Why do people invest in cryptocurrencies?
People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit.
If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value.
If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you’d purchased one Bitcoin before that increase in demand, you could theoretically sell that one Bitcoin for more U.S. dollars than you bought it for, making a profit.
The same principles apply to Ethereum. “Ether” is the cryptocurrency of the Ethereum blockchain, where developers can build financial apps without the need for a third-party financial institution. Developers must use Ether to build and run applications on Ethereum, so theoretically, the more that is built on the Ethereum blockchain, the higher the demand for Ether.
However, it’s important to note that to some, cryptocurrencies aren’t investments at all. Bitcoin enthusiasts, for example, hail it as a much-improved monetary system over our current one and would prefer we spend and accept it as everyday payment. One common refrain — “one Bitcoin is one Bitcoin” — underscores the view that Bitcoin shouldn’t be measured in USD, but rather by the value it brings as a new monetary system.
Why is Bitcoin still popular?
Since its inception, Bitcoin has been regularly derided as dead, worthless or a scam, in part because its price is prone to meteoric rises and dramatic falls. Most recently, when Bitcoin’s price rose to $60,000 in 2021 before collapsing to around $17,000 in 2022, many experts and investors said it wouldn’t recover from this burst.
But it did, hitting a series of record highs in early 2024. As of this writing, the cryptocurrency is up about 250% from a year ago.
The latest surge in price can partially be attributed to approval by the SEC of spot Bitcoin ETFs in Jan. 2024. This gave some of the largest asset managers in the world (think Fidelity and BlackRock) a way to offer their clients exposure to Bitcoin, making it easier for those clients to hold Bitcoin in accounts such as IRAs and taxable brokerage accounts.
But Bitcoin’s 2024 price rise is also due to other factors. Every four years, something known as “Bitcoin halving” occurs. The last halving occurred in 2020, when the reward for mining bitcoin was slashed in half from 12.5 to 6.25. In 2024, that will happen again, cutting the mining reward from 6.25 to 3.125. With fewer Bitcoins entering the market, its possible scarcity could drive up the price, leading to investor speculation today.
What’s more, the surge in interest rates in 2022 that pummeled growth stocks may have had a similar influence on Bitcoin; investors tend to prefer security over volatility during times of uncertainty. But as talk of interest rate cuts in 2024 circulates, some investors may have more appetite for risk assets like Bitcoin, leading them to get back in now.
And lastly, there are still Bitcoin enthusiasts who preach that looking at Bitcoin through the lens of fiat currencies like the U.S. dollar or Great British pound is missing the point entirely, and that its true value lies in being a new monetary system.
But, if there’s anything about Bitcoin that appears to be predictable, it’s that it will continue to be volatile. In the relative short-term, both camps are likely right: Bitcoin will rise and Bitcoin will fall. But at the moment, it appears the Bitcoin bulls are winning out.
How does cryptocurrency work?
Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice
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Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
» Dive deeper. How does Bitcoin work?
How are cryptocurrencies created?
One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
» Learn more: How Bitcoin mining works
For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user.