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Why Is Cryptocurrency So Volatile and Where’s the Next Big Move Coming From?

From Bitcoin to Ether and beyond, the power of blockchain technology is rising.

Since 2009, the world has been trying to discover the identity of Satoshi Nakamoto, the mysterious person (or persons) who created and designed the cryptocurrency Bitcoin. During these eight years, individuals have claimed to be Nakamoto and several attempts to identify him/her/them have proved inconclusive. However, during this time, the popularity of cryptocurrencies has increased dramatically.

The rise of cryptocurrencies, which there are many, comes from Nakamoto’s development of blockchain technology. Often called ‘distributed ledger technology’, it allows a database to be created and shared securely between all users. In terms of finance, a transaction is stored on the blockchain’s database but the identity of a cryptocurrency’s owner is kept secure through an encrypted personal wallet. This offers a form of anonymity for individuals alongside a transparent record of all payments.

To this day, Bitcoin remains the most used and popular cryptocurrency and it has led to multiple real-world applications. Some pre-schools in New York accept tuition-fee payments in Bitcoin and its biggest competitor, Ether. Some pubs allow food and drink to be purchased using the currency, while it’s possible to buy Bitcoins with cash at special ATMs.

A national-level digital currency will launch in at least one country within the next five years

“The general population is slowly becoming aware of Bitcoin,” says Giovanni Vigna, a professor at the Computer Science department at the University of California and founder and CTO at digital security company Lastline. Although, he adds, many “non-technical” people are only becoming aware of the currencies due to news of ransomware attacks around the world where hackers demand payment in Bitcoin to unlock encrypted files.

“If illegal activities that leverage Bitcoins increase, there will be some major legislative action that will try to prevent, or limit, its use in specific contexts,” Vigna says. However, this issue has long been a problem for Bitcoin. In the early days, its reputation was tarnished due to its connections with the illegal darknet market Silk Road.

Despite these issues, it has been able to survive and rival cryptocurrency markets have grown alongside. Ether is the second largest cryptocurrency, but the market also includes Litecoin, Monero, Ripple, Emercoin and Dogecoin. During the second quarter of 2017, Bitcoin and Ether saw massive rises in their worth: Bitcoin’s valuation rose past £2,332 and Ether jumped to £182 (Source: TechCrunch, 2017). The underlying blockchain technology makes it no surprise that governments around the world are testing out their own distributed ledger systems.

“There are many misconceptions and misunderstandings around cryptocurrency,” says Kyle Wilhoit, an investor in the currencies who works in cyber-security research. He says that all cryptocurrencies are managed differently, use different types of encryption, and are generated in different ways. This means there will always be some variation in them and what they’re used for.

Bitcoin requires a huge amount of computing power to create it. Those who allow their computers to ‘verify’ a transaction – by automatically solving encryption puzzles – and add it to the public ledger are rewarded with Bitcoins. This process is called mining and allows for a future limit of 21 million Bitcoins to exist. Separately, Ether, the currency of the Ethereum network, is different in that it isn’t just a cryptocurrency. The Ethereum network has a ‘smart contracts’ system built-in that allows negotiations to take place and allows for crowdfunding campaigns to take place. One of the oldest banks in the US, Brown Brothers Harriman, has predicted that the Ethereum network will overtake Bitcoin in the coming years because its process of mining currency is cheaper and easier.

However, at present, the Ethereum and Bitcoin markets are volatile. Although it has risen sharply, in June 2017 the value of Ethereum crashed after false reports of the death of its 21-year-old founder Vitalik Buterin. “Like normal markets, cryptocurrency markets follow the ebb and flow of market economies,” Wilhoit says. “The difference with cryptocurrencies is the ability to thrive in the traditional volatile marketplace”.

The co-founder of the Emercoin cryptocurrency agrees. Oleg Khovayko sees further expansion within the crypto markets. “Prices will increase over the years,” he says, “and so will regulations and legalisations.”

Khovayko does warn about the “madness” of the latest cryptocurrency trends. The Initial Coin Offering (ICO), where investors buy cryptocurrencies, instead of traditional shares, has grown in popularity in the last 12 months. A new web browser, Brave, raised £27 million from its ICO in under 30 seconds.

Khovayko says those looking to be involved in cryptocurrency investment should carefully consider whether they take part in an ICO as there are a number of risks. “An ICO is not regulated in any jurisdiction, and investors are totally unprotected by laws,” he says.

As these markets mature, it will become clearer about each of their benefits and potential pitfalls. “Many people view these as complex and hard to understand and break down,” says Wilhoit. “However, just like any market that allows investment, it takes time to understand how each of these cryptocurrencies work”.

Wilhoit expects to see more interest from governments and regulators around cryptocurrencies, and predicts that a national-level digital currency will launch in at least one country within the next five years. Through the use of the blockchain, cryptocurrencies have a big future.

Matt Burgess is a staff writer at Wired and the author of Freedom of Information For Journalists (Routledge, 2015).