A love for higher returns comes with higher volatility and risk. The new age of investing is taking investors not just into esoteric territories, but to the digital world of cryptocurrencies. Bitcoin, one of the largest, has been the subject of much discussion due to its heavy volatility and unregulated exchange.
With a market capitalisation of nearly to $4.9bn (£3.1bn), the asset class has a total of 100 digital currencies, with bitcoin leading the market with 85.7 per cent market share. Chart 1 shows the top four cryptocurrencies according to market share and emphasises bitcoin’s dominance. It is followed by ripple – with $268m (£171m) which had early investment from Google – and litecoin with $198m (£126m).
So what is a cryptocurrency? It is a means by which people can exchange property in a secure way without the use of a central institution such as a bank. Bitcoins, for instance, can be obtained in three ways – buying on an exchange platform such as CoinDesk, accepting them for goods and services, and by ‘mining’ – or creating – new ones.
Individuals looking to start mining need a digital wallet. This wallet can be stored online or locally on your computer. Once created, individuals start solving a series of complicated mathematical problems using mining software such as Slush or Kiv’s GUI. Every time a computer solves an algorithm, its owners are awarded a certain number of bitcoins. The problems tend to get more complicated with every round. The awarded bitcoins then stay with the individual in their digital wallet and can be used to either pay for goods or invest on an exchange platform.
While bitcoin is the leader, other cryptocurrencies have been in the news. In 2013, Google Ventures invested in OpenCoin, the company that created ripple’s payment network. Ripple is billed as the world’s first open payment network. It allows banks and non-bank financial services companies to incorporate the ripple’s protocol into its own systems, thus allowing customers to use these services.
Following ripple’s footsteps is litecoin which enables instant payments worldwide. Similar to bitcoin it is mined using consumer-grade hardware but the price of litecoin is less volatile than bitcoin.
