What can be set against an increase in the asset by 3700% since the beginning of the year? Firstly, the freezing of $260 million worth of ether in crypto wallets of Parity users. But there are other problems, too.
It happened historically that the stock market is the main source of wealth. In the long-term perspective, investments in shares brought an average of 7% per annum, taking into account the reinvestment of dividends.
Cryptocurrencies in 2017
The financial scenery changed this year, when cryptocurrencies such as Bitcoin (TICKER: BTC.EXANTE) and Ethereum (TICKER: ETH/USD.CRC), rolled everything upside down. The aggregate capitalization of the market, which trades over 1,200 Cryptocurrencies, increased from $17.7 billion at the start of 2017 to $236 billion today, or almost 1000% in ten and a half months.
Market leaders were bitcoin, whose capitalization reached $133 billion, and Ethereum, with a rise in price by almost 3700%. The popularity of bitcoin is connected to its capitalization, as well as to the fact that it was the first cryptocurrency in the market and that a number of large retailers accept it for payment, while the sharp increase in the popularity of Ethereum in 2017 is due to the potential of blockchain technology. Now the Enterprise Ethereum Alliance includes more than 150 organizations, with nine famous companies that test various projects of Ethereum blockchain in sectors related to energy, finances, etc.
Ethereum differs significantly from other blockchain technlogies due to the use of "smart contracts". These protocols help to enable and verify contracts and enforce their terms. Simply, they help companies to safely and efficiently deliver supplies and comply with legal requirements. Given the number of companies testing Ethereum blockchain already now, it is quite possible that it will become a generally accepted standard in the financial services industry.
Everything comes with a price
All this looks great in theory, and it's difficult to say something against the growth of the asset by 3700% in ten months, but investing in cryptocurrencies is still a subject to great risks.
CNBC reports that because of the critical vulnerability of Parity cryptowallet provider, the amount of ether equivalent to about $280 million was frozen. According to Parity itself, because of this vulnerability, users could change the code and gain control over someone else's wallets. Worse, one user destroyed the wallet and removed the code, which caused this amount of money to be frozen. Following this event, users cannot withdraw their cryptocurrency from the wallet, and it is unclear when this problem will be solved. A situation like this in the stock market would probably never happen.
Unfortunately this is not the only example of problems with investing in Ethereum. The same Parity revealed in July that hackers had access to some users' wallets and were able to steal $32 million worth of ether. The cryptowallet provider indicated that vulnerabilities are susceptible to multisignature wallets. It happened twice in four months.
And that's not all. On June 21, the price of ether on the GDAX crypto-exchange in one second fell from $319 to $0.1, and then recovered in a few minutes. At first, GDAX told those investors who lost their investments due to a sudden collapse, that they were unlucky and they will not get their money back. But after several days of public criticism, the crypto-exchange reversed its decision, although it remained convinced that its software worked without failures.
Other problems
The above mentioned are the examples of problems that Ethereum has encountered in the past few months. However, the problems of cryptocurrencies in general are much more serious.
Probably the biggest problem (and the motive why cryptocurrency should be avoided) is that most investors are focused on the potential of the cryptocurrency itself, whereas the real value lies in the blockchain platform on which they are based.
Even if you live in the US or Japan, using Bitcoin would be very problematic, imagine how difficult it is to use Ethereum, which is only accepted for payment at Overstock.com.
There is no telling how quickly blockchain technology will be adopted or how much it will be worth, even if investors rightly focus on it.
Another important problem is regulation. Despite the fact that actions such as the promise of the CME Group to launch trading in bitcoins by the end of the year is good for cryptocurrencies, since it would help Bitcoin to become a new class of assets, they also push other countries to abandon the cryptocurrency. South Korea and China recently banned the ICO, and China then went ahead and announced the closure of the local crypto-exchanges.
Despite the profits that Bitcoin and Ethereum now bring, they can simply vanish.