One cryptocurrency, in particular, has entered the public lexicon as the go-to digital asset: Bitcoin.
But the cryptocurrency market is significantly more complex than the public lexicon might suggest. And while there have been plenty of studies examining the role and future of Bitcoin, there have been few that explore the broader cryptocurrency market and how it is evolving.
Rating and reviewing the big boys, such as Bitcoin and Ethereum are easy. You can look at their growth, their social networks, their pricing and liquidity. But once you move away from the big guns how do you actually determine if a coin will succeed and ever make profits for the owner or will have enough liquidity that it will be bought and sold easily in the marketplace.
Amid constant headlines about huge increases in the values of cryptocurrencies bitcoin and Ethereum, the dental profession recently launched its own cryptocurrency, Dentacoin. At first glance, the idea of a dental cryptocurrency (and its name) may seem absurd, but there’s actually a lot more cryptocurrencies out there than the average investor may realize.
Many websites list no less than 1,037 different types of cryptocurrencies, 626 of which have listed market caps of at least $100,000. At the top of the list is, of course, bitcoin, with a market cap of $55 billion. Ethereum is a distant second with a market cap of $25 billion, but there are seven other cryptocurrencies with market caps over a billion.
In the world of investing, there are many general rules to follow but some are more important than others. The first of several I want to speak about is the rule of longevity. When choosing your long term investments, it’s important to select projects that appear to have longevity in mind, not just with the product itself but those producing it. The common questions to ask are: will this service still be needed or used in several years? Is there a competing service that can easily out-perform this project? And do the developers appear committed?
Many cryptocurrencies on the market today will face this problem over the long term, even if they provide real use-cases. The problem with most cryptocurrencies is, for your average person, there is little to no incentive to hold it. If you exchange goods or services for Bitcoin, such as a restaurant or service station may do, they will quickly transfer that Bitcoin into fiat, and the Bitcoin will go to the exchange to be sold. Now without going into more complexities behind this, a cryptocurrency that does just this is merely a pass-through currency.
1) investors will hold a currency that provides a guaranteed yield, even if it’s just 2–4%, it’s better than any bank gives today;
2) investors will hold a currency if there is a specific platform on which to use it; and
3) investors will hold a currency they believe will be higher in value in the future than today. The first two points are certain, the 3rd is less so because no one knows the future growth of anything, but based on the characteristics of this project, it is fair to assume higher expected value well into the future.
As you begin to analyze different projects apply these same rules in the process, and ask yourself the questions listed above. There is no golden formula, per se, to finding the best projects, but avoiding the ones with potentially dead end paths will help you stay in the game.