2018 has already been another stellar year for organizations raising money for blockchain and cryptocurrency projects. While initial coin offerings (ICOs) reportedly raised more than $3.69 billion in 2017, the total amount raised this year already stands at a staggering $17.25 billionin late July, according to CoinSchedule.
Should the current trend I’ve observed in crowdsourced funding for technology companies continue, it will be important for investors to discern the nuances of investing in blockchain technologies and the virtual assets created on top of them, as ICO investors usually receive virtual assets in the form of coins or tokens in return for ether or bitcoin. Here’s what you need to know about common blockchains and assets.
Fundamentals Of Currency
To understand cryptocurrencies, investors should first recall the fundamental tenets of currencies: They are typically units of measurement, stores of value and mediums of exchange. Blockchain-based virtual assets — such as cryptographic tokens — often demonstrate these three characteristics of currency. However, as an investor, I advise you to consider if and when these functions are only a byproduct of the objective inscribed by the creators into the asset’s software code before investing in a cryptocurrency.
Ether is a virtual asset on Ethereum. Even in the current bear market, one ether trades at about $292 as of this writing, according to CoinDesk. That puts the market cap of the Ethereum blockchain at $29.66 billion — which isn’t far off from the current valuation of NASDAQ-traded Vanguard Total Bond Market ETF.
Ethereum’s Virtual Machine, which allows developers to write programs called “smart contracts,” executes if the user makes a payment in its native currency ether. These transaction costs on the Ethereum blockchain are consequently labeled as “gas.” Like its real-world counterpart, gasoline, I believe this virtual gas should be valued by investors — not for its currency properties or inherent value but for the utility it fulfills in the Ethereum network. The more applications that are being built and used on the blockchain, the more demand ether is likely to have.
EOS is the virtual asset native to the recently launched blockchain EOS.IO. While providing similar functions as Ethereum, users of the EOS.IO blockchain are not required to pay for transactions in the blockchain’s native asset, “EOS.” Block.one, which raised a reported $4 billion to fund the launch and rollout of EOS.IO, has according to a July 2018 report allocated about $700 million to grow the EOS.IO ecosystem. Like with other cryptocurrencies, one benefit to investors is that EOS token holders may receive free tokens from projects funded by venture firms supporting blockchain in what is referred to as an airdrop. I believe investors in Ethereum’s ether might also find it valuable to keep at least a small number of EOS in their digital wallets as an easy way to keep track of applications being launched on EOS.IO.
Tokens On The Ethereum Blockchain
The Ethereum blockchain provides an easy-to-navigate, token-generation interface referred to as the ERC20 Token Standard. This standard ensures that all people who control electronic wallets that comply with this standard can receive new tokens generated this way. These tokens can also easily be listed on exchanges that support this Ethereum standard, and most of the more than 200 virtual asset exchanges do.
Tokens created by software engineers on the public Ethereum blockchain are usually coded to fulfill a specific function, such as triggering an event, allowing access or assigning other rights. These tokens are therefore not created as “units of measurement.” Consequently, I advise investors to value these tokens according to the overall validity of the system they are being deployed in, using startup investment criteria such as the state of the technology, experience of the team and product market fit. Good starting points for an investor’s research are the LinkedIn profiles of the team members (for qualifications) and activity of the GitHub repository of the project (to track progress). Positive signs are teams led by previously successful technologists and depositories with code development stretching back over a year or more.
The Bitcoin blockchain and its currency, bitcoin (the lower case “b” differentiates the currency from the blockchain and concept), is identified by its original creators in their 2008 whitepaper on the currency as electronic cash (registration required). However, unlike fiat currencies — which are created continuously and as needed by governments — bitcoin’s total supply is limited by code to a total of 21 million, making bitcoin inherently scarce. Even though a number of major currencies accept bitcoin as a form of payment, most signals seem to suggest that bitcoin is mostly bought for its “store of value” function. I recommend, therefore, that investors approach bitcoin purchases in the same manner as they would approach the purchase of gold: as a hedge against their stocks or bond holdings.
A few virtual assets were created for the specific purpose of functioning solely as a cryptocurrency. These cryptocurrencies include Zcash, Dash, Monero and Bitcoin Cash. Zcash publishes transactions on its public blockchain, but the currency’s privacy features enable users to conceal the sender, recipient and amount being transacted. Dash —launched as “Darkcoin” — also provides privacy functions to users and is using a self-governed organizational structure referred to as a Decentralized Autonomous Organization.
The value of any currency is mostly determined by the soundness of its monetary policies and inflationary tendencies. Investors seeking to add cryptocurrencies to their portfolio should familiarize themselves with the government models of the blockchains these assets are being created on and follow their specific use cases, which can generally be found in the whitepapers published by these projects. Mainstream adoption, such as when well-known merchants accept the currencies and when U.S. exchanges such as Coinbase add them, is also a positive signal for investors to look as they build a cryptocurrency portfolio.
I believe that blockchains and their applications, such as cryptocurrencies, are likely to play a central role in the future of any investment strategy. However, investing in these assets is not yet well understood. This is likely in part because of their nascent history and because of contradictory handling by government agencies in the U.S. and abroad that seem to incorrectly conflate cryptocurrencies with other blockchain-based assets and functions. I advise investors to look at each blockchain project’s individual merits. They should use standard venture investment criteria such as the team or community supporting the technology, the size of the market opportunity and the current development status of the product while differentiating cryptographic currencies from cryptographic assets.