Now that you have decided if you want to be a part of the Revolution and you understand the things to avoid in this Industry you need to know how to decide on what you will want to Invest. There are two main ways you can approach this, by being a Passive Investor or by being an Aggressive one :
- Passive Investor : You want to Invest and be a part of the Revolution without trying to learn about how things work, without doing Research everyday to find new Ideas to invest into and without reading too many news and trying to Analyse everything.
- Aggressive Investor : You are ready to learn, ready to read and ready to expand your Investment Strategy and Portfolio. You want to understand how to Analyse not only the Idea of the Project, but the Project itself and be able to decide whether it has potential or not.
Important : By Passive or Aggressive I do not mean the distinction between Trading and Investing ( in the video “The Difference Between Trading and Investing” by The Plain Bagel, you can learn the difference and choose your strategy accordingly, it applies to Cryptocurrency pretty well ).
You can start by being a Passive Investor in Cryptocurrency and then evolve into being an Aggressive one. But you don’t have to in order to make money. In this Article I will try to show you both ways of Investing and will try to help you with creating your own Strategy of Research when it comes to being an Aggressive Investor. Below I will cover basic concepts for Analysis that you can use in your Aggressive Investing Strategy. There are many more things to consider, however I will cover the things I find are most important. Concepts like Diversification ( investing in different Projects that work in different fields ) and Risk Assessment ( do not Invest more then what you can afford to loose ) are also advised for both types of Investment Strategies.
First and foremost you need to understand that buying Cryptocurrency coins does not always mean investing into a Project’s Success. There are certain Cryptocurrency Projects that have a Company offering a Service using Blockchain that brings profit to it, but does not need the Cryptocurrency coin for anything ( or at least not at the moment ). These Projects may have a slower and longer adoption strategy in mind, where they start by offering Services without using the Cryptocurrency and only using the Platform / Blockchain. After that is implemented they start to slowly introduce the Coins into the Ecosystem and start creating Tokenomics.
Other Cryptocurrency Projects do not even aim to increase the price of their tokens and they work just as well regardless of Price. They focus on building communities, creating tools and developing things that will benefit everybody.
So you can distinguish Projects as :
- Business oriented with disruptive expansion strategy
- Business oriented with slow expansion strategy
- Community oriented with the goal of creation
- Community oriented with the goal of simple Utility
Every Project has its own strategy for adoption. By knowing if a Project is run by donations you can assume that it is Community driven. If it offers Services for Businesses and uses its coins in an elaborated Plan of Tokenomics, then you only need to follow the Project updates and see if their Adoption Strategy involves working with Regulators, Governments and other Companies.
It is not to say that Projects that have a disruptive expansion strategy in mind are superior or inferior to their counterparts. Nor it is to say that they do not work with Regulators. They simply prefer to create something that can be sold and let the rest catch up to them. Since changing a system or upgrading takes so much time, Projects that have a slow expansion strategy will take much longer, if at all, to succeed. Since there is a big focus on trying to upgrade older systems and Regulations, Projects with a slow strategy will fail to implement the newest innovations, while Projects that are eyeing disruptions will be the ones creating, innovating, developing and getting exponentially better.
You also need to understand the Idea and the Goal of the Project. You can categorize them more or less like this :
- Utility : Mostly Projects that aim to facilitate sending value from Wallet A to Wallet B. It is something you can easily use without knowing how to Program and have the benefits of Finance 3.0. Be it Pseudonymous or Anonymous these Projects have the goal of value transfer, with some targeting Businesses while others have no target and anybody is free to use them. These do not allow expansion or creation of anything ( by expansion or creation it is meant that there are, for example, no smart contracts. You can still help with the development of these Projects since most of them are open source )
- Service : Projects that provide a Service or any means of end User interaction. As Example you have Smart Contracts and Decentralized Applications that run on certain Platforms. They are mostly focused on making something accessible to the end User that may not be familiar with programming. In this Category we have things like DeFi ( Decentralized Finance, which includes Decentralized Exchanges ) or even Games. Services are run on Platforms that may have other Services which helps them be interoperable with each other.
- Platform : A platform is where things are born. It facilitates creation and development of new Ideas. Before you had to do everything from scratch, now you can start by building something on a Platform and then migrate away from it to make your own. A lot of Cryptocurrency Projects started and are currently run on same Platforms. These Projects can have a focus on the community or even Businesses, so that everybody can create something new and bring their Idea into reality. Different from Utility Projects that only have one purpose, these Platforms allow for creation of everything using Programming.
When you want to interact with a Service or a Utility provided by a Platform you have a User Interface, so you don’t have to have a technical understanding or skills to use it. You can see these Categories as something you can Interact with and use ( in case of Utility and Services ) and something you can only Invest in the Success of if you aren’t a developer( Platforms ). Some Projects offer Grants for those that contribute to them in forms other then developing ( like advertising, compliance & legal and even translations ) so you can also participate and make it either a Job or a Hobby.
Important to note is that there are Cryptocurrency Projects that are part of all three of these Categories. Which could ( or not ) mean that a Project focusing on one Category will outperform others that are focusing on many at once.
Purpose and Value
So what’s the point in buying Cryptocurrency Coins then ?
Here you need to understand what the Coins in the ecosystem of a Project do, the so called Tokenomics. Depending on a Cryptocurrency Projects Goal you can think of this as a Business Plan ( how is this Project going to make money ). Basically you need to know what the Coins ( Tokens ) do and how they are used. Because if a coin is not necessary or not used within the Ecosystem, its only value derives from supply-demand and its scarcity ( thus falling prey to speculation ). Cryptocurrency coins may be used for things like :
- Payment for sending a transaction ( used as sort of Gas to fuel a Car )
- Strengthening of the security of the Blockchain ( Proof of Stake )
- Governance ( Voting on decisions and changes )
Currently a lot of Cryptocurrency coins have their value from Speculation and Scarcity. Their “Usage” within the Ecosystem of a Project is not enough to increase its value. For me a Cryptocurrency token that has the most of the above uses has a better potential then a token that only has one use.
You also need to keep in mind that some Projects have no aim of making money and increase in value. They work just as well regardless of the Price of their coins.
Another thing to keep in mind are Stablecoins. This is where a Cryptocurrency Coin is pegged to the value of fiat ( like the $ or the € ). So if you want to make money from Cryptocurrency do not expect a Stablecoin to rise in Price. You can however buy Stablecoins and using DeFi Services put them into a sort of a savings account that will generate profits much bigger then what Bank savings accounts will give. This i will cover in a separate Article because there is just so much to say.
There are a lot of topics to cover in this Section which I will not explain thoroughly and try to stick to the basic concepts. The important thing here is that you do not judge Projects strictly because they fail in certain areas shown below. Some Projects are smaller in scale and will not be able to afford to do things that other Projects will. It is a question funding, where a Project with more money will be able to do much more.
But here you can see what a Project’s approach to these things is :
Under Transparency you can simply think of the communication the Project is doing with the community ( even Business focused Projects may have great communities ). Things like reports, research and updates on innovations the Project is doing. Things like Financial reports( of the Project, where money is spent, where it is allocated ), Collaborations and Partnerships with other Projects or Companies. Research could be in form of studies made by the Project that would point out Problems that the Project is trying to solve. These studies could be in collaboration with other Projects and could also be peer reviewed to give them more legitimacy. If a Project has a newsletter / blog / podcast to bring the news to the community in a complicated form ( technical updates ) and in a simple form ( updates that are explained simply so that everybody can understand ) it is a very good sign of Transparency.
This might be complicated if you are not a developer. But you can always ask other people and their opinions about the Documentation a Project has ( one way to do it was described in the previous Article “Investing in a Financial Revolution : How I do it ( Part 2, Defining Research )” and it can be as simple as asking in a Forum or a Discussion Board ). Projects can then be described as developer friendly ( very good quantity and quality of Documentation, many Tools provided and developed by independent developers and the Project themselves ) or developer hostile ( pretty much the opposite ).
- Community Engagement
There are many ways to “Engage” with the Community. Things like Discussion oriented Forums and Boards, presence in Discord / Telegram and other types of instant messaging Platforms focusing not only on development but also things like Community Awards, Contests, Giveaways, Hackatons, Contributions Awards, Grants Programs ( for many different things ) and many more. Presence of Security Audits ( IT Audits ), Code peer-review and contributions could be considered Community Engagement and are a very healthy for a Project ( open-source Projects only, most of Cryptocurrency Projects fall into that category ).
- Innovation Strategy
Last but not least is the pace of Innovation. This can be difficult to judge and understand if you are new to the Industry. But there are Projects that simply fail or refuse to Innovate and keep up with the exponentially growing Cryptocurrency Industry. You can Analyze the pace of the Development ( creation of new things, solving Problems in the code like vulnerabilities ), Adaptation ( how a Project responds to a Business Partner requiring certain parameters and prerequisites ), approach to Scalability ( the more the Product is being used, the better the system needs to be ) and Risk Assessment ( if a Project thinks about the Risks a change might do to the ecosystem and also thinks about Problems that might arrive in the future ).
The Big and the Classic
As much as I want to avoid giving any sort of advice, it is not possible to give a base Investment Strategy into this Revolution without this section. Here I will give you a rundown on how to engage in a Passive Investing Strategy in the Cryptocurrency Industry.
Disclaimer : Here I am not giving you advice nor am I advertising anything. I will simply give you 2 examples of Projects and try to give you an Idea of what you can expect from them. You can start by Investing in them but you are doing so at your own Risk. So before you are ready to Invest in this Financial Revolution be sure you have a basic understanding of Blockchain and Cryptocurrency and make sure to read up on many different Sources to avoid being prey to Bias and Disinformation. It is also VERY important to understand the basics of cryptocurrencies because you need to exercise basic Cyber-security practices. There is plenty Information and Education on these topics.
These are the Two Cryptocurrency Projects you can start your Investment Strategy with ( they are not sorted in any order ) :
- The big : Ethereum ( Coin Ticker ETH, Official Website )
- The classic : Bitcoin ( Coin Ticker BTC, Official Website )
The main reason I have chosen Bitcoin and Ethereum is because they are the oldest in the field. The Cryptocurrency evolution started with Bitcoin and big innovations like Smart Contracts, Decentralized Applications and Decentralized Finance were facilitated by Ethereum. The idea of smart contracts was proposed before Ethereum even existed, but Ethereum as a Platform made it easy to create smart contracts which in turn made possible the creation of various Services and Projects that currently run on it.
The Fundamentals of Bitcoin, a small Analysis
I suggest you read about Bitcoin’s history to understand the purpose of its creation. But to put it simple Bitcoin falls under the Category of : Community Oriented Utility, which means :
- It does not focus on providing Businesses with a Service ( Businesses can still use it if they so choose, there are however much better options )
- It is a Utility only Project ( does not support smart contracts, you can only send Bitcoin from one wallet to another )
- Community funded Project ( runs on donations from the community. Community can also contribute to its development )
- The only Utility of the Bitcoin within the Ecosystem is to pay for transactions ( see “Mining” section )
Now I would like to share with you points of critique about the Project. In my opinion it is always important to start with the negatives before going into the positives, because then you have an idea what Problems need to be solved for the Project to be more successful.
- Lack of Innovation
New things have been developed to make Bitcoin better over the Years ( like a Layer 2 Solution called “Lightning Network”). But it has been very underwhelming ( you can search over the Internet on criticism about this solution and lack of additional solutions to tackle other Problems ).
A recent study “A Cryptoeconomic Traffic Analysis of Bitcoin’s Lightning Network” by the Institute for Computer Science and Control (SZTAKI) Hungary, found out that : “First, the participation of most router nodes in LN is economically irrational with the present fee structure; however, signs of sustainability are seen with increased overall traffic volume over the network. By contrast, at the present level of usage, if routers start acting rationally, payment fees will rise significantly, which might harm one of LN’s core value propositions, namely, negligible fees”. Which basically suggests that if Lightning Network will have more Volume, aka Participation, it may help prevent the disruption of the core Lightning Network’s proposition ( lower fees for transactions ). At the current state it has not been able to tackle big Problems that Bitcoin suffers from, namely : Transaction fees and Transaction times ( second Problem is not related to the above Research but you can experience both these Problems yourself ).
- Concerns about true Decentralization
It is true that anybody can be a participant in the Bitcoin Consensus, the current majority of Bitcoin’s Hashrate ( in a Proof of Work Consensus Hashrate can be seen as Power. The more computers join this Consensus the stronger it becomes ) is concentrated in one Place. Usually whoever controls the majority of the Network’s Power can control the Network itself ( Bitcoin Network in this case ).
A study made in 2020 called “Bitcoin Power Analysis Hashrate Implications and Miner Economics”, by Bitooda found out that : “About 50% of 9.6 GW global mining power capacity is likely in China; the US is at ~14%; capacity utilization is ~ 67%”.
- Concerns about Scalability
You can read more about this Problem in this Wikipedia Page. What it basically means is that Bitcoin, due to lack of innovation, will be harder to use if more people use it. Currently, different Cryptocurrency Platforms even Tokenize Bitcoin to avoid its Problems ( basically create a smart contract that upon receiving real Bitcoin issues another coin that has the same value, kind of similar to a Derivative. Users are then able to avoid Bitcoin’s Problems, namely speed and transaction fees by trading, sending or using this Bitcoin Derivative Coin on that Platform )
- Concerns about Environmental Impact
Many studies like this one : “The Carbon Footprint of Bitcoin”, ( by Christian Stoll, Lena Klaaßen, Ulrich Gallersdorfer ) suggest that “The corresponding annual carbon emissions range from 22.0 to 22.9 MtCO2. This level sits between the levels produced by the nations of Jordan and Sri Lanka”.
- Concerns about Purpose
Due to the fact that bitcoin is slow and has very high transaction fees many have questioned whether Bitcoin’s purpose is to be a Store of Value. There are many critics that argue against it and data that shows that “Days when it would have been profitable to buy BTC compared to today’s price is 97%”.
Make sure to make your own Research on this topic and decide for yourself.
The Fundamentals of Ethereum, a small Analysis
I also suggest you reading about Ethereum history to understand it better. For me Ethereum falls into the Category of a Community Oriented Platform which means :
- Since it is a Platform things can be built on it. ( This allows Projects that are focused on providing Services to Businesses be born on Ethereum and thus give it more value ). To understand why Platforms are so powerful I highly recommend you to read “The Rise of Successful Platform Businesses And Why They Work”, by Investintunisia.com and “Characteristics and success factors of digital platforms”, by Scientific assistance for AUTONOMICS for Industry 4.0 iit Institut für Innovation und Technik at VDI/VDE Innovation + Technik GmbH Alfons Botthof.
- It Facilitates creation of new Projects with innovative Ideas that could benefit the whole Industry ( new Projects can use the benefits of the ERC-20 Token Standard on Ethereum to create their own tokens on that Platform, thus avoiding writing a whole Blockchain from scratch ).
- Ethereum is “run” by an Ecosystem ( which includes the Ethereum Foundation and the Community in General ).
- At the moment of writing this article ( 10.2020 ) : The only Utility of the Ethereum within the Ecosystem is to pay for transactions ( Services / Projects that run on Ethereum must also pay ETH for transactions ). However Ethereum 2.0 aims to switch to Proof of Stake Consensus Algorithm which would bring usage of the ETH Token to improve the security of the Blockchain ( something called Staking )
- Ethereum ( and other Platforms ) is a gateway into Decentralized Finance. An interesting Article about this : “Global Debt, Ethereum and a new Open Financial System”, by Anthony Bertolino ( No paywall version ).
An important takeaway is to understand that Ethereum focuses on building and creating. Since it is a Platform it will be less viable to be used as Utility ( for that purpose there are a lot of other Cryptocurrency Projects. Some even being fee less, Eco friendly and almost instant ).
Criticism also exists for Ethereum despite it looking so great. Since it is a Blockchain with Proof of Work Algorithm it inherits all the Problems of Bitcoin ( except for Purpose ). At the moment Ethereum is the biggest Platform ( being best or worst is another question ) and has the most Projects running on it, all of them suffering the consequences that come with the Problems above. This created additional obstacles for Decentralized Finance Projects that are built on Ethereum to have many issues ( such as extremely high fees ).
Another point of criticism is the slow innovation pace at which the Project is going. Ethereum 2.0 was promised for Years and is only being released now ( planned for end of 2020 / beginning of 2021 ).
You need to keep in mind that there are Cryptocurrency Projects that do what Bitcoin and Ethereum do but with a much better approach. They may be superior but at the moment Bitcoin and Ethereum have what’s called the “first mover advantage”. The Cryptocurrency Industry is in its infancy and everything takes longer to be developed and adopted. With time it is impossible to tell if these 2 Projects will still lead the Global Industry. They will however be profitable if you invest ( note that i said “invest” and not “trade” ) in them right now, because this Revolution has only just began.
As a Passive Investor your Strategy can also consist of Investing into an Index Fund. Instead of Investing into singular Cryptocurrency Projects you invest in a Fund that has many of these Projects at the same time. This way you are directly investing into a big chunk of the Cryptocurrency Market without the need to learn about how every single one of the Project’s Blockchains operate and have to worry less about Cybersecurity Practices.
There are many Companies that offer Cryptocurrency based funds for Institutions / Businesses and even small Investors. You can even buy these Index Funds on Cryptocurrency focused exchanges ( for example Bitpanda announced its Cryptocurrency Index Fund in September 2020 ). There are many more options so be sure to do a thorough Research and find the best place to buy it for you.
Having a Passive Investment Strategy in this Financial Revolution can be as easy as buying the Major Cryptocurrency Coins or buying an Index Fund. Having an Aggressive Investment Strategy requires a lot of reading, research, critical thinking and decision making. This Industry is only just beginning to expand and it has had exponential growth in Technological / Innovation aspects and even in Acceptance / Adoption aspects. There is always more and more educational material, usage of cryptocurrency is becoming easier and becoming an Investor has never been easier. It is up to you to decide whether you want to ride this train to its destination or will you rather meet it once it has arrived, because it will get there whether you ride it or not.
This content is for Information and educational purposes only and should not be considered investment advice or an investment recommendation.