Cryptocurrencies are not a short term investment. Period!
I woke up at 6.30 on a sunday morning because my mind had settled on this topic and I am finally now able to grasp the value of cryptocurrencies.
There has been a lot of hype around ICOs lately. Everyone wants to be part of what they perceive as a goldrush, and ICOs allow anyone to feel like an Investor on Shark Tank.
There is no doubt you can make an exponential return on your investment in an ICO, but here is some free advice: There are two Cryptocurrencies that have always been and will always be outperforming every ICO.
Bitcoin and Ether.
If you would have kept Bitcoin or Ether instead of investing it in an ICO, you would have gained more value than with 99% of the ICOs over the last 3 years. If you don’t believe me, go to https://icostats.com and take a look at any token older than 6 months. Find its increase in value and compare it to the increase in value of Bitcoin or Ether over time.
Short term gains are what investors love about ICOs, but to be successful you have to buy and sell a lot, and you will make a lot of mistakes doing so, especially with more and more ICOs coming out. If you are not spending your full day on trading but want to benefit from the value gain of Cryptocurrencies, stay out of ICOs and simply buy Bitcoin or Ether and just hold them.
One more thing, don’t say you “invest” in Bitcoin or Ether. By saying that, you demonstrate you do not understand the concept of these currencies. Bitcoin is designed as Digital Cash; to spend on daily transactions like coffee (although recent implementations don’t seem to support this idea from Satoshi Nakamoto anymore).
People compare Bitcoin to gold because it has a limited supply, which differentiates it from state issued cash or “fiat”. Fiat is only scarce for the individual, but not the central banks printing it. Satoshi Nakamoto does not use the term gold in his whitepaper and only used it to enhance Bitcoin’s capabilities as cash by adding a limited potential supply.(https://bitcointalk.org/index.php?topic=583.msg11405#msg11405 )
Ether, on the other hand is actually only meant to be the fuel for computational power. It is designed to keep the Turing Complete Ethereum Blockchain secure from attackers. For attackers it would cost too much to create useless functions that would clog up the system and the functions could never run endlessly, as they would run out of gas eventually.
Neither were originally designed for speculation but can be used for it, just like tulips once have been.
Now that I have this off my mind, let’s talk about the value of the ICO Tokens.
Why should someone invest in an ICO and how does the token generate value?
ICOs are great tools to generate liquidity for a startup to create their product. ICOs tend to be used at a very early stage of a product creation, and most startups have nothing more than a whitepaper. That makes it risky and speculative to buy the token, as an investor really doesn’t know how, when, or if the token will be finally used. When supporting an ICO and buying the token, you have to understand the functionality of the token, because this will indicate the future value it may create.
Most of the projects I have seen don’t want their token to be a security, and therefore use it as the means of payment in the product the ICO is funding. The next section in this post will only focus on the types of projects that will let you earn their token by using their product. I will not cover tokens that represent shares, dividends, gives you access to a system, or are simply prefunding a product like in crowdfunding (where your token gets burned once you redeem it for the product).
Imagine a platform where you need a specific token to use the services offered in that platform, or a token that gives you premium access to services, and in addition you can also participate by earning the token. (Examples are — Golem, Storj, KIN, Swarm City, and many more)
To me this is the most interesting model and showcases the novelty of having a token in the first place.
If you are able to create a service that is so useful to people that they don’t mind going through the hassle of acquiring your token, the value of the token comes from within the platform itself.
Let’s imagine for a moment that you cannot buy a token but only earn it. How would you measure the value of the token when it comes time to spend it? Most likely on the amount of work you have put into it acquiring the token. If it takes you 10 hours of work to earn 10 tokens you would measure its value by this amount of work it took to acquire it. So if you want to buy a product that costs 10 tokens it must have an equivalent value as the work you have done to earn the tokens.
This is the same concept you live by right now. You earn your salary in a currency that is based on the region you live in. You will always look at the prices of goods and services, measuring it against your income, denominated in your local currency. Even if you go to another region (on holiday for example) with another currency, you always compare prices by calculating them in the currency you received your salary in.
This concept becomes more obvious for people that have changed workplaces and receive their new salary in the new regional currency. This shifts your valuation of the goods you can buy. In the beginning you will constantly convert the cost for a product to your former currency, as this is most familiar with you. Over time though, by being exposed to your new regional currency, you get used to paying the price that your regional market will ask. This is still based on the value you derived from the work you have done.
The conclusion is, you should not compare the long term value of a project’s token based on a currency outside the system. You should measure it by looking at the amount of effort/work it takes to earn the token, and the amount of value you can achieve by spending it. In addition, and this is the selling proposition of blockchain, the spending process should be really simple, trustless, and with low transaction costs.
I am often asked about the volatility of cryptocurrencies and how this will affect the consumer appreciation of a product based on cryptocurrency. It took me quite a while to understand that actually the question/concern only has value if you constantly compare the cryptocurrency to an outside of the system currency. So if you always compare a cryptocurrency with the value of the Fiat currency, you will be exposed to the volatility of the currency. An analogy is if you live in the US, but you compare the cost for your grocery shopping in Euros every day. But nobody does that, unless you are there for a short term only.
If you stay within one system, and earn and spend money in that system, only the effort for acquiring/earning the token will determine the value of that currency to you.
But as I pointed out before, if you want to benefit from cryptocurrency you should not think short term, you should think long term. Crypto is here to stay.
Looking forward to your comments.
Thank you Matthew Carano and Griff Green for editing this piece.
Disclaimer: I like to simplify things. Nothing written in my blog posts is scientifically researched and only reflects my personal point of view. I use naive logic and have come quite far doing so.
