Learn to invest in the different applications of blockchain technology each coin is tackling
A wild 30 days to say the least.
Cryptocurrency has just started to blossom as an asset class, and in its current immature state, risk is high and hard to quantify.
To manage volatility and downside risk, some projects are working on creating financial instruments backed by cryptocurrency, whether its the CME launching Bitcoin futures for institutional investors, or companies like Olympus Labs that are defining the protocol for portfolio managers and retail investors to use and create their own indexes and derivative products.
However until these solutions become mainstream and easily accessible, investors are at the mercy of market volatility and price correlation. I’ve already written about ways to diversify using varying market caps here, but another way to further diversify your risk is to invest in projects tackling different market needs.
When the general population thinks of cryptocurrency, they view all the 1400+ coins as being only used as currency. This isn’t the case. Companies decide to raise funds through an Initial Coin Offering create their own coin in the process, but it is important to note that the purposes of the coins vary from company to company.
Investing in a coin is speculating on widespread adoption of a project, and by spreading around your investment to different applications of blockchain technology, you have the best chance of being a successful investor.
Platform Coins
Source: https://cryptocanucks.com/head-head-neo-neo-ethereum-eth/
What they are:
- Native coin of each project’s blockchain (Ethereum, Neo, QTUM, Cardano, RChain)
Examples:
- ETH, NEO, QTUM, ADA, RHOC
Usage:
- Operating smart contracts in their blockchain
- Governance
- Staking
What you are investing in:
- Blockchains to be adopted by reputable corporations or for other projects to build on top of their underlying blockchain. For example, Request Network (REQ) is a project built on top of Ethereum, Deepbrain Chain (DBC) is a project built on top of NEO.
- Ethereum is the clear leader in platform coins, with the strength of the Enterprise Ethereum Alliance and the sheer amount of ERC-20 tokens on the market.
Thanks to PandorasBox on Steemit for this graphic showing Ethereum’s dominance as a blockchain platform.
Currency Coins
What they are:
- Coins built on their own blockchain that are specifically used to transact value
Examples:
- Bitcoin (BTC), Litecoin (LTC), Stellar Lumens (XLM), RaiBlocks (XRB)
Usage:
- Store of Value (BTC)
- Cross-Border Transactions (XLM)
- Quick, fee-less payment (XRB)
What you are investing in:
- You are speculating on adoption as a legitimate currency in a retail environment and/or speculating on more people thinking the coin is valuable, which makes the price rise.
- Bitcoin takes usually multiple hours to process a transaction, Litecoin in less than an hour, and Stellar and Raiblocks in usually under 10 seconds.
Obviously a dated graphic, now that RaiBlocks market cap is $2.6 Billion as of Jan. 15, 2017…
Utility Tokens
What they are:
- Coins that are necessary to access a service, similar to an API key.
Examples:
- Request Network, QuantStamp, ChainLink, 0x, Binance Coin
Usage:
- Need a certain amount of token to access a service
- Governance
- Staking
- Discounts on exchange fees
What you are investing in:
- Utility tokens cast a wide net, and each token has a specific usage in its respective ecosystem. For Request Network, participants need to pay a network fee in REQ which will be burned. For 0x protocol, ZRX tokens are used to vote on the changes to the protocol and to pay Relayers (that maintain an order book on the decentralized exchange) transaction fees.
- Exchange Tokens are an interesting development in utility tokens. When you buy an exchange token like Binance Coin or Kucoin Shares, you are speculating on the adoption of the exchange by the general public. Those exchanges incentivize people to buy the coin by offering them a discount on transaction fees when using the exchange.
So what now?
I personally think the greatest investment opportunities exist in platform coins and utility coins. I think that some platforms are great for enterprise and others are great for consumer facing applications, and some utility tokens have a really great shot at being around if the project behind it has solid partnerships, a great development team, and a legitimate market need.
As always, do you own research, because everything is still completely speculative. Learning about a projects team, white paper, and market need will go a long way in making an investment in a project that will be around long after the bubble bursts.
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