Harry Hamburg – Exponential Investor (United Kingdom) –
Welcome back. It’s time for the second part of my “Beginner’s guide to investing in crypto”.
Today we’ll cover more about the different types of cryptos and why you would want to invest in them.
If you haven’t caught up on part one yet, you can read it here.
You’ll remember I broke cryptos into three main categories:
- Platform – these are like owning the land every crypto project is built on.
- Currency – these are meant for payment and as stores of value.
- Utility – these get value from their use in a system, such as tokens that represent units of electricity.
I already covered platforms and why these should make up the vast majority of your portfolio in part one. Today, I’ll talk about currencies.
Currencies are where it all started, hence why many people refer to every crypto as a crypto-currency.
Although this isn’t strictly accurate, the name has stuck and is now widely adopted. I usually just refer to cryptos as cryptos, without the currency part. Other people call them digital assets.
The main idea behind cryptocurrencies is they let anyone transfer money to anyone else in the world through the internet, without relying on a third party.
I explained why this is such a breakthrough in my article on blockchains vs DAGs. You can read it here. But to summarise:
Cryptocurrencies solve the problem of trust.
In ordinary transactions you have to trust the person you’re dealing with. Or trust in a third party – such as a bank – to compensate you if that person turns out not to be trustworthy.
Cryptocurrencies ensure you can transact with people, even if you don’t trust them. They remove the need for a third party, such as VISA, PayPal, your bank, etc, to process and guarantee your transactions.
This is huge. It completely changes the basis of our monetary system. With no need for third parties, every transaction can be cheaper, faster and more secure.
This is why people call bitcoin a monetary revolution.
It really could change the world, in a big way. This is also why the traditional institutions fear it so much. It takes away our need for them.
However, cryptocurrency’s biggest strength is also its biggest weakness.
By removing the need for third parties and fiat (normal) money, it needs to battle with entire countries to gain traction.
This is why it’s taken bitcoin a number of years to get to where it has. It’s had to prove itself worthy time and time again.
Another big hurdle for cryptocurrencies is the logic of their use case. I’ll explain.
The Bitcoin Pizza problem
Cryptocurrencies want to become alternative payment methods. But in order for that to happen they need a stable price.
Everyone has heard the story of “bitcoin pizza guy”. He paid for his pizza with bitcoin a few years ago, and now those bitcoin are worth millions of dollars.
No one wants to spend a currency that is increasing in value at such a rapid rate. It would be completely foolish.
And therein lies the problem.
If you invest in cryptocurrencies because you believe the price will go up, you are proving they have no use as an actual currency.
The logic is circular. It doesn’t work. That’s why many people now call bitcoin “a store of value” and not a currency.
However, this logical leap doesn’t seem to deter investors or cryptocurrency prices. Some of the best performers in crypto are cryptocurrencies. And they most likely will continue to be.
One way cryptocurrencies can overcome the value problem is by enabling easy and fast ways to get in and out of them. That is happening as I write this. In fact, a number of cryptos have been created with that express purpose. I’ll cover them a bit later in this guide.
For now, let’s just acknowledge the logical failing of cryptocurrencies and move on.
As I said, there are many, many supporters out there, and cryptocurrencies are continually among crypto’s top performers. It would be foolish not to dedicate some of your portfolio to them.
Just remember to keep most of your crypto portfolio in platform coins. Platform cryptos and their offspring are the ones that will really go on to change the world.
And let’s not forget, platform cryptos can also be used for payments. But payment cryptos cannot be used as platforms.
Four leading currency cryptos
As with the platform cryptos I listed in part one, these are the leaders in this space – as I see them. Others may disagree with me.
So if you like the sound of any of these cryptos, do your own research (DYOR) before investing.
Bitcoin – see part one for more information on bitcoin.
I’ll just say here that bitcoin is currently king of crypto and any portfolio should hold some. Bitcoin’s moves affect the entire market. You cannot escape its influence, so you might as well own some and benefit from its swings.
Monero – the undisputed #1 in privacy. If you care about your privacy, this is the one to own. Unlike bitcoin (which is very easy to trace) it’s (currently) untraceable. You can’t even see public account balances.
I have written a very detailed article on the merits of Monero before. You can read it here. I’d argue the uses of Monero make it uniquely valuable and so it transcends the issues I listed of typical cryptocurrencies above.
Litecoin – I’d be remiss if I didn’t mention Litecoin. It was designed to be a faster, higher-tech bitcoin. It is based on the same code as bitcoin and so it can also implement features bitcoin adds.
Personally, I don’t see the point of it though. Once bitcoin gets its Lightening Network sorted (likely very soon) it will have extremely fast and cheap transactions. So why would you even bother with Litecoin?
Litecoin has a big following though. Many people champion it. It’s also one of the only three cryptos currently listed on Coinbase. So it gets a lot of interest from people new to the space.
People log on to Coinbase, see the prices of bitcoin, Ethereum and Litecoin and pick the cheapest one (Litecoin) in the hope it will one day reach the price of bitcoin. It won’t.
In fact, Litecoin’s founder, Charlie Lee, sold his entire hoard of Litecoin towards the end of 2017. A move like that doesn’t really foster confidence.
RaiBlocks – RaiBlocks is very new to the scene, sort of. It’s actually been out for a number of years, but it has only recently gained a lot of attention.
However, I’ve still decided to include it here. Why? Well, it has massive potential.
It’s based not on a blockchain but on a DAG. I explain the differences between blockchains and DAGs here.
Because of this it boasts near-instant, feeless transactions and an amazing ability to scale.
RaiBlocks’ motto is “do one thing and do it well”. It is a pure payment crypto and within that scope, it is (seemingly) unparalleled. The only place it falls down on is privacy.
Because it’s so new and not really battle-tested yet, it is probably one of the riskier plays. But it does have a lot going for it.
NB: there are very strong rumours RaiBlocks is rebranding to Nano any day now. So if you’re reading this and can’t see RaiBlocks anywhere, that’s probably why. I’ll update this guide when the rebrand happens, but it is something to keep in mind.
See part one.
Okay, that’s all for part two.
As there’s so much to cover I’ve decided to write two parts a week from now on. So 0n Friday, I’ll write part three, where I’ll talk about utility and hybrid cryptos.
Then next week, we’ll get to the good bit – how to actually invest!
Editor, Exponential Investor