This will be a mini-series looking into:
- the nature of Cryptocurrency trading and investment,
- the key factors which shift the markets, and
- the important differences between Crypto and more traditional traded assets.
Fundamental factors of Cryptocurrencies vs traditional assets.
In terms of investing and long term trading, Cryptocurrency can be analyzed somewhere between a stock and a commodity.
It should be seen very much as a speculative investment — in the case of most Cryptocurrencies, you’re buying into a token which represents no stake in a company nor any voting rights, similar to a commodity. However, you’re not investing into a physical asset either. You’re simply betting that over time the use-case and thus demand for your token will grow, driving up the price.
Since price over time will be relative to the success of product, it can be analyzed similarly to an investment in a start-up. The main focus when looking at a token should be the team and their ability to deliver a working product that will actually be used. Not only this, you should also take
into consideration the use of the token itself within their product.
Will growth of the product actually lead to higher demand for the token, or is it simply tacked on as an after thought?
Additionally, Cryptocurrency projects seem to have a very different valuation split to previous technologies. A shift in valuation from the applications built on top of a protocol to the Blockchain protocol itself. No-one is investing in creating a new protocol layer for the internet, as the captured value comes from the applications and companies build upon it, such as Google, Facebook and Amazon.
On the other hand, Cryptocurrencies such as Bitcoin and Ethereum have market caps of $100B while very few applications have even been produced yet, let alone applications in wide use outside of the sphere of Crypto-enthusiasts.
This may be a symptom of a wider speculative bubble around the Cryptocurrency market as a whole, or simply a fact of the technology — requiring a sufficient valuation to be maintained to allow efficient flow of payments. That being said, we haven’t seen a truly successful product built
on Blockchain yet, maybe the Blockchain killer app will dwarf current valuations in the long term - only time will tell.
What to look for in projects
The core proposition of Cryptocurrencies over the traditional financial system is the fact that you don’t have to trust a third party.
A transaction can be sent to anyone anywhere in the world without needing a bank or escrow account in the middle. This property of trust-less decentralization should be the backbone of any good Cryptocurrency.
However, simple transactions are a very basic and limited use-case, which has been offered by Bitcoin since its first release in 2009. A project has to offer a unique and useful advancement on basic Blockchain technology. Many new Cryptos are becoming “smart contract platforms”.
Smart contracts are pieces of code which can be run on top of the Blockchain, in the same decentralized and trust-less manner as payments. This allows the easy creation of full applications on top of the basic transaction layer, providing much wider uses for businesses and developers.
Longer term, one of the fundamental issues that needs to be solved in Blockchain technology is that of scaling. Since the basic Blockchain model relies on all connected nodes to process every transaction, it quickly runs into limitations of how fast a payment can be distributed and verified, not to mention that of storage.
While there are many projects out there which claim “1,000,000 transactions per second”, almost all of these approaches are either impractical in real life or break the fundamental premise of a Cryptocurrency being trust-less and decentralized. Its relatively easy to achieve “1M tps” when running high powered servers in the same location that all have implicit trust.
However, in reality, flow of transactions is limited by latency between nodes around the globe and the fact that we shouldn’t rely on a central node for verification — otherwise why don’t we just use a regular bank?
The scaling issue is being progressed on with such technologies as “sharding” or a change from a traditional Blockchain to a “DAG”. In the long term, these are the kind of advancements which will achieve reliable scaling, rather than misleading promises from certain projects.
Product Value w/ Blockchain
Finally, and most importantly, you should consider who the Cryptocurrency is developed for and whether it is truly a useful product to them. Many have tried applying Blockchain in a misguided manner to any and all systems to join in with the hype. However, unless you need the very specific properties of a decentralized and trust-less system, Blockchain is no more than a glorified
While there is innovation left and right in the Cryptocurrency space, caution is still strongly advised. Out of the over 1500 coins and tokens in existence, only a handful of projects are likely to survive. While the vast majority will fail in the long run, due diligence pays off — helping us sift through the rubbish to find those which have a chance at leading the revolution of decentralized finance.
by Matthew Tweed