Thursday, June 21, 2018

What's The Most Important Thing To Consider When Investing In Cryptocurrency?

Investing in cryptocurrency used to be a whole lot less complicated.  That's because in its infancy, there were just a few cryptocurrency to buy.  There was the original crypto, Bitcoin, of course, and Namecoin and Litecoin, emerging afterward in 2011.  Someone looking to get in on the ground floor of a new altcoin only needed to do research on a handful of non-Bitcoin options.  As of April 2018, there are over 1600 cryptocurrencies!  Here is a list of all the current available cryptocurrency ranked in order of market capitalization.  So go ahead...I dare you to try to discover the next Bitcoin.

Image result for ethereum

Buying Bitcoin simply because it's at number one on the aforementioned list is foolish.  As a digital currency, Bitcoin is the most widely accepted.  They're not making any more of it, meaning, its "circulating supply" is finite, giving Bitcoin an allure to ownership.  Buying fractions of a Bitcoin at a time, if you can't afford a whole Bitcoin (current price, $6,474), may seem like a good alternative, but each time you do so you're also paying for transaction fees.  And you still don't know what the market will do.  One of the many concerns of digital currency investors is the high volatility of the cryptocurrency market.

Putting price aside, how should you go about sizing up a crypto as an investment?  What are the most important things to consider?  These are the questions I'll try answering for you next.

Blockchain Is To Crypto As Location Is To Real Estate

You've heard the real estate addage, "Location, Location, Location," I'm sure plenty of times.  For example, a few months ago I saw a story about a burned up house selling for $900K.  The house happened to be in one of San Jose's most sought after neighborhoods, Willow Glenn.  I know the area quite well, having grown up in Central-East San Jose.  So it didn't surprise me.  The buyer is paying for the land obviously.  How does this relate to investing in cryptocurrency, you may be thinking.  Well, when you look at a particular coin to buy, you must also do your homework on the underlying blockchain technology it comes with.  The blockchaing technology is like the location in real estate.

Image result for ethereum's blockchain motley fool

Bitcoin's blockchain technology isn't that great.  For example, though someone buying things with Bitcoin can count on a ledger that is decentralized (some anonymity) and there not being a middle man, like a bank, to suck up additional transaction fees, there may be a waiting time before your purchase is cleared by miners.  Bitcoin's network only has the ability to process three measly transactions per second!  Compare this to Visa and Mastercard which can process thousands of transactions per second.  So it's clear here that Bitcoin's blockchain technology can never serve as a better replacement for the current payment processing networks for vendors.

Now take the case of Ethereum, ranked number two in terms of market cap in the crypto world.  Ethereum's blockchain went beyond solving some of the problems posed by traditional currency.  Ethereum's blockchain can also provide businesses with smart contract protocols, meaning, businesses can more easily verify or even enforce the negotiation of a contract.  Financial firms are thinking about applying Ethereum in the futures (exchange) market...think all the stuff that goes on before the stock market opens.  That's an application that makes Ethereum's blockchain clearly more useful than Bitcoin's.  Still, Bitcoin is winning the price war, but in my view only because it was first out of the gate.

Another example of a blockchain with interesting application is that of Ripple's.  If Bitcoin is the tortoise in terms of transactions per second, then Ripple is the hare.  Ripple's blockchain tech is capable of processing 1,500 transactions per second!  That's still well below the speed of traditional financial institutions like Visa, but Ripple has an ace under its sleeve: transaction costs are only a fraction of a penny.  This can woo banks looking to offer customers lower fees for their business.

Cryptocurrency Is Still Evolving

By now you can see that what makes a particular cryptocurrency a more worthy investment is its blockchain.  Even though Ethereum and Ripple's blockchain technology both have real-world application, they're still not better than what's out there already!  Do you remember when cell phones came out.  For a long time you didn't have to upgrade.  Most old phones were capable of doing what new versions of more expensive phones could do, namely, call and text someone.  Not until the "Smart Phone" came out were people willing to pay up to replace their old models.

The same can be said with businesses and their interest in blockchain technology.  When cryptocurrency blockchain technology is finally better, more cost effective, etc., for a company to utilize versus what they already have in place, the floodgates will open.  Ripple claims its transaction speed can be faster and capable of handling more transactions per second.  Great!  But it still remains to be seen.  In the meanwhile, you may consider either Ehtreum or Ripple as intriguing investments, certainly more so than Bitcoin.

So now as you research from the multiple cryptocurrency that is available and that which is not yet gone through an ICO (Initial Coin Offering), remember the importance of the underlying blockchain.  Ask yourself: 

1)  What blockchain features does cryptocurrency X have that may have non-currency application for companies and business?

2)  How long before these features are able to replace existing business technology or processes?

3)  What are the threats to or weaknesses of the blockchain technology of cryptocurrency X?

There you have it.  Hopefully this article has served to help you how to better inform yourself about a potential cryptocurrency investment.  Thanks for reading!

*Disclosure: I do NOT own any of the cryptocurrency mentioned in this post.  Not yet at least... 

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