Usually, when people ask this question, they likely mean which cryptocurrency to speculate on in terms of its market value.
However, there’s more ways to earn with cryptocurrencies than just speculation.
Cryptocurrencies have many different designs and so, they can also give you returns in different ways. I normally categorise coins in the following manner:
- Market value coins
- Interest rate coins
- Profit sharing coins
Depending on what you’re trying to achieve, the answer to which altcoin will give the best return also changes. Let’s have a closer look at what I mean.
Market Value Coins
This is the most common category of token investment. The main idea is to buy a token that is expected to rise in value and then either hodl or sell it at a profit.
Investors that concentrate on this category are most concerned with:
- Are people likely to be hyped about this token
- Does the altcoin project have a capable marketing team / strategy
- Does the altcoin have a large and dedicated community to pump its value
- When is the token is listed on (major) exchanges
- Fundamental and technical analysis
Most of the tokens in this category usually only have a promise or an idea for the investor. In the better cases, they may have an MVP (minimum viable product). In the best cases, they already have a working product that you can use - but their price is likely to then already reflect that.
The tokens have functions in addition to market value of course, but they may not interest the investor at all. The biggest gains are usually made from undervalued altcoins that (thanks to the above) caught the speculation speed train. Hodlers are also hoping that the project solves a real life problem, so that the token remains relevant in the future and upon which they speculate for the long term.
Interest Rate Coins
A more wholesome way to earn revenue from cryptocurrencies is through investing in coins that give holders an interest rate for owning it.
This is also called staking or minting. And it’s the form of mining used in Proof of Stake cryptocurrencies. Staking is an environmentally friendlier and more cost-effective form of generating new tokens (if you want to learn more, read here).
In addition to providing interest, staking also serves the noble cause of securing the originating blockchain and all its users.
Investors that concentrate on this category are most concerned with:
- What is the planned inflation rate of the cryptocurrency that forms the investor’s interest rate
- Does the token project solve a real life issue so that it will be needed
- Is the project capable of realising its goal
CLOAK, a privacy coin project from 2014, is a great example of an investment of this type.
If the wallet containing CLOAK is staked into the service of their blockchain, the project rewards every single coin holder with 6% on their holdings per year.
This is possible because, unlike most other Proof of Stake coins, CLOAK does not use Master Nodes. This achieves a more fair and distributed blockchain that gives advantage to all investors, big and small.
Compare that to DASH, where you need 1000 DASH to function as a Master Node. At current price, you only benefit, if you’re an early adopter or able to invest 1 million dollars.
What is the planned inflation rate of the cryptocurrency that forms the investor’s interest rate
The interest rate serves an important function for Proof of Stake currencies. In other words, the interest rate is also the planned inflation of the cryptocurrency or the amount of tokens by which the circulating supply grows each year.
CLOAK grows by 6% each year. Consequently, all of its investors that hold staked wallets also earn 6% on their amount of CLOAK.
There are economists who are concerned over the deflationary nature of Bitcoin and other cryptocurrencies with a limited supply. It is widely accepted in economic schools of thought that, at least in the current economic system, a deflationary currency would bring the growth of economies to a halt. Cryptocurrencies with a limited supply include no planned “growth”, which is another way to say, no inflation.
Investors concerned over this may find CLOAK attractive, because the annual inflation in CLOAK unwittingly bridges this economic concern with cryptocurrencies. This inflation also supplies CLOAK’s attractive return of interest in addition to its market value, presenting an opportunity to earn that is many times higher than through traditional investment channels.
NOTE: the debate over inflation vs deflation in cryptocurrencies is wide and it’s not a bad idea to get to know both sides of the argument.
Does the token project solve a real life issue so that it will be needed
CLOAK is one of the few strongly privacy driven cryptocurrencies out there. And privacy is the last human right we have forgotten to fight for. As quoted by Edward Snowden:
“Arguing that you don't care about the right to privacy because you have nothing to hide is no different than saying you don't care about free speech because you have nothing to say”
Yet, freedom of speech is inarguably important to most of us while privacy is a liberty we (relatively) willingly surrender.
We do this, because we are sold the idea that it’s necessary for our own security. But data suggests government agencies, like the NSA, have actually not achieved any better security from this. On the other hand, there could be a quite serious threat to democracy in allowing our privacy to be continually eroded.
I’m motivated to believe the case for privacy driven projects, like CLOAK, is quite strong, as it serves an important role in empowering citizens in the maintenance of civil liberty in a democratic system.
Check out this illustrative video on the topic with an extensive list of sources in the description worth reading on precisely this topic.
Is the project capable of realising its goal
When I first came across CLOAK, it ticked all the boxes I use in evaluating the long term sustainability of a cryptocurrency. Looking at the project and talking to some of the members, I was immediately drawn in by the tight and active community, strong developer team, purpose of the project and how well designed the project was.
Worth mentioning that the original team behind CLOAK has been replaced by a new one. After taking over the project, the new team found the previous code to be majorly flawed and incomplete. So they redesigned the original code and “built it up from scratch”.
You can chat with the team members directly on the dedicated CLOAK chatroom to find out more about the state of CLOAK today or check out the code, that was recently released as open source on their Github.
All in all, I believe CLOAK has what is necessary to do well in the future.
Profit Sharing Coins
This is the newest option to earn from cryptocurrencies. Cryptocurrencies in this category are designed to incentivise investors by sharing some of the profits of the project to its token holders. Think of them as loyalty programs or company shares that give you derivatives in addition to the market value of the token.
Investors that concentrate on this category are most concerned with:
- How big is the potential revenue capacity of the project
- Does the token project solve a real life issue so that it will be needed
- Does the altcoin project have a capable team to realise the project
KCS, the native token of the cryptocurrency exchange KuCoin, is an example of a good investment in this category.
If you own KuCoin, you own shares in the company, as stated in the ICO. So everyone that owns KCS is entitled to trading fee discounts as well as a portion of the revenue that the exchange makes from fees. The revenue divided between KuCoin holders is set at 50% of the fees.
KuCoin ticks the relevant boxes for being a great example of a Profit Sharing Altcoin project. You can read my full breakdown for KuCoin here: Which cryptocurrency should I invest in, in 2018? Why?
So, as you can see, there are a number of ways to earn from cryptocurrencies beyond simple speculation. I aim to answer questions in a novel and thought-provoking manner. If you found this article helpful to you, let me know with an upvote!
Which category of coins are you most likely to invest in? I look forward to reading your comments.
Original article published on Quora here.