Is Algorand a Good Investment?

Algorand ($ALGO) was a great investment in 2021: the price rose over 300 percent through the calendar year. That’s over 10x better than the S&P 500’s return of 28.7 percent, including dividends. But it wasn’t a smooth ride – like most cryptocurrencies that are not stablecoins, the price of Algorand has been highly volatile.

Nevertheless, is Algorand a good investment now or its market cap north of $10 billion a sign of a top?

Crypto Vs Stocks

Crypto investments are harder to price than traditional stocks and bonds. We know how much revenue a company like Alphabet (NASDAQ:GOOGL) or Apple (NASDAQ:AAPL) generates on a quarterly basis. We can see their products and services, and we can trace all of that historically back over the course of decades.

But blockchains and cryptocurrency coins don’t necessarily have customers in the traditional sense. Ethereum ($ETH) and Polygon ($MATIC) are among the most popular blockchain projects, and they each have only about 500,000 monthly active users. It’s a small percentage of the 80+ million Ethereum wallets, which admittedly is much higher than Algorand’s 10 million.

That begs the question: what’s the value of a crypto at all? And specifically what is the utility of Algorand that warrants a multi-billion dollar valuation?

What Is the Purpose of Algorand?

Algorand was founded in 2017 by MIT professor Silvio Micali, although its test network and main chain weren’t launched until 2019. Development is shared between a private corporation, Algorand Inc, and the Algorand Foundation, which manages on-chain governance and the decentralized ecosystem.

The platform was built to solve the blockchain trilemma: scalability, speed, and security. The problem is that blockchain platforms must sacrifice one for the other of these, and early projects lacked at least one of the three. Ethereum and Bitcoin’s proof-of-work (PoW) mining model, for example, is secure, but both projects lack speed and scalability in their current states.

Algorand goes one step further from proof-of-stake (PoS) to use a more democratized pure proof-of-stake (PPoS) consensus mechanism. It’s a 2-Layer blockchain that processes smart contracts on sub-chains that are then added to the main chain.

Algorand can process 1,300 transactions per second (TPS), which is much higher than the 30 tps maximum capability of Ethereum or Bitcoin. It’s also in the process of improving that speed using “instant finality,” which immediately adds verified data permanently to the block.

This makes it a more environmentally friendly solution to solve the blockchain trilemma, but that alone isn’t enough. Plenty of Layer 2 projects, like Solana ($SOL), Polygon, and Cardano ($ADA) have also been deemed “Ethereum Killers” like Algorand. So, do Algorand developers have something up their sleeves?

How Does Algorand Gain Value?

Algorand is like a dividend stock in that it generates interest simply by holding the token. This interest is funded and distributed by the Algorand Foundation, and the rate is determined based on the circulating supply compared to the fixed total supply of 10 billion ALGO.

This means simply hodling Algorand can earn liquidity, and because this reward accumulates every time an address is involved in a block transaction, it can be gamed. Continuing to send ALGO transactions to a wallet will force ALGO to compound approximately every 9 minutes, which can really add up over the course of days, months, or years.

But what’s really adding value to the blockchain is major partners integrating Algorand into their own tech stacks. In the case of Algorand, it has partnerships with major infrastructure in Italy, the Marshall Islands, and El Salvador. And Circle ($USDC) is building on it too.

Development and user adoption could make Algorand a winner, but is it too late to invest now that it’s valued so high?

Is Algorand a Good Investment?

Conventional wisdom (along with analyzing the history of crypto until now) tells us that crypto won’t be a “winner take all” market.

In fact, it’s becoming increasingly more likely that multiple blockchains will exist and interoperate with each other. So, Algorand can grow alongside Ethereum just like Apple and Microsoft (NASDAQ:MSFT) became trillion-dollar companies while embroiled in a heated battle with each other.

Algorand focuses on interoperability, and that’s just one reason to be bullish about it. Instead of building a silo, it’s working to connect to other blockchains and support their data to reinforce the industry. Both USD Coin ($USDC) and Tether ($USDT) are built on the platform because it offers much lower gas fees than Ethereum.

And its listing on high-profile crypto markets like Coinbase Global (NASDAQ:COIN) means it could stand out among large-cap crypto assets. It’s one of about a handful of tokens that offer an interest payment on Coinbase simply by hodling, which makes it accessible and enticing for entry-level investors interested in paid dividends.

There’s risk to buying ALGO though.

Algorand Crypto: What Could Go Wrong?

The idea of tps speeds is often touted in crypto, and that typically includes comparing XYZ other project to slow speeds of Bitcoin (under 30 tps) and fast speeds of Visa (24,000 tps, although it only processes about 1,700 tps). But comparing to those projects has become somewhat of a false equivalency.

Solana promises a speed of 65,000 tps, which easily trounces the 3,000 tps Algorand will reach with its instant finality upgrade. Both of these combined pale in comparison to Amazon Web Services processing over 500,000 tps.

That means Amazon is processing as many transactions every second as Algorand has total users. And until it starts generating revenue, it’s impossible to tell how long this project will truly last. With that said, it’s widely touted as a respectable platform that’s more secure than options like Solana.

Is Algorand a Good Investment: The Bottom Line

Algorand is a relatively new blockchain platform, but incorporates solid technology that has the attention of even the most fervent blockchain critics. It’s faster and more secure than Ethereum, and it’s also a lot cheaper to run, thanks to its Byzantine fault PPoS staking verification model.

This attracted a lot of development that could have otherwise gone to Ethereum, but it still has a long way to go before it can challenge enterprise cloud-based giants.

As a result, Algorand may be priced correctly near $10 billion. To become a trillion-dollar company it will need to onboard a lot more users. But the race to adoption is on, and Algorand hodlers have plenty to look forward to ahead.

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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.