I was glad to see a lot of interest and follow up questions and comments from readers on the Blockchain post last week. As I mentioned in that post, I have been spending the better part of the summer reading voraciously and learning anything and everything I can on the topic. This area of technology has completely grasped my imagination and I can't help but try to make sense of things currently and envision what the future economies will look like. Rest assured, I think most industries will be disrupted – some for the better, some for the worse in the coming years/decades as the blockchain tech improves rapidly.
I’ve known about blockchains for a few years now, but never really took a deep dive as I had no vested interest. But now the technology has advanced quite a bit and so has the hype. To motivate myself to read and learn more, I started off earlier this summer with some skin-in-the-game. I decided to finally take a plunge and open a small investment in cryptocurrencies.
Why Invest in Cryptos?
In addition to the obvious reason of making money and retaining purchasing power of the funds, it is a fantastic diversification asset class. Regular readers may be aware that I am a big fan of diversification as a risk mitigation tool and have covered various topics and ways to diversify assets. Almost every person who is familiar with the crypto market, if they are being honest with you, will tell you that digital assets are here to stay. We are in it for the long haul. The currencies of today — Bitcoin, Ether, Litecoin, Ripple, Dash etc may or may exist exactly in their current form 10-20 years from now, but there will be some form of digital asset in use by the masses.
Digital assets, such as crytocurrencies, provide an extremely unique diversification aspect to any portfolio. They have absolutely no correlation to other asset classes — which is what we desire when we diversify. In this crazy world, where investors fall over themselves to buy negative yielding government bonds; or cheer when companies raise debt in order to pay out dividends; or correlations out-of-whack based on traditional models; there is a gap that is filled by digital assets. This needs to be a big draw for investors to the space, if not already.
My Investment So Far
Back to the topic of what I’ve bought so far. This is by far not a large investment. In total my current investments are less than $1,000. I am yet to find an efficient way of buying cryptos as Coinbase charges 4% in transaction costs. I am familiar with a few other services such as GDAX (which is actually owned by Coinbase and is cheaper), Gemini, Shapeshift, Kraken etc, but looking for something more catered to the Canadian market — as I do not want to convert funds to US$ and lose again on conversion costs. For now, the hunt continues…
But nonetheless, even with the small investment, I decided to open a Coinbase account and bought my first crypto back in spring. Which cryptos did I pick? Instead of going with the obvious choice of Bitcoin (BTC), I decided to go with the next two most popular cryptos — Ether (ETH) and Litecoin (LTC).
Why ETH and LTC instead of BTC?
I feel that I missed the boat on BTC as it has run away as the de-facto store of value and unless I see a massive crash in BTC, I don’t want to chase it. Who knows? I could be completely wrong here — as there are some investors who call BTC to go as high as $100,000. However, I think ETH and LTC provide more lucrative entry points.
The following chart from CoinMarketCap shows the market for the major cryptos as percentage.
Ethereum
Ethereum is currently developing at a rapid pace and has the concept of smart contracts built into the blockchain. This is more ideally suited for broader business adoption than something like BTC. Vitalik Buterin, the founder of Ethereum puts it:
“…whereas in bitcoin the protocol exists to maintain the currency, in ethereum, the viewpoint is much more that the currency exists to maintain the protocol.”
What the most lucrative aspect of the Ethereum protocol is that the smart contracts enable business to codify their business logic and make an impact. The protocol has a more general purpose use than blockchains such as Bitcoin, who’s focus is only on the currency itself. This is why some of the largest companies of the world such as IBM, Microsoft, big banks such as Scotiabank, UBS, JPMorgan (yes, even though Jamie Dimon may say so, JPM is deep into blockchains and is active in the community), etc are all part of the Enterprise Ethereum Alliance. I have watched this list grow by leaps and bounds just over the course of this summer, as companies clamor to join the alliance for fear of the unknown in the future that could potentially disrupt them.
The other aspect that traditional/conventional monetary thinkers like about ETH is that there is no theoretical max for the amount of cryptocurrency you can have. The biggest criticism for BTC is that there is a max of 21 million Bitcoins that can ever exist. Depending on who you are debating with, this may be considered a good thing while some will argue that this is terrible as it upper bounds economic growth.
Note that this does not mean that I think ETH will win the blockchain race and will obliterate others such as BTC, LTC etc. I think the future will hold/support hundreds of different types of blockchains and technology will develop to support and communicate across each other. In fact, there are a couple of companies that already have a prototype that can connect different blockchains to talk to each other.
Litecoin
Litecoin started off as a lightweight version of Bitcoin, and has a theoretical max of 84 million coins — 4x the number of max Bitcoins. It is also designed to be faster than BTC and has demonstrated to be quite utilitarian in the field. I like one analogy someone online had for BTC and LTC: “BTC is your savings account and LTC is your checking account”. Charlie Lee, the founder, has spearheaded the development and rapid adoption pace of this currency and recently demonstrated interop atomic transactions for swapping BTC and LTC — which is a major step towards further adoption and usage.
Other cryptos/token/ICOs
The world of cryptocurrency is huge. There are tons of public currencies and its hard to decide which one will see better adoption rate and grow over the years. The fact of the matter is that the network effects these digital assets go through, due to which their value increases are incredible hard to predict, borderlining on impossibility. To murky up the waters, there is more confusion thrown into the mix with token sales and ICOs — which I will be staying away from as there seems to be a cash grab in the space, with every company throwing shit at the wall to see what sticks.
There are still some wonderful companies that are trying to achieve some great stuff, but the sheer volume means its hard to separate the good from the bad. As a result, I have decided that sticking with the three major currencies — BTC, ETH and LTC are a decent entry point for anyone considering the option. I will be looking to creating a bigger portfolio if/when we see a correction in the space as I believe digital assets and these types of cryptocurrencies are here to stay.
What are your thoughts on the space? Do you own any cryptos? Which platform do you use? Leave and comment below.
Full Disclosure: Long ETH, LTC.
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