Should you invest in a Cryptocurrency?
In the last few years, traditional currencies such as the US dollar, the Euro, and the Yuan have been joined by a crop of digital currencies called cryptocurrencies. There are hundreds of these cryptocurrencies, though a few have gained far more attention and use than others. The two most popular of this need breed are Bitcoin and Ether.
These currencies remain highly volatile, which has transformed millions of users — often unwittingly — into currency investors. While most people aren’t aspiring to be a crypto-equivalent of George Soros, use or possession of cryptocurrencies currently necessitates some consideration of the potential gains and losses involved. Moreover, it presents an investment opportunity that many would never have ventured into with traditional currencies.
All of this raises the question, should you invest in cryptocurrencies?
The answer depends on your own risk-reward appetite and the actual risks and rewards involved. We can explore the latter through an analysis of possible future scenarios. I’ll focus my analysis on Ether (ETH), which is currently undergoing a period of higher investment and corresponding volatility. Here are four such scenarios:
Strong Bull case: ETH grows to rival fiat currencies. The strong bull case for ETH is that it eventually attains the circulation of traditional, fiat currencies. This scenario presents an 80–160x upside from current levels. I base that off the US dollar and the Euro each having about a trillion (USD) worth in circulation and the Yuan/Renminbi having about half a trillion (USD) in circulation as of 2008.
Weak Bull case: ETH grows to rival Bitcoin (BTC). The weak bull case for ETH is that its price appreciates to match the market capitalization of BTC with no or limited growth in BTC. This scenario presents approximately 3.5x upside from current levels.
Weak Bear case: ETH stagnates. The weak bear case for ETH is that the price stagnates. This would result in no loss other than the opportunity cost of not having your invested capital in a more productive asset.
Strong Bear case: ETH crashes or goes to zero. There is a possibility ETH could fall out of favor as a winner among the new cryptocurrencies, which would likely see a significant drop in price. Additionally, a possibility remains of some kind of catastrophic failure leading the price to collapse to zero, though the distributed nature of ETH ought to greatly reduce the likelihood of such an event.
I have no idea what will happen, yet there appear to be considerable forces that are adding momentum to the rise of cryptocurrencies. Given this and my expectation that ETH will be one of the winners among the new cryptocurrencies, I expect some combination of the bull scenarios to play out. For these reasons, I rate ETH as a buy if you’re willing to hold a risky asset with significant upside potential.
Disclosure: I personally have a long position in ETH. My business has also released a Bitcoin spam solution called BitBounce.