By Ross Pomeroy, Real Clear Science
February 22, 2021
With cryptocurrency prices skyrocketing
to all-time highs, digital monies based on the ultra-secure blockchain are
making some people very wealthy and catching eyes across the Internet.
Scientists are also taking notice. While
research into cryptocurrency is still in its infancy, dozens of studies have
been published that shed light on these upstart digital assets and the people
who purchase them.
Here are five takeaways:
1. Cryptocurrency consumes a lot of
energy. Cryptocurrencies are energy-intensive
because they require computers to solve complex puzzles to verify transactions.
People who dedicate their computers to this process are rewarded with coins of
a specific currency. The University of
Cambridge estimates that Bitcoin, with roughly a trillion dollars-worth in
circulation, consumes around 118 TerraWatt-hours of electricity each year,
about the same amount as the country of Norway.
Add in all of the other cryptocurrencies out there and the energy
consumption rivals Thailand's. Some scientists contend that this process is inherently
unsustainable and requires revision, while others disagree, insisting that
digital currencies generate real wealth and the only "fix" needed is
to replace fossil fuels with zero-emission energy sources.
2. Cryptocurrency traders tend to be
more erratic. A
study published last fall conducted in South Korea compared Bitcoin investors
with traditional stock investors on various psychological measures. The
researchers found that Bitcoin investors tended to seek out novelty more often,
bought and sold frequently, demonstrated a higher inclination to chase losses,
and were more likely to gamble.
3. Cryptocurrency is a healthy part of a
balanced portfolio. Whatever you think of it,
cryptocurrency is undeniably innovative in the world of finance, and likely
merits inclusion in a long-term investment portfolio. Last year, an international
team of economists explored whether the addition of five cryptocurrencies –
Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin – from November 2015 to
November 2019 would have boosted the returns of four traditional asset
portfolios. "The results show that the diversification increased the
returns in most of the cases, and reduced the portfolio volatility in all
portfolios, and also provided higher returns as compared to the traditional
portfolios for the same level of risk," they reported.
4. Cryptocurrency investors display
significant herding behavior. In
behavioral economics, herding is "when people do what others are doing
instead of using their own information or making independent decisions."
As cryptocurrency prices remain highly speculative, people who buy and sell
these digital assets often trade based upon what others seem to be doing. If prices rise, they rise rapidly as more
people jump on the bandwagon. On the other hand, if they fall, they fall hard.
5. Ethereum might be a better long-term
investment than Bitcoin. The cryptocurrency Ethereum
ranks second to Bitcoin in terms of popularity, yet two studies have shown that
tends to be more stable and a better "safe-haven" investment during
difficult economic times. As a team of researchers from Singapore wrote in the
journal PLoS ONE, "Although both
Bitcoin and Ethereum are digital tokens that serve as decentralized currency
based on blockchain technology, there are crucial differences between them.
While Bitcoin has positioned itself as an alternative monetary system in the
financial market, Ethereum has mostly focused on monetizing smart contracts. Also, being the first cryptocurrency, Bitcoin
has been widely used for speculative purposes. These traits are reflected in the user
composition... where the behavior of Ethereum users is observed to be more
stable as these users are more optimistic of the market. In contrast, the
behavior of the Bitcoin users tend to fluctuate according to the trend of the
market, with a loss of optimism when the market goes down."
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