A number of industries have absolutely been on fire in recent years. First it was 3D printing, and now it's virtual reality and marijuana companies. Still, the growth in these industries seems to pale in comparison with the optimism surrounding cryptocurrencies such as bitcoin and ethereum. Over the trailing year, bitcoin is up nearly 200%, while ethereum has jumped more than 1,100% as of July 16, 2017.

Here's why cryptocurrencies are soaring

Why such love for digital currencies? It appears to be a confluence of factors.

To begin with, growing signs of legitimacy have helped push cryptocurrency valuations higher. Earlier this year, Japan announced that it would accept bitcoin as legal tender, in exchange for the currency's compliance with anti-money-laundering regulations within the country. We've also seen a number of high-profile retailers and service providers accepting bitcoin. The more bitcoin and other digital currencies can increase their exposure and shorten the turnaround time between converting cryptocurrency-based transactions back into U.S. dollars, the more businesses, consumers, and investors will view them as legitimate.

A person holding a physical ethereum coin.

Image source: Getty Images.

Weakness in the U.S. dollar has also opened the door for investors to buy bitcoin and other cryptocurrencies. A weaker dollar tends to help U.S. exports, but consumers generally aren't thrilled with a decline in the value of their currency. The solution? Investing their money into a separate store of value. Traditionally, gold has been this store of value given that it's a finite resource. But a cryptocurrency like bitcoin has protocols written that ceases mining at 21 million coins. Unless this protocol is changed, which seems unlikely at the moment, bitcoin is just as much viewed as a finite resource as gold, thus making it an intriguing dollar-weakness play.

Finally, you could certainly argue that cryptocurrencies have been shown some love from investors because they challenge traditional monetary theory. A lack of governmental backing for these currencies is what many investors and digital-currency users find attractive. And as noted, the more media time these digital currencies receive, the higher their valuations have seemed to go.

Which digital currencies are the largest by market value?

However, the success of cryptocurrencies has also meant that new digital currencies are regularly being introduced. As of this past week weekend, more than 900 cryptocurrencies were available for purchase over the internet. That's a lot of needles in the haystack. But a few cryptocurrencies stand out from the crowd based on their size. Let's take a look at the 20 largest cryptocurrencies by market cap as of July 16, 2017, according to CoinMarketCap.com. 

Physical coins being transformed into digital coins on a tablet.

Image source: Getty Images.

  1. Bitcoin: $32.29 billion
  2. Ethereum: $15.24 billion
  3. Ripple: $5.89 billion
  4. Litecoin: $2.18 billion
  5. Ethereum Classic: $1.41 billion
  6. Dash: $999.6 million
  7. NEM: $903.8 million
  8. IOTA: $510.7 million
  9. Monero: $441.7 million
  10. EOS: $294.1 million
  11. Tether: $291.5 million
  12. Stratis: $287.6 million
  13. BitConnect: $286.3 million
  14. Zcash: $285.8 million
  15. Veritaseum: $270.9 million
  16. AntShares: $259.9 million
  17. BitShares: $257.2 million
  18. Steem: $219 million
  19. Qtum: $212.7 million
  20. Bytecoin: $211.7 million

Bitcoin and ethereum are light-years ahead of the pack in terms of market valuation.

They're also considerably more popular with investors in terms of liquidity. Over the past 24 hours, based on data as of 10 p.m. ET on July 16, 2017, ethereum had $1.55 billion in market value worth of trading volume, and bitcoin had nearly $1.2 billion worth of coins changing hands. No other cryptocurrency crossed $410 million in market value traded over the previous 24-hour period, with some digital currencies, such as NEM and IOTA, coming in with very low volumes of just $2.6 million and $4.1 million, respectively. As you might imagine, lower trading volume can equate to considerably lower liquidity and higher volatility.

In addition, if we were to add up the market caps of all 20 of these cryptocurrencies, we'd total only $62.7 billion. By comparison, the value of the slightly more than 500 companies represented in the S&P 500 (SNPINDEX:^GSPC) totaled $21.8 trillion as of June 30, 2017. It's important to realize that cryptocurrencies are still very much a nascent concept, and their relatively puny market caps next to established stocks listed on the broad-based S&P 500 demonstrates this.

A person holding a needle and readying to pop a bubble containing a dollar sign.

Image source: Getty Images.

A coming cryptocurrency bubble?

While cryptocurrencies have seemingly been unstoppable throughout the first half of 2017, they've run into trouble in recent weeks, lending to the belief that we could see the wind let out of the sails of many of these digital currencies.

Perhaps the biggest issue for cryptocurrencies like bitcoin and ethereum is that there's no centralized trading platform. A decentralized system is critical to encourage mining for these currencies and to provide protection against a cyberattack. However, a lack of exchange centralization makes it incredibly difficult to legitimize these currencies to investors and retailers.

It also has the effect of increasing volatility, which could turn off businesses from accepting bitcoin or ethereum as payment. For instance, if a bitcoin payment occurred on Friday, July 13, but wasn't processed back into U.S. dollars until a day or two later, that business would have seen 10% to 15% of its payment erode from the devaluation in bitcoin over this past weekend. This sort of volatility caused by exchange decentralization simply doesn't sit well with most businesses, and that's a big problem for bitcoin and digital currencies in general.

Though cryptocurrencies may offer a new payment and investment channel for the future, they are, for the time being, far too dangerous for investors' portfolios. This Fool would suggest keeping your distance and simply monitoring from the sidelines.

Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.