Is the cryptocurrency gold rush going to last?

In the mid-19th century, the discovery of gold in California led to a gold rush as tens of thousands of would-be miners flooded to the region in the hope of getting rich quickly.

Human nature is remarkably predictable, it seems.

Today, the latest in a series of subsequent gold rushes involves cryptocurrency – a catch-all term for digital currencies operating outside traditional financial models.

Donald Trump recently created his own cryptocurrency, while announcing a relaxed legislative approach to existing cryptos and exchanges.

But what are investors actually purchasing, and does any of it hold intrinsic value?

Rocket from the crypto

The cryptocurrency gold rush started slowly, when the enigmatic Satoshi Nakamoto unveiled the world’s first decentralised digital currency in 2009.

Bitcoins were mined (in crypto parlance) and paid out in exchange for computers completing fragments of complex mathematical problems.

In other words, surrendering your CPU or GPU to solving collective maths challenges earned you remuneration in the form of digital currency tokens.

It took a few years for Bitcoin to ignite, but when it did, its value soared like a rocket, only to crash back and then roar off again – establishing a pattern which continues today.

This is partly because any cryptocurrency’s value depends entirely on what people are willing to buy and sell it for.

Traditional (fiat) currencies retain some intrinsic value. Barring devaluation, the pound in your pocket will be worth as much tomorrow as it is today.

Because they are not supported by a central bank or underpinned by a physical token, cryptocurrencies can (and do) fluctuate wildly in value.

They’ve morphed into a stock market plaything, no different to gilt futures or other complex investment vehicles bought and sold by automated trading algorithms.

Don’t all rush at once

A few years ago, some people believed that the cryptocurrency gold rush would herald the end of fiat currencies, as we moved into an internet-based economy.

That clearly hasn’t happened. Hardly any companies in the UK accept cryptocurrency payments – mainly because their volatility makes it impossible to guarantee profit on sales.

Today, there are over 11,000 different cryptocurrencies in existence, and anyone can invent a new one if they understand the technicalities of tokens and the blockchain.

The latter is an uncorruptible (yet anonymous) ledger of all transactions made using a cryptocurrency such as Bitcoin.

However, the blockchain can’t prevent the wholesale theft of crypto tokens, the collapse of exchanges or the hacking of digital wallets, all of which have been endemic.

So what’s the appeal?

Some investors see crypto as a straightforward get-rich-quick scheme.

If they cash out today and the entire edifice collapses tomorrow, they’d be entirely unsympathetic as they flaunted their new Lamborghini on Instagram.

Donald Trump’s newly ‘minted’ meme coin (already worth around $8 billion) has been pilloried for its lack of utility.

Yet people are still buying it. Why?

Partly, the frenetic purchasing of cryptocurrencies is driven by people who missed out on Bitcoin – still the biggest and best-known – and don’t want to miss out again.

Partly, it’s because cryptocurrencies have become an easily tradeable commodity, even if their value is as intangible as air.

Should a particular currency experience a collapse in confidence, or a major cyberattack, its value could plummet almost overnight – as has happened on many occasions.

Currencies have failed, exchanges have collapsed, coins have forked into incompatible variants and high-profile hacks have seen billions of dollars’ worth of currency being stolen.

Note how we mentioned dollars there. Everyone knows what a dollar is worth, but few people could say what Ripple or Litecoin are worth today – or where you could spend them.

Yet digital prospectors continue to invest their savings in the latest cryptocurrency gold rush, hoping for a prosperous future.

That suggests the cryptocurrency gold rush will last for a while longer, though the rapid collapse of the NFT market shows breaking points can often be reached.

As with all gambling – which is what this effectively amounts to – our best advice is to only invest money you’re willing to lose, either through theft, devaluation or currency collapse.