Cryptocurrencies have quickly become an essential part of everybody’s portfolio. From being a risky asset that didn’t warrant more than a throwaway amount of money being invested in it, it is almost its own asset class. All of this has happened over a short few years, and it is expected that this trend will continue.
As with any investment, it is important you come to it with a sober mind. Your returns are more likely to be high the more you doubt your original thesis. That is to say, if you believe the first idea you come up with and never question it, you are going to lose money. To avoid these situations you should think about exactly why it is you think a cryptocurrency will go up.
Before you do this, it is probably necessary to point out there are two main types of cryptocurrency. There are the well-known coins that have reached some sort of mainstream acclaim, and then there are the alternative coins which fewer people have heard of. There is a high amount of risk in all types of cryptocurrency when compared with traditional blue chip stocks or cash, but the well-known currencies are less risky than the obscure ones. This is simply a matter of the network effects involved. Once a coin has achieved some sort of notoriety, it has “made it” in a sense. It still may fail due to poor engineering and a lack of real-world use, but it got the exposure necessary to catch on. This isn’t always true for alternative coins, which is why it was necessary to point it out.
Bitcoin and Ethereum make the top two
When we refer to mainstream coins we are of course talking about Bitcoin, the first and most well-known cryptocurrency. It has achieved massive returns over the period of its life and incited much controversy across the world in the markets. Most laymen have very little idea of what the difference is between Bitcoin and the rest of blockchain technology, because they have basically become synonymous.
Then there is Ethereum. Although developed later than Bitcoin, it has gone through massive growth in its market capitalization in the last few years. Ethereum was founded with a completely different goal than Bitcoin. There is still a currency aspect in the Ether component of the network, but Ethereum is more about creating a decentralized computer that is capable of running massive applications on it.
Ethereum is planned to be the platform that the next version of the Internet is built upon. By allowing for decentralized apps, or dapps, to be constructed on its system, it is helping the next generation of computing begin.
In comparison to this, Bitcoin is mostly seen as a digital currency that has the power to replace the US dollar or gold as a “safety investment” even though right now it is more of a speculative investment. The hope is that one day it will operate like the best parts of cash and gold to provide superior utility to its investors. The idea is that there is added stability when you have no central bank making unilateral decisions that affect the fate of the entire coin without a vote. Only time will tell if this is true.
There have been issues with both of these currencies, but in the last few months major strides have been made to address these shortcomings. A user-activated hard fork for Bitcoin occurred on August 1st that addressed many of the biggest problems in scaling the currency, and in mid-September Ethereum began to roll out its Metropolis hard fork in order to fix scaling issues in the network. As issues such as this are resolved, we will see more and more money flow into the coins due to its perceived safety.
When you cross over from these mainstream coins to alternative coins, you find that all the up-and-coming cryptocurrencies have been designed to solve a certain problem. For example, Zcash was created to add anonymity to the network. There are perceived problems in the Bitcoin and Ethereum networks when it comes to confidentiality. Zcash is trying to solve this problem by implementing changes to the ledger that would partially obscure who and where the transactions are coming from. Anyone who believes this to be an important priority is likely to join the Zcash network, which is where the investment thesis would be founded. Only recently has it received mainstream attention, and now it has been adopted to CEX.IO and other major exchanges.
Another example of an alternative coin is Litecoin. It was previously mentioned how Bitcoin has had some scaling issues in the past and is aiming to solve these by working on the block size and speed of blocks, but Litecoin seems to have already addressed these perceived issues right out of the gate. The currency’s value has gone up significantly in the past quarter, but there is a huge potential for it to continue to increase as people begin to see it as a viable alternative to Bitcoin. This is important to note, because a lot of investors have the thesis that Bitcoin will remain the frontrunner in the cryptocurrency world and be indicative of the overall performance of the industry.
Play on a hunch
With the total worth of all cryptocurrencies hovering around $100 billion (and rapidly rising as more investors enter the space), there is lots of opportunity to be had. A few things to remember are that past returns don’t indicate future results. Each of these coins will eventually hit an equilibrium price, and for coins that have advanced an incredible amount in the last few years, that point is going to come sooner than some of the lesser known coins we mentioned.
Prudent investing is about coming up with a thesis, testing it, and then putting your money where your hunch is. It is also about knowing to get out. These cryptocurrencies bring a lot of opportunity as well as a lot of risk so as long as you understand that, good luck to you!