This article is the first of two that will provide some basic tools to help any crypto currency investor to assess whether a particular coin is likely to be a good investment. The points discussed are as applicable to Bitcoin as they are the smallest alternative crypto currency. I hope you find them useful.
What kind of coin is it?
The first thing to consider is what kind of coin is the coin you are looking at. Most coins fall into one of three broad categories;
• Currencies
• Platforms
• Applications
While there are exceptions, the above classification serves as a good starting point.
Currencies - Currencies are, exactly as the name implies, intended to serve as digital currencies, or to use another popular term, a digital medium of exchange. Bitcoin, the grand daddy of all crypto currencies falls into this category, but so do many other coins including Bitcoin cash, Litecoin, Zcash, Monero and numerous others. In order to be an effective medium of exchange a currency must be easily able to be transferred between wallets in a relatively short space of time.
Platforms – Platform coins are coins that are associated with blockchains that have been built to facilitate a specific purpose. Ethereum is the most well known of the platform coins, being a blockchain that is purpose designed to facilitate the execution of smart contracts. There are however many others including Stratis, Lisk and Neo to name a few.
Applications – Application coins are coins that facilitate the operation of a specific digital application. Siacoin is a good example of this. Sia aims to provide more affordable cloud storage solutions to individuals and businesses and Siacoin is the medium of exchange that facilitates the specific application that the team are trying to implement. Another example of an application coin is Bowhead (AHT) which is an application that is attempting to allow individuals to store and use their personal medical information more effectively.
Who are its competitors?
Once you have identified what your coin actually does, you can then assess who its competitors are. In the currency space there are many different coins all attempting to claim the title as the best digital medium of exchange. Taking this further you can break down the crypto currency space into further sub categories. These would include more general currencies such as Bitcoin or Litecoin, and privacy currencies such as Zcash and Monero. Bitcoin could be more accurately said to be competing with Litecoin then with Monero, as even though all three are trying to be adopted as mediums of exchange, Monero has different objectives than Litecoin and potentially aims to service a different market.
Whatever coin you choose, the number of direct competitors is a key consideration when developing an investment case for your coin. If there are many, many different coins all competing for the same role then the chance of your particular coin being the most successful, or successful at all, are even slimmer. If there are only one or two coins competing for a particular use case, then the chances of your coin being a success are much higher, assuming there is a use for this particular type of coin in the first place.
What is its competitive advantage or point of difference?
I have deliberately chosen to discuss this point here, as it suits the flow of the article better, but it arguably should have been the first point discussed, as it is likely to be the most important factor in determining if your coin is a successful investment or not. It is also very closely related to the point above in relation to competitors. Your coins competitive advantage is the thing that it can do better than any other technology in the market today. If your coin has no competitive advantage, or nothing to differentiate it from its competitors, then it will fail. Period.
So the first thing to do when assessing a coin is to think about whether you can see an ongoing use for the service this coin is trying to offer. Is there a market for this product? I recently read about a project that used a crypto coin to facilitate a real estate project. When you looked under the hood, the project was just a real estate project. It was my opinion that the developers just tacked a crypto currency onto the project to try and tap into the current crypto hype. It may well turn out to be a very successful business venture, but this will have nothing to do with the coin. This project had no discernible competitive advantage (in my opinion), and nothing to separate it from the many other real estate projects going on in the world today. So I passed on this as an investment.
This point is further illustrated by some more examples:
Privacy coins – Privacy coins are a specific type of crypto currency that have an enhanced focus on anonymity for its users. Zcash and Monero are two such coins. When making a decision about which coin you choose to invest in, you would need to have an understanding of the differences between the technology that underlies the two coins and be able to make an assessment of which you think is most likely to be successful. While you may decide to hedge your bets and buy both, you generally would not invest in one coin, if you felt the other had a clear competitive advantage, either technical or otherwise.
SiaCoin – As referenced above, Siacoin a specific crypto project that aims to provide affordable cloud storage solutions through the use of blockchain technology. While Sia has no competitors (that I am aware of) in the crypto space, it has several very serious competitors in Apple, Google and Dropbox. . Sia’s claimed competitive advantage is that it can deliver cloud storage via blockchain significantly more cheaply than its more traditional competitors. If you believe that it can, then it has the potential to be a very successful business and thus a very successful investment. Dropbox and Apple are serious competitors however and are unlikely to give up market share easily so Sia has quite a job in front of it. It’s competitive advantage will need to be significant to overcome the competitive forces arrayed against it.
What obstacles exist to the uptake of this coin?
Are there any significant technical obstacles to the success of the coin you are examining? A great example of this is Bitcoin itself. While Bitcoin is currently the dominant crypto currency globally, it has significant technical obstacles to overcome to live up to its promise as a medium of exchange. These issues are covered elsewhere in great detail, so I won’t revisit them here. Suffice to say that many market observers (your author included) believe that bitcoin is doomed in the longer term, due to its technical short comings. Other coins such as Litecoin, Bitcoin Cash or perhaps a yet to be developed crypto currency are much more likely to succeed longer term as global medium of exchange. Please not that this is not a recommendation to sell Bitcoin. The change won’t happen overnight and Bitcoin is likely to be around for a while yet. At some point in the future however, it is possible, if not likely, that other coins will replace Bitcoin as the crypto currency of choice.
Another example of a technical obstacle effects Siacoin. Sia uses blockchain technology to lease hard drive space off third parties in exchange for payment in Sia tokens. So if I have 1 TB of free space on my home computer, I can lease this to Sia in return for payment in Sia tokens. Sia then sells this storage in the cloud storage market to the end user. When I last reviewed this coin, the amount that Sia was paying was insufficient to cover the costs incurred by the third party to provide their hard drive to the service. Put another way, it cost you more in running costs to rent your hard drive space to Sia than you received in payment. The price of Sia has jumped recently and the economics of this situation may have changed accordingly, but if your business model doesn’t pay enough to encourage people to make their hard drives available, then your business is doomed to fail.
Some technical obstacles can be overcome, but when considering where to invest, an understanding of what needs to happen for a project to be successful and what obstacles stand in its way is crucial to determining the likely success of a given investment. If its clear that the obstacles are difficult to overcome, then it may be best to stay away.
In the second part of this article I will cover some other intangibles that can be looked at when assessing the investment case for a crypto currency investment.
Please note I hold positions in Bitcoin, Bitcoin Cash, Litecoin, Lisk, Stratis and Siacoin.
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