Markets
Which Cryptocurrencies Will Survive the Market Crash?
As valuations soar to new highs, sentiment in cryptocurrency markets is increasingly being compared to the dotcom craze at the turn of the century. When that craze subsided, companies with no business model and multi-billion dollar valuations went bust.
The situation in cryptocurrency markets is not dissimilar. Not much is known about the vast majority of the 1,385 coins available on the markets today, but they are still being offered up to multi-billion dollar valuations. For example, Dogecoin, a cryptocurrency that was intended as a parody of the bitcoin boom, is valued at $1.6 billion at the time of writing. The coin has no clearly defined use case or feature to justify such a value. (See also: Bitcoin vs. Litecoin vs. Dogecoin)
Nolan Bauerle, director of research at CoinDesk, says that 90% of today’s cryptocurrencies won’t survive a market crash. Those that do will dominate the game and boost returns for early investors. And those returns are substantial, considering that we should believe RBC Capital estimates future cryptocurrency market at $10 trillion.
But identifying survivors in cryptocurrency markets is easier said than done. No single currency has gained popularity or is even close to it. Even bitcoin, the world’s most valuable and popular cryptocurrency, is plagued by scalability issues, such as high transaction fees and slow networks. (See also: 3 Dark Cryptocurrencies to Watch)
Jake Brukhman, founder of Coinfund, a Brooklyn-based blockchain investment and advisory firm, says fundamental factors are not reflected in current cryptocurrency valuations.
“It’s just a bet that information and awareness will lead to adoption (of said cryptocurrency),” Brukhman says. He says forward-looking sentiments about decentralized networks are reflected in cryptocurrency prices.
Cryptocurrency Rating
Christopher Gray, co-founder of CapLinked, an enterprise software company, identifies three areas investors should focus on before committing their money to the asset class. (See also: How to Find Your Next Cryptocurrency Investment)
The first is the experience of the founders and project teams. The cryptocurrency and blockchain world may be in its infancy, but its roots are in established industries. For example, Ethereum smart contract tokens are used to connect things within established industries. As such, experience matters.
“If a project team member has no experience in cryptocurrency or blockchain, an investor should ask themselves: How does what they have done before make them qualified for this project? Have they at least been involved in the same industry,” says Gray.
Investors should also carefully examine the terms of the offerings. Two important points to consider in this regard are the amount raised and how much of it goes to investors. Conventional metrics applied to stocks do not apply to this evaluation. This is because cryptocurrency markets are an inversion of typical market paradigms in that founders may seek funding before they have a sustainable customer base or product traction.
“If someone wanted to change the entire world of finance and they only raised $5 million, there would be a huge disconnect between what they wanted to do and how much money they were raising,” Grey says, adding that the reverse is also true. In other words, the clearer a company’s focus, the better its prospects.
Finally, investors need to look at the technology itself. “If it’s just an idea, a white paper, with nothing built, you’re going to have to believe only in the team, and if that’s the case, it better be a really good team,” Gray says. “If a team has built a product, how does it work?”
This assessment comes with a caveat. Brukhman says cryptocurrencies are among the least interesting applications of blockchain. “We don’t have a good understanding of it,” he says, referring to how markets could be disrupted by cryptocurrencies. (See also: The 5 Weirdest Cryptocurrencies)
So which cryptocurrencies will survive?
A good place to start is the top 20 most traded cryptocurrencies. It is fairly easy to determine some notable survivors on this list if and when a crash occurs in the cryptocurrency markets. Bitcoin is the original cryptocurrency and is quickly emerging as a store of value. Its blockchain and codebase have also spawned offshoots, such as Litecoin and Bitcoin Cash. Both are striving to become the preferred cryptocurrency for everyday transactions. The world of decentralized applications or Dapps on Ethereum is rapidly gaining traction and is responsible for a number of tokens, such as Populous, that are built on its platform.
Others, like Dash, have made similar claims and carved out niches in emerging markets like Zimbabwe and developed economies like Spain. NEO may prove to be the dark horse. It is targeting the smart economy and is working closely with the Chinese government to grow the cryptocurrency ecosystem in the country. It has also announced a strategic partnership with Microsoft China and has collaborated with entities like the Japanese Ministry of Economy.
Moving down the list, however, we see cryptocurrencies where investors will need a higher risk tolerance. For example, TRON, a cryptocurrency that has recently surged, does not have a product in place and its founder is relatively inexperienced. Likewise, Request network claims to be the future of commerce, but that vision itself is actually a recent shift by an online money transfer aggregation service. Cryptocurrency White paper announces multiple use cases for its coin, from the Internet of Things to online payments to implementing business logic for government regulations. But the startup has little to show in terms of partnerships or experience in those areas.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, you should always consult with a qualified professional before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of any information contained herein. As of the date of this writing, the author holds small amounts of bitcoin, bitcoin cash, and ether. It is unclear whether he holds any other forks of bitcoin.