The stock market indices are in a “topping” behavior at the moment, with recent dips and spikes pointing to volatility. The investing environment in equities right now isn’t at its prime, and even real estate or traditional investments such as CDs are topped out. Individual investors confronted with stalling in these markets should consider cryptocurrencies and blockchain as non-traditional investment vehicles that will become commonplace and are poised to disrupt multiple industries.
Before moving into the investing specifics, some definitions are needed. Blockchain is a technology that allows people to send money or a contract without a centralized authority, while doing so in a completely transparent and unalterable manner. The simplest explanations for blockchain have been “spreadsheet in the sky” or “distributed trust platform.” Cryptocurrencies such as Bitcoin and Ethereum are powered by blockchain. These digital currencies are available worldwide and leverage blockchain technology’s unique attributes, such as transparency and immutable security that make cryptocurrency a truly global decentralized form of payment or device for binding contracts.
Interest in cryptocurrencies and blockchain shouldn’t be considered a passing craze that is merely headed to the dustbin of history. There are movements in dozens of industry sectors towards using blockchain to solve problems and streamline operations. For example, various firms are using blockchain to tackle the blood diamonds issue, and companies such as Samsung are exploring blockchain-based logistics platforms. Blockchain even has the potential to transform healthcare information sharing.
Bitcoin and the Alt Coins
The price of Bitcoin (BTC) rose precipitously in early 2018, only to fall back considerably. The pricing has certainly flattened out, and we should be entering a more mature growth phase. Over time, Bitcoin will do very well because it’s the Coca-Cola or Google of the industry. In other words, it’s the standard of the cryptocurrency space and should function as a kind of “store of value” with the benefit of quality compounded growth. Despite the changes that have recently taken place in the industry, such as ICOs falling and firms combining their services, Bitcoin has remained the primary currency method.
A different kind of potentially explosive growth is found within “altcoins,” which are simply coins that are an alternative to Bitcoin. These range in size from the established coins Ripple, Ethereum, and Litecoin to much smaller coins. Each of these coins offers a distinct set of features and benefits from Bitcoin. Perhaps they perform transactions faster or they’re designed to execute contracts. To understand the potential for any kind of specialized coin, consider the largest current currency that isn’t “money” — frequent flyer miles. The value of such miles dwarfs the Bitcoin market and represents a subset of currency that isn’t very liquid but massive potential. While frequent flyer rewards won’t all convert to cryptocurrency immediately, there has already been movement from some airlines that are exploring Bitcoin purchases for miles, and vice versa.
Many of these altcoins are presented through an Initial Coin Offering (ICO), which is essentially a cryptocurrency-based equivalent of an IPO for traditional stock rounds. ICOs involve a company presenting an idea for a business model and then offering their own cryptocurrency in exchange for fiat or established currencies such as Bitcoin or Ethereum. The company receives funding, and the investor receives newly created tokens with the expectation of pricing gains. Unlike stocks, there’s no ownership that comes with ICO tokens; instead, the investor is looking to gain access to the products/services offered by the company or exchange the tokens for Bitcoin and then fiat currency. It’s a truly global marketplace that broadens access to greater opportunities, such as allowing a baker in Korea or a teacher in Portugal the same chance to get into the “ground floor.” The tokens themselves are often integrated into the company’s entire “project” and model, so the entire ICO industry has the potential to democratize and transform the financial system.
The Impact of Regulation
What about risk? As the cryptocurrency and ICO markets have swelled during the past two years, there has been much more interest in regulation from the SEC. Several SEC-regulated cryptocurrency exchanges are coming out in the next year, which will likely lead to heightened mainstream interest. It’s a single sign that cryptocurrencies are here to stay, and that regulation is needed to remove a lot of the fear and doubt that plagued many ICO altcoin failures that were essentially “pump and dump” schemes.
Regulation of the exchanges will also encourage further growth from established financial industry players into the blockchain markets. Fidelity already offers a blockchain-related Exchange Traded Fund (ETF), and the ARK ETF (ARKK) has investments blockchain and another leading-edge tech. These types of funds are an excellent choice for investors who want exposure to blockchain without taking on the risks of unregulated altcoin investments through ICOs. A sound investment mix could be for investors to buy Bitcoin and a few of the other biggest cryptocurrencies as well as some ETF shares to capitalize on the growth of the broader blockchain. Once regulated exchanges work out the initial kinks, there will be considerable investing opportunities in 2019, as these exchanges offer some attractive ICOs that can pay off over the long term.
In the meantime, investors should certainly keep up with the latest news surrounding blockchain and cryptocurrencies, especially the ways in which companies are conducting use cases and eagerly integrating blockchain into their businesses. Resources such as CryptoCompare are helpful, as they provide real-time data on coins, ICOs and industry news. Staying informed is always a best practice in investing and having a broader understanding of the blockchain market can pay off handsomely in terms of finding quality investments.