When it comes to investing in cryptocurrencies a lot of investors are hesitant. They don’t understand the technology (or don’t want to), see the extreme volatility or think it’s a fad. However, the investor who sees that this is the beginning of a big trend, can profit quite handsomely.
We believe cryptocurrency is here to stay, in what format nobody knows. There is a great chance that the top cryptocurrencies will win big and the others potentially will go to zero or stay niche products.
We’re not saying that cryptocurrencies are without issues, au contraire: Scaling is still the biggest problem of the technology, hacks happen left and right and mass adoption is far from here.
That shouldn’t scare you away though as a seasoned investor. Think of cryptocurrencies as an emerging asset class, or an emerging market if you will.
We will address all three points that might keep you from investing down below and give you suggestions on how you can profit from this crypo craze that’s going on.
Scalability is still one of the biggest issues for almost all of the top 10 or top 20 cryptocurrencies. Even the cryptocurrencies that claim that they can do multiple hundreds or even thousands of transactions per second, have not been proven in practice.
A lot of smart people are working on solutions already though. Don’t forget when the internet first started, we all had dial-up internet, not blazingly fast fibre internet connections.
This is cryptocurrency’s dial-up phase.
Technology and infrastructure is still being built, a lot of things are still in testing phase and products or services might break from time to time.
But you’re an investor, you don’t want to wait until all the technology has been built, you want to invest into something now. Two technologies you could look at would be: Ripple and Nano (formerly RaiBlocks).
Ripple is a centralized cryptocurrency which is blazingly fast (1500 transactions per second) and has strong partnerships in place. People against Ripple are saying that it is against the original idea of the blockchain though, as it’s very controlled and centralized by the company behind it, Ripple Labs.
Another interesting cryptocurrency is Nano, formerly known as RaiBlocks, which is said to be capable of 7000 transcations per second. How is that possible? Nano doesn’t use a traditional blockchain approach, but distributes to every user their own blockchain, which is keeping track of the transactions locally. The network still then works in a similar way but much, much faster.
If you’re interested in the bigger cryptocurrencies, read on.
One smaller change that has been implemented for Bitcoin was called SegWit, or Segrated Witness. This change, which now has been adopted by all major cryptocurrency exchanges, separates the signature data and appends it separately. That way the size can be reduced to 1/4th and transactions will go quicker.
This change has been formally introduced by the beginning of November 2017 and has been finally accepted by all the big cryptocurrency exchanges.
SegWit was also a necessary fundamental change for the upcoming Lightning Network. A lot of cryptocurrency projects are planning on implementing the Lightning Network in order to scale their blockchain technology up.
One of the biggest changes that Lightning Network proposes are so called payment channels. These are channels that are being opened between two parties that transact often. While the channel is open, the transactions go quick and for a very low fee, as the transaction itself is not recorded on the blockchain yet. The blockchain only records opening and closing channels, saving a lot of bandwith in the meantime.
An open channel can also be used (for a fee) from other parties, making connections between third parties much quicker.
If you’re looking to test the Lightning Networks as early as possible, take a look at Litecoin. The “little” brother of Bitcoin has been known to adopt technologies much faster and has a wide-spread adoption amongst the biggest cryptocurrencies.
You’ve read it in the papers and on the blogs: “Exchange X got hacked!”, “… exchange Y has lost users money”. As you’re risk tolerant in products you understand, you tend to be risk averse in products you don’t understand. This is understandeable, but let’s have a look at how you can secure yourself properly to avoid problems like these.
Get a hardware wallet
One of the easiest and cheapest solutions to the above problem are hardware wallets, these are wallets in the size of USB sticks that you plug into your computer and that hold your private keys (your access information to your funds). They normally cost between 80 and 100 USD and can be purchased online.
Two of the most known wallets are Ledger Nano S and TREZOR. Both are fine if you’re starting out.
You purchase the cryptocurrency on an exchange and then send the funds to a hardware wallet. This will help you in 99.9% of the cases that you read about in the news. Cryptocurrency funds should not be left on exchanges like other securities, as they are not properly secured (yet).
Banks and exchanges will need to implement some type of cold wallet storage systems as well as put insurance into place in order for your funds to be secured. For the time being a hardware wallet will let you sleep without stress at night.
We did a video series on how to do that exactly here.
Mass adoption is not here yet
That’s true, but this is also a big chance. Apple is a mass adopted stock, GE is mass adopted and Coca-Cola is as well. That’s why the potential returns are also much smaller compared to something as volatile as cryptocurrencies.
As we’ve mentioned in the beginning of this article, cryptocurrencies are an emerging asset class and should be treated as such.
When Google or Facebook IPO’d nobody said that these would be big homeruns in the coming years, yet they still performed quite well.
Technology products, by design are made for network effects. Cryptocurrencies are no different here.
Imagine if your friend told you that he’d like to pay for the lunch you just split with Litecoin or Bitcoin. At the beginning you would want to receive it in a different way, but he would then tell you how much faster and cheaper it could work and after seeing it you’ll believe it as well and will in return tell your friends etc.
Cryptocurrency use cases may start as niche products, but mass adoption will come soon. Which currencies will win, nobody knows… but you can make assumptions and an investment thesis on how you could set yourself up to win. We have mentioned some already in this piece but in the next articles we will discuss other investment theses you could bank on.