There are few areas of finance at the moment that are generating as much hype as cryptocurrencies. Bitcoin is the most popular, but it also fields its fair share of criticism. Earlier this year, Jamie Dimon, chief executive and chairman of JP Morgan, called it a scam and announced he’d fire any employee caught trading the digital currency.

To crypto-enthusiasts, this seemed to signal that the old world of finance is feeling threatened by the new. And from an investment perspective, they have a point.

As of December, the price of one bitcoin crossed the US$11,000 (HK$90,552) threshold. Compare that to the start of this year, when a bitcoin was worth less than US$1,000. Looking further back, for a lot of 2010 its value fluctuated between six and seven cents. Prescient people who bought bitcoin back in 2010 and held them until now would have seen their investment grow by 10 million per cent. Not a return to be sniffed at.

Ether, the second most popular cryptocurrency, looks like it is at an earlier stage of the same process. After its creation in 2014, the price saw little growth for a couple of years, and one ether was worth less than US$1 at the start of 2016. It rose, however, and in December 2017 the price floated around the US$460 mark. Again, solid returns for the early enthusiasts.

Looking beyond the big two, things get a little more complicated. There are now thousands of cryptocurrencies. Some – Ripple, for example – have been around for a while, but more are arriving. Genesis Block, a crypto exchange in Hong Kong, now allows traders to buy and sell over a thousand different cryptocurrencies over the counter. Since there are only about 180 traditional currencies in the world, some of which are barely traded, life for the normal investor in the crypto world is not going to be easy.

Another exchange in Hong Kong, OKex, will soon launch trading in bitcoin derivatives, with plans to offer derivatives of other cryptocurrencies in the future. If you fancy speculating on what the price of an ether will be in six months’ time, there’s the place to do it.  

With the crypto ecosystem clearly growing, how should a normal investor take advantage of it? At their simplest, cryptocurrencies are digital tokens underscored by distributed ledger technology, or blockchain. Whatever happens to cryptocurrencies, blockchain is going to be part of the future. It is turning up in everything from the world of financial services to shopping. Over on the mainland, US retail giant Walmart is experimenting with blockchain technology to track its produce.

In some ways, blockchain could be seen as many giant excel spreadsheets, linked in such a way that if one is updated, all the others are simultaneously updated. In the age of pre-blockchain internet, one of the problems that prevented a digital currency takeover was figuring out whether an asset was the original or a duplicate. If you can copy your digital token and pay two different people with the same coin, it doesn’t work. Blockchain technology has changed that, and alas, bitcoin was born.

While many of the new tokens use the bitcoin blockchain to operate, others use the Ethereum blockchain, which underscores ether. Yet many fall into neither camp and are off doing their own weird thing.  

Investors are advised to stick to cryptocurrencies that use an established blockchain. There are already enough variables to worry about when investing in crypto without throwing another into the mix.

If you understand what a token is used for and why, and it seems sensible, then maybe it’s worth a punt. If you really like an idea and want to get in on the action from the start, then a token sale, or ICO (initial coin offering), allows you to do just that.

Developers looking to create a project using cryptocurrencies hold a token sale to raise funds and distribute their tokens. They don’t normally cost a lot to invest in, and they may even offer high returns.

Many are getting excited. So far, nearly US$2.3 billion has been raised in ICOs, mostly in the first half of 2017. Be careful, though – even experts in the crypto world are exercising caution. “There are so many ways to scam people with an ICO,” Leonhard Weese, president of the Hong Kong Bitcoin Association, told the South China Morning Post.

“Investors beautifully admit that most of these start-ups will fail, so all you need to do is raise a few million, appear busy on social media for a few years and then say you ran out of money and blame it on competition, developers or bitcoin. Alternatively, you could ‘hack yourself’ and retire immediately.”

Text: Emrys Gould