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Traders might be misunderstanding the cryptocurrency craze and it could come back to bite

  • Investors are missing the nuances between different cryptocurrencies which could make them a long-term source of value
  • Cryptocurrencies like bitcoin and ether are being lumped together in one basket which could be dangerous

There's no doubt that people are in a frenzy over cryptocurrencies. Not just bitcoin, but ether and litecoin and a number of others have seen huge gains this year.

The interest in cryptocurrencies as a whole, and the hundreds of thousands of people signing up to platforms like Coinbase, has led to investors pouring money into other digital coins.

But I feel there is a huge misunderstanding among both people trading cryptocurrencies, as well as critics. People will look at many cryptocurrencies and say, "this is madness." They're not wrong. There is bubble right now in a lot of these digital currencies with people trying to make a quick buck.

And many people trading will no doubt just see ethereum or litecoin in their app and decide to buy it because it's cheaper that bitcoin, and hope that either could be the next big thing.

Both groups – critics and uneducated investors – are in danger of missing the bigger point. That is, there are nuances between the different cryptocurrencies, and in the long-term that could be a big source of value.

Bitcoin originally billed itself as the "peer-to-peer version of electronic cash" for online payments able to circumvent the banks. But transactions in bitcoin are extremely slow — taking on average nearly 300 minutes — and there is not widespread use. In this instance, it may be hard to value it.

Bitcoin replica coins plunging in water.
Jaap Arriens | NurPhoto | Getty Images
Bitcoin replica coins plunging in water.

Ethereum wants to be a key player in so-called "smart contracts." These are contracts that execute when certain conditions from all parties are met, without the need for intermediaries. And litecoin, which has faster transition times than bitcoin, wants to be the de factor currency for paying for things. While ripple wants to be the main currency to help facilitate cross-border payments.

If these cryptocurrencies end up doing what they set out to, valuing them could be easier. For example, if ripple is responsible for several billion dollars of cross-border payements, then we may be able to value how much one XRP coin is worth. If Ethereum continues to get big companies on board with real world projects, we may be able to value this.

But the problem right now is that cryptocurrencies are being lumped into one basket. That could sting a lot of investors not understanding the difference between them. In the long-term, many of these digital coins could become key platforms used by huge companies. It is, however, still the early days of cryptocurrencies, and a new, more improved version could come along.

For now though, the crypto-gold rush shows no signs of abating.

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