The universe of investable cryptocurrencies is large. As at this date, on Coinmarketcap.com, there are nearly 1,000 to choose from. You could buy and hold all of them but this would be impractical and scattergun.
Most of these you would think will fail. By failure, I mean they will not be around in 5 years or longer. You might make some money in the short term but equally you might lose.
This kind of scattergun approach is a bit like VC fund strategy. You might bet on 10 startups and 9 fail but one returns 20x.
This isn’t my strategy with cryptocurrencies.
Instead, I want to pick the most promising. I want to protect the downside as much as possible. A lot of people I know would probably laugh at me for saying this. After all, even investing in Bitcoin, the biggest crypto in the room, isn’t really protecting the downside in the strictest sense of that in investment-speak.
Protecting the downside in traditional stock investment might be getting in at a discount to what you believe is current value.
Protecting the downside in property investment might be investing in good locations and waiting until a bear market to enter.
Protecting the downside in cryptocurrencies is different.
You could invest 100% of your money allocated to crypto in the market leader Bitcoin and you still might lose all your money.
However, this is certainly protecting your downside more than just putting all your money into a new ICO (Initial Coin Offering)
Protecting your downside by investing in crypto market leaders will mean that you give up the chance to fully maximise your upside potential. After all, if you get in on an ICO at pennies, then you’ve got in at the beginning. However. the chances of the ICO’d coin even being around in 5 years is minimal. Protect the downside instead with the following criteria and you give yourself a chance of not just making money, but also reducing your chances losing it too.
This is still such a early market. Just because you see Bitcoin at USD 4,000 doesn’t mean that you’ve missed the boat.
Here’s what I’m looking for in buying cryptocurrencies:
Signs that there could solid future mass adoption
Adoption is crucial in this game. If it doesn’t get adopted, then there’s no demand. If there’s no demand, then there’s no upward price movement.
Signs that there’s potential future mass adoption are:
- Lots of buzz and chatter like news stories,
- videos on YouTube being made about it,
- a sub-reddit on Reddit,
- buzz on Twitter
Evidence of current adoption
The biggest indicator of current adoption is its position in the current market cap tables.
The bigger the market cap, the bigger the price of the coin vs the amount of coins in circulation.
The bigger the price, the greater the demand vs supply.
The greater the demand, the greater the current adoption.
The greater the adoption, the greater esteem it is held by people.
So check out coinmarketcap.com and look at the biggest market caps.
Market cap = current price X number of coins in issue.
eg. Bitcoin market cap as at 28 August 2017 = USD 4,606.35 X 16,531,512 BTC = USD 76,149,930,301
Some serious upside potential
Monero at USD 40 has some serious upside potential. I think it still has serious upside potential even at USD 130. However, it clearly has less upside potential in the second scenario.
What about the upside potential of those new ICOs? Well they’ve got potentially massive upside potential but they’ve also got a massive chance of being worthless in a year or two.
I believe that Bitcoin could be at USD 50,000 in a few years. That’s still serious upside potential from where it is now at USD 4,600.
Signs that the underlying tech and idea is respected
Look at Ethereum on Google and you’ll quickly see that people think this is game-changing.
Look at Bitcoin and it’s been scrutinised for years and there’ve been no major problems with it (except for those concerned with privacy and anonymity)
Finite supply of coins
You want something with some scarcity built in. Value is based on scarcity.
Talent like Lionel Messi is scarce, therefore he is valuable.
Gold is scarce and in limited supply, therefore it’s valuable.
If Bitcoin will only ever have 21 million coins mined, then it is finite and scarce.
If it becomes adopted, it will only ever rise in value.
Open source and immutable code
The whole philosophical basis for cryptocurrency and blockchain is to decentralise things, whether that be money or other information.
The coin you’re looking at investing should be open-source and fully decentralised.
It should also be immutable, meaning that it can’t be changed.
A quick bit of research should reveal this.
Mutability and closed source will be well-known bones of contention in the relevant crypto community.
What do you look for when investing in cryptocurrencies? Let me know in the comments below!