Bitcoin. Etherium. Alt-coins. ICOs. The world of cryptocurrencies can be just as confusing as it is exciting, but anyone looking to jump into this market needs to be aware of just what they are investing in. While most cryptocurrencies are the same structurally in that they are Blockchain-based, whether or not any specific crypto is a worthwhile investment will vary dramatically.
Investors need to look no further than Bitcoin — the most well-known of the cryptocurrencies — to find a prime example of why cryptos are so controversial. Originally conceived as an online payment system that could be used to bypass bank fees on currency conventions, Bitcoin has been hijacked by traders hoping to ride the swell in prices. Those swells reached bubble proportions in mid-December of last year, when Bitcoin crossed the $20,000 (Dh73,400) mark on some exchanges. Bitcoin is now trading at around $8,000.
Bitcoin’s inherent value — and the value of most cryptocurrencies — is based on its usability as a currency, which is increasingly coming under fire from banks. Its value is not based on the technology behind it, any more than the US dollar is valued by the paper it is printed on. Just what is Bitcoin’s fair-market value is still a matter of fierce debate, and anyone looking to invest in the hopes of making a short-term gain is making a very risky investment.
Etherium and the other so-called alt-coins play largely by the same rules, but investors should be extremely cautious of Initial Coin Offerings, or ICOs. The UAE’s capital market regulator, The Emirates Securities and Commodities Authority, on Sunday issued a warning that not only does not recognise, regulate or supervise any ICOs, anyone who does invest in them won’t be afforded “legal or regulatory protection.” In short, anyone looking to invest in an ICO is taking an extra-ordinary level of risk that will likely cost them their investment.
Most ICOs are the digital equivalent of junk bonds. They are issued by companies to raise funds quickly and without the rigorous and regulated capital raising process required by venture-capitalists or banks — a process most companies undergo to raise money. Frankly, junk bonds would probably be a better investment than many ICOs, some of which are incredibly limited in usability and cannot even be converted back to cash. We will not tar all ICOs as bad investment, but there are very limited examples of successful ICOs to point to. Investors are advised to seek advice, including legal counsel, before investing in an ICO.