Bitcoin, the volatile digital currency value of which soared to nearly $20,000 per coin in 2017 and soon crashed to a small fraction of that value, has again risen to over $5,000 in past few weeks.
Investors and proponents of cryptocurrencies view bitcoin as both the leader and barometer for digital currencies. However, many casual investors who rushed in to buy bitcoin in late 2017 or early 2018, thinking they were buying digital gold, did not really understand where the value of bitcoin (or lack of value) comes from. When bitcoin crashed in 2018, many investors lost their money. In the end, buying bitcoin did them more harm than good.
The cryptocurrency crash in 2018 caused not only bitcoin to plummet, but hundreds of other digital currencies as well. So the question is—are digital currencies really going to be viable or safe for the average person to own? The short and practical answer is, in a few cases they can be, but only if you really know what you’re doing.
Why cryptocurrencies’ value fluctuates
Think of bitcoin as being like a digital file-storage system for money. A people can place their money in a bank for safekeeping, or as an alternative, convert it into a cryptocurrency stored like a digital file in a network of computers (waiting to be downloaded and used when needed). The value is converted into the native currency called bitcoin, the total supply of which is fixed at 21 million coins. Hence, as more people buy bitcoin, they barter for access to this digital file storage that’s fixed in supply, and the value will normally go up due to the conditions of supply and demand.
Conversely, when people cash out and redeem their bitcoin, the price of each coin would be expected to drop incrementally, again driven by the conditions of supply and demand. When the price of bitcoin soars to a high and many people (or the really big players) rush to cash out and realize their gains, the value of bitcoin can drop precipitously. This is why the price of bitcoin is so volatile.
Bitcoin is high-risk, and a person should only buy bitcoin with money they can afford to lose.
One other risk to consider
Redeeming bitcoin and other cryptocurrencies requires you to use your encryption key. If you lose your key, you will lose access to your money, and it will forever remain floating out in the ether never to be seen or used by anyone. Experts are saying that as many as 4 million bitcoin have been lost permanently due to people’s encryption keys having gone missing.