The Fundamental Flaw of Cryptocurrency Investing — The Motley Fool

Last year valid to be a record-setter for the cryptocurrency market. In just 12 months’ time, the total market cap of all practical currencies rose by almost $600 billion, which worked out to a more than 3,300% gain. At no point has Wall Street witnessed any item category benefit over 3,300% in a singular year before, nor will we expected ever see anything like it again in our lifetime.

Though cryptocurrencies have undergone their first “hiccup” in quite some time this year, they still move a lot to the list that investors can convene behind.

A chairman holding a intense golden lock, surrounded by latticework that represents blockchain technology.

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Catalysts galore in the cryptocurrency space

Perhaps no matter has been more earnest in attracting investors than blockchain technology. For those of you who are unknown with blockchain, we’re articulate about the digital, distributed, and decentralized bill that underpins most practical currencies and is obliged for logging sell in a pure and unalterable way. For the financial services industry, blockchain is a means to speed up the transaction validation and allotment routine while stealing normal banks from the equation. For other sectors, blockchain offers a new way of storing and observation information so as to lane products in genuine time or more firmly store and back up data.

Partnerships have also been another unchanging source of excitement. Ethereum, the second-largest practical banking by marketplace cap, has captivated approximately 450 members to the Enterprise Ethereum Alliance, many of which are brand-name companies from a horde of industries and sectors, in just over one year’s time. 

Meanwhile, brand-name companies like IBM (NYSE:IBM), which has been on the leading corner of blockchain contrast and development, has partnered with the likes of Stellar to assist cross-border payments in the South Pacific region. These are just two of what are expected hundreds of examples of how partnerships have vehement investors. 

Virtual banking trade and investment are also dominated by the sell investor. Since most all trade occurs on decentralized exchanges, and institutional investors won’t put their income to work on these decentralized exchanges, it’s authorised sell investors to control the show. The thing about sell investors is they have very singular means to gamble opposite cryptocurrencies (a routine famous as short-selling). As such, there’s a healthy bent for these sell investors to gamble on upside in cryptocurrencies, which has been another instrumental nonplus square in pulling marketplace caps higher.

A palm reaching for a neat smoke-stack of hundred dollar bills in a rodent trap.

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Cryptocurrency investing has a elemental smirch

But what if we told you that cryptocurrency investing has a pretty critical smirch — and that it expected isn’t any of the cadre of concerns you’ve probably listened about before?

Make no mistake, there are no necessity of issues with cryptocurrencies. For example, they miss the normal elemental metrics that concede investors to place “appropriate” valuations on assets. Without these normal metrics, digital banking valuations are more guesswork than anything.

Yet this and other issues aren’t what should worry cryptocurrency investors. Instead, the loyal elemental smirch of cryptocurrency investing is that people are putting their income behind the wrong asset. In other words, they’re shopping practical banking tokens, when the profitable item is the underlying blockchain.

In invulnerability of cryptocurrency investors, there aren’t too many ways to get your feet soppy in the digital banking space but shopping practical tokens. But the problem with purchasing tokens and presumption they have “value” is twofold. First, shopping tokens for a specific practical banking in no way gives the stakeholder tenure in the underlying blockchain. Second, even if a practical token and blockchain work seamlessly with one another, larger adoption of a practical silver doesn’t in any way meant that the underlying blockchain is more successful, or that the plan is generating more in the way of sales and/or profit.

Take financial services industry-focused Ripple as a good example. Its XRP silver shot into the stratosphere in January, quickly leading a $150 billion market cap after San Francisco-based Ripple announced a handful of deals. Some investors perspective the adoption of the XRP silver by financial institutions as a pointer that Ripple’s market cap should conduct higher, when in reality, XRP adoption has subsequent to no temperament on what Ripple should be worth. In fact, of the 3 products Ripple offers, only one — xRapid — uses the XRP silver as a means to yield on-demand liquidity in rising markets. With Ripple, and probably every other cryptocurrency, digital token adoption has little to no temperament on valuation.

A magnifying potion being hold over a change sheet.

Image source: Getty Images.

The only intelligent way to get cryptocurrency bearing in the item that matters

So, what’s an financier to do? Should you want bearing to the cryptocurrency space, the best means to do so is by purchasing commons batch in publicly listed companies on batch exchanges. In doing so, you’ll benefit tenure in the resources that matter, and at the same time, you’ll have entrance to financial stating information and balance-sheet information that can concede you to make a reasoned call on a company’s valuation.

Sure, you could conduct to a decentralized sell right now and squeeze the Lumens coins that IBM is using on the blockchain plan in the South Pacific. But, at slightest to this investor, it creates a heck of a lot more clarity to cruise shopping into IBM, which grown the blockchain plan in the first place. Stellar’s Lumens silver does zero more than act as a monitor to assist these cross-border sell being processed on IBM’s blockchain network. Given the low separator to entrance in the crypto space, it wouldn’t take much for IBM to rise the possess application token of sorts that could reinstate the Lumens silver at some point in the future.

Long story short, stop meditative of cryptocurrencies in terms of token adoption, and start think about the value of their underlying assets, which, in scarcely all instances, means their exclusive blockchain technology. Ultimately, that’s what’s going to matter.

Article source: https://www.fool.com/investing/2018/05/01/the-fundamental-flaw-of-cryptocurrency-investing.aspx