index, and leaving several internet companies in the dust or close to bankruptcy. The company believes that the same could happen with cryptocurrencies if people without deep knowledge of the market invest too much in it.

Still a volatile investment

Market bubbles are bad on their own, but cryptocurrencies are generally a volatile thing to invest in. We wrote about how the biggest currency, Bitcoin lost 12% of its value in days to Chinese transactions.

But Ethereum isn’t better at all: some weeks ago, its prices fell from $310 to 10 cents per coin due to one huge transaction. It was only momentary, but volatility is obvious: many lost thousands of dollars in seconds. What’s more, Ethereum prices did not go back to their peak since then, and they are $100 less than they were, and this fall only took days to happen.

No regulations to protect

Volatility is not the only problem with cryptocurrencies: the missing regulations are just as important. GDAX exchange is investigating the event, but it’s a huge question what they can do about it. There are no official authorities behind these coins and this may lead to a 100% loss of an investment if a cryptocurrency disappears altogether for some reason. Another problem is that these currencies are anonym and if someone steals the wallet of the rightful owner, there’s nothing to do about it.

No wonder several central banks are warning against cryptocurrencies and mention that these are extremely volatile investments. Therefore, the best way to invest money, if we want sure returns, is a well-diversified investment portfolio.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.