Behind the crazy rise of Bitcoin and Ethereum, should we enter the market or withdraw cash and leave?

Two months ago, Bitcoin achieved a symbolic milestone: after a surge in price, the price of 1 BTC surpassed the price of an ounce of gold.

Currently, the trading price of Bitcoin is close to $2,200, almost doubling from two months ago, while Bitcoin's cousin Ethereum is even crazier. The price of its token ETH (Ether) has currently reached $180. In the past three months alone, the price of Ethereum has increased by an astonishing 1,400%.

Is the rally over or just beginning? What caused the explosive growth of these two digital currencies?

In the world of cryptocurrency, answering these questions is not so easy.

A new cryptocurrency

To begin with, it is very important to understand Bitcoin. Although Bitcoin is still the largest cryptocurrency, it is not the only cryptocurrency that is growing rapidly. According to data from Coinmarketcap, the total market value of all major cryptocurrencies is approximately US$79 billion, of which Bitcoin's market value is US$35 billion, accounting for less than half. At the same time, the market values ​​of Ethereum and Ripple have grown to US$17 billion and US$13 billion, respectively.

A few years ago, one Bitcoin was worth less than $100, but now it has surpassed the $2,000 barrier and is growing like a weed.

The market cap of cryptocurrencies is an oft-quoted metric that can mean everything or nothing, depending on your perspective. If you believe that Bitcoin will eventually replace fiat currencies, then $35 billion is a small number. But it may never happen, and even if it does, Bitcoin may be forgotten.

While Bitcoin remains by far the most promising digital currency and payment platform, new breeds of digital currencies are very different. Litecoin, an early competitor to Bitcoin, has again attracted attention after its recent adoption of Segregated Witness (SegWit). Ethereum is a modern cryptocurrency that promises advanced features such as smart contracts. It wants to be the basis of the blockchain, or a new type of internet. Such ambitions are not small.

The value of digital currency

When commodity or stock prices go up, you can usually point to some definite reason. When Apple has a good quarter, its stock price usually goes up. When disaster strikes, uncertainty in global markets usually increases investor demand for safe investments like gold, driving up the price of gold.

But in the world of Bitcoin, things are not that simple.

There hasn’t been a lot of good news about Bitcoin lately. In April, the U.S. Securities and Exchange Commission rejected the Winklevoss brothers’ application to list a Bitcoin ETF on the Bats BZX exchange.

In the past few years, the Bitcoin community has been debating the issue of Bitcoin blockchain expansion, and the community has even split because of it.

However, the price of Bitcoin does not seem to be affected by the bad news. It has risen from $400 a year ago to more than $2,000 now. The same is true for other cryptocurrencies. Why?

What exactly happened?

We contacted a number of cryptocurrency experts, and they generally agreed that the development of the Japanese cryptocurrency market is likely the biggest reason for this bull run.

"The Japanese have given Bitcoin a green light and are expected to increase compliance on exchanges," said Charles Haytar, CEO of market analysis platform CryptoCompare. From a purely technical perspective, the price difference between the Japanese market and other markets also provides arbitrage opportunities, thus driving the entire cryptocurrency market.

Hayter said:

“There are a lot of inexperienced investors who are rushing into the market, and that’s creating a bit of a bubble.”

Jörg von Minckwitz, CEO of blockchain payment service Bitwala, pointed out that Ethereum has seen additional growth due to the rise of ICO (initial coin offering) projects.

In other words, to invest in a new project, you have to buy Ether.

"Many cryptocurrency projects raise funds from the community and then develop their projects. Most of them use Ethereum to raise funds. Ethereum has established a standard, so it is an easier way to raise funds using Ethereum. This has led to many people buying a large amount of Ethereum in order to participate in ICO projects, which has driven up the price of the currency," he told reporters.

However, none of this explains the fact that the entire cryptocurrency market had already seen massive growth before Japan recognized Bitcoin as a legal form of payment. Nor does it give us a better idea of ​​the actual value of 1 Bitcoin or 1 Ethereum. Go to any Bitcoin community and you will see various price predictions ranging from zero to $40,000.

While predictions of a price drop to zero may sound extremely pessimistic, consider that cryptocurrencies are highly volatile. For example, Bitcoin dropped from $1,100 in December 2013 to $200 in January 2015. The recent surge in prices is unlikely to last forever.

In recent years, as cryptocurrency trading has become easier, exchanges such as Coinbase, Kraken and BitStamp have enabled users to exchange dollars and euros for Bitcoin or Ethereum. This has definitely driven some of the growth in the market, and when you see some coins increase in value 10 times in a month, you more or less want to be a part of it.

The question is: how far can prices go?

Enter the market or withdraw cash and leave?

Predicting price movements in any market is difficult, and advice from Warren Buffett tells us that you should put your money into a stock index fund and let the experts do the trading because short-term market movements are difficult to predict.

As I write this (Friday), the total market cap of all cryptocurrencies is $63 billion, and just one week later, the market cap has increased by a full $16 billion.

Both Hayter and von Minckwitz believe that the cryptocurrency market is overvalued in the short term, but positive in the long term. Hayter is more pessimistic, comparing some Ethereum-based ICO projects to the South Sea Bubble (referring to the British South Sea Company, whose stock price rose sharply in the early 18th century and then collapsed).

Hayter said:

“I would not recommend anyone to buy cryptocurrencies right now, I’m worried that the lack of rationale will hurt the entire market.”

Is Bitcoin just a fad? If so, it’s probably overvalued, but if you think this technology could potentially change the way money or the entire internet works, then it has a lot of room to grow in the future.

Disclaimer: The author holds Bitcoin, Ethereum, and Zcash.