There has been a lot of talk about Bitcoin and other cryptocurrencies over the last two years or so. The financial innovation of decentralized digital currencies based on blockchain is taking the world by storm. More people are learning about how the current fiat system is hungry for an alternative, which is the cryptocurrency market.
It’s an exciting time in the history of humankind. For the first time ever, we have an asset class that is completely censorship-resistant, offers genuine scarcity, and is non-confiscatable. Such qualities in a monetary system are highly attractive.
Bitcoin delivers all the above and more. However, in the years following its launch, there have been many new tokens seeking to improve on the original design. These altcoins might look tempting from an investment standpoint, and many could truly be innovative for various industries.
Today, we’ll look at both Bitcoin and altcoins from an investment standpoint. Remember, however, this is not to be taken as investment advice and is only to be used as a starting point for your own extensive research.
There’s no denying the fact that Bitcoin is the most well-known and high-priced digital currency today. It has been on top for all its lifetime. If you want to invest in the potential future of money, you should probably buy Bitcoin then, as it has all the qualities that make money viable. It has a known supply (true scarcity), it is incredibly expensive to make more of it (prohibitively so), you needn’t ask permission from any government or banker to make a transaction, and no government or banker can confiscate your BTC if stored correctly.
Whilst other cryptocurrencies might share some or all these qualities in differing degrees, none is as solid as Bitcoin. It is backed by the largest network of computers which is incredibly expensive to attack.
Even the strongest altcoin networks are nowhere near as robust as Bitcoin. This makes these networks easier to compromise. Additionally, they all have an official spokesman, capable of steering development, and thus being in control of the cryptocurrency future.
Bitcoin has been developed to stand its ground in the face of changes. It sacrifices convenience for security at its base layer. Many who favour altcoins will often claim that Bitcoin is slower than other cryptocurrencies, or more expensive. For now, both of those things are true. However, scaling solutions are already being created by a network of developers who work on the protocol to design an entirely new system of finance.
The coming financial revolution could see all economic activity directed through one of the many layers developed for the protocol. A sound monetary policy is vital for the base layer, however. Those who are wowed by the speedy transfers are overlooking the importance of hard money to replace the fiat options we already have.
There are over 2,000 altcoins in the market, and to be fair, a bunch of them are absolutely useless. However, it would be overly dismissive to suggest that none of them will amount to anything. The problem is that it’s difficult to predict how successful they might be. If Bitcoin will solve its technical issues, will there be any room for other coins to compete in terms of a replacement for fiat currency?
That said, some altcoins have different industries to disrupt. First, you need to decide if the problem supposedly being solved by altcoin is a legitimate concern. Next, it’s important to consider whether that problem is best solved by a blockchain system that uses tokens. The fact of the matter is that blockchain systems require immense computing power, and this comes at a cost to the user. So, sometimes it can be inefficient to use blockchain for specific purposes.
Several altcoins are often competing to solve the same problem. Take decentralized storage, for example. There are several projects with native tokens that seek to allow the sharing of users’ hard drives for a small cost. Which one will win? Probably the one with the best technology. As an investor, are you in a position to judge the subtle nuances between two blockchain systems? If you are, then good for you. But many people must rely on the marketing of each project and the opinions of others to decide if it’s a worthy investment.
High Risk/High Reward
Investing in any cryptocurrency should not be done lightly. We are in a very early stage of this technology and each project faces many challenges to achieve its goal. These challenges are technical (can the developers deliver what they set out to do?), regulatory (will they be allowed to do it?), and related to competition (are others attempting to do the same thing better?).
Above all, if you want to invest in any cryptocurrency, you should never do so with more than you can afford to lose and only after you have done extensive research into all aspects of your investment. The less research you conduct, the higher the risk of your investment will be.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.