Bitcoin, Dogecoin, and Ethereum have all been trading on, or maybe even above, Cloud Nine since the turn of the year as the crypto currencies enjoy massive gains on the year.
And while crypto currencies remain as volatile investments, they have slowly gained acceptance in consumer markets as an increasing number of companies have begun accepting payments in the currencies. Most notable is Tesla (TSLA), whose “Technoking” (CEO) Elon Musk announced that they would begin accepting payments in Bitcoin earlier this year.
Tesla’s announcement was far from the first, with Amazon-owned Whole Foods (AMZN), Starbucks (SBUX), Overstock (OSTK), Home Depot (HD), and others also allowing payments in cryptocurrencies to varying degrees. Though, if you’d like to purchase your coffee with BTC, you’ll need a separate app called “Bakkt” to convert your BTC into USD to reload your Starbucks card.
We’d hardly call Starbucks’s on-the-fence-acceptance of Bitcoin a win for cryptos, as you could already do this via other websites that allow you to purchase gift cards with cryptocurrencies, but a company-endorsed method - even if it is a pain in the neck - does point to a tad bit more acceptance of the coins.
These half-hearted concessions, as well as the few companies that have already fully accepted a crypto or two, and tweets from the Dogefather Elon Musk and Dallas Mavericks co-owner Mark Cuban, have all sent crypto investments through the roof.
According to Cuban, and really any crypto investor, the key for these cryptos to becoming legit is that companies continue to accept them more and more, and that people spend their cryptocurrency holdings. The more usable your DOGE, BTC, and ETH become, the more the cryptocurrency becomes an actual currency.
So, with potential for crypto to become an actual currency, with real-world utility, there becomes the opportunity that holding the most-desired cryptocurrency could actually be a good long-term investment. Crypto proponents have long argued that because the amount of any individual crypto currency is usually fixed, the coins should be a hedge against inflation in government-backed currencies, which are often referred to as "fiat" money. If a particular crypto currency were to gain widespread acceptance, a fixed supply and increasing demand would send the value higher relative to more traditional currencies. This could create a self-reinforcing cycle as more and more people transition to the cryptocurrency.
However, just like how there are very differing opinions on money supply at various government treasuries across the world, this too exists in the world of cryptos.
The Gold Standard
Bitcoin, the original crypto currency and by far the most widely accepted and known crypto, is run on the blockchain. The blockchain users "miners" on powerful computers to complete transactions. The miners solve complex math problems and, when solved, the miner earns some cryptocurrency and the "block", or transaction, is added to the blockchain, or ledger. Furthermore, all of the nodes must be in consensus and validate the solution before the transaction is added to the blockchain. This makes it virtually impossible to hack and falsify transactions because, in order to do so, one would have to control 51% of the network in order to falsely verify a transaction. Of course, this also makes reversing any accidental transactions impossible.
Technicals aside, what separates Bitcoin from Dollars is that Bitcoin is currently limited to 21 million tokens, with nearly 19 million of them having already been issued. This limits the amount of the currency that can enter the market to a finite amount. After every 210,000 blocks, the BTC reward for solving the problem is cut in half.
This means that, in the not too distant future, all of the tokens could be mined and there would no longer be any incentive for mining Bitcoin, or the incentive would be too low to be profitable. In either scenario, this would essentially crash the Bitcoin blockchain because it relies on miners all over the world to solve the math problem and the others to validate its answer.
The fewer computers vying for the coin reward, the less secure it becomes as operating 51% of the nodes becomes an attainable goal, while transactions would take even longer to be completed. Current transactions times are between 10 and 20 minutes on average.
So, we aren’t sure there is a real future where you buy groceries with Bitcoin, under its current model. But, we already don’t purchase groceries with gold bullion, so, perhaps, this was not really the end game to begin with.
Modern Meme Theory
Dogecoin, which was started as a joke, but has seen a rapid increase in value this year, takes a different, more modern fiscal approach to ensuring that its blockchain maintains secure. The currency adds 5 billion coins per year, effectively using inflation to help ensure safety and security of transactions on its blockchain. Bitcoin and other coins are designed to be completely mined by the year 2040, which makes the long-term feasibility of these coins rather iffy. By incorporating inflation, Doge coin is able to ensure that, if miners keep mining and people start/keep using DOGE, that the coin will be usable 19 years from now.
However, despite having a more modern answer to the question of inflation, Doge still has a huge disadvantage to Bitcoin and others. First, Bitcoin predates and dwarfs the meme coin. Second, creating a crypto currency of your own is fast and easy, so at the end of the day, someone could come along and make a better-managed coin - or a more memeful one - that eradicates Dogecoin’s utility.
The Widely Applicable
Ethereum while it does also use a blockchain, is an entirely different beast all together. Ethereum is designed to more or less as fuel for creation of decentralized applications and smart contracts. This technology is wide-ranging in its potential applications and executes without any downtime, fraud, or third-party interference.
Ethereum’s smart contracts and decentralized applications were created with a separate goal from that of DOGE and BTC. While those two aim to being currency-alternatives, Ethereum aims at facilitating "immutable, programmatic contracts, and applications via its own currency."
This means that, unlike the others, you aren’t investing in Ethereum on a bet that it will become a widely accepted currency, rather you are investing in the technology and that it will be widely adopted for completing transactions and creating applications. A bet on Ether is a bet that its technology will be in higher demand in the future.
So Should I Invest?
As with any volatile and risky investments, that is not my place to say. That is up to you and your belief in the technologies and the potential for a long-term adoption of cryptos. Even if you believe in the technology, the ease with which a new coin can be created makes tech start-ups look like oil refineries in that, it hardly takes any capital or expertise to launch your own cryptocurrency.
The most important thing to do, if you want to trade cryptos, is to not be a sheep investor. Currently, crypto investors jump from one to the next, pumping them higher and higher, before moving on the next one. On forums like Reddit, traders unabashedly say things like "We are pumping to $300 and then it’s onto the next one." These arbitrary price targets are deceitful in nature because, if everyone tries to sell at $300, no transaction will occur as there needs to be someone willing to pay $300 to buy it from you.
The people promoting these price targets, likely are looking to generate interest in the coin in order for someone to buy them out so they can make money, not so you all collectively make money. As the price gets closer, they sell out early to get their gains, while moving to the next investment, leaving others to continue buying the coins thinking that it is a game of buying and holding.
With that said, cryptos can offer gains that you just won’t get elsewhere, so if you want to invest, do it. Just don’t let yourself be another person's exit strategy and take any advice or random price targets with a grain of salt.
