At the beginning, everybody must understand that cryptocurrencies basically vary from stocks. Stocks have intrinsic worth– they represent a real piece of a physical service. In the short term, stocks can swing up and down for no obvious reason, but long-term, as a company’s intrinsic worth increases or reductions, the stock tends to move in the exact same instructions. By contrast, cryptocurrencies have no intrinsic worth– they’re simply computer code. That makes future token rates hard to forecast.
Nevertheless, I think there’s a fundamental economic concept we can utilize to our benefit. It’s the principle I utilized when choosing to buy bitcoin and Ether (the tokens for the Ethereum network) in 2018. And it’s the same principle anyone can utilize to today to direct their thinking of any cryptocurrency investment.
Image source: Getty Images. Supply and need In economics, few concepts are as basic as the law of supply and demand. Price is determined by just how much of something is available (supply) and how much individuals desire or require it (need). When it pertains to cryptocurrencies, supply differs in each case. Bitcoin’s supply is popular, and bitcoin fanatics argue this proves its future worth.
However, supply is just half of the formula. Keep In Mind Beanie Children? Ty, the company that made them, regularly “retired” particular Beanie Babies, limiting their supply forever. This minimal supply inspired some collectors to buy the toys hand over fist, triggering their worth to soar in the ’90s. Some even fetched countless dollars. Nevertheless, Beanie Infants prices rapidly plummeted after their quick prime time– most still sell for a fraction of what they cost in the ’90s. However supply hasn’t changed; they still don’t make the discontinued ones. Demand altered. People do not desire them as much any longer, so they deserve less.
Many cryptocurrencies have known products. That’s exceptionally helpful. But an educated opinion of future token value needs a forecast for future need. Thinking through both supply and need led me to buy an equal quantity of bitcoin and Ether over the countless other choices. In my opinion, they’re the two probably cryptocurrency candidates to be in demand moving forward and the ones I would purchase today (however more on that in a bit).
Image source: Getty Images. Why I bought Ether I bought Ether since the Ethereum blockchain has real-world energy. While tokens can be utilized for digital payments, more practical things like wise agreements and applications can be constructed on top of the Ethereum blockchain. Consider it like a tank of gas. Sure, the tank of gas has worth. However it also has an useful use. Continuing this analogy, some cryptocurrencies are simply tanks of gas in engine-less worlds. However Ethereum’s blockchain is a gas-powered engine.
Ethereum isn’t the only blockchain network like this, however it’s arguably the very best known. That is essential due to the fact that blockchain networks gain from a network impact. Simply put, the more individuals use one system, the most likely it is more individuals will utilize the system. To me, if individuals were going to build upon existing blockchain technology, Ethereum is surely amongst the top prospects.
Many services already see the value of utilizing blockchain technology. And some, like DocuSign, are already building upon the Ethereum blockchain. To execute a transaction on the blockchain, you’re charged a fee in Ether. As more real-world applications are powered by the Ethereum blockchain, there will likely be an increasing demand for Ether to make it run. This might keep sending its value higher– its value is already up about 350% in 2020.
Image source: Getty Images. Why I bought bitcoin Bitcoin has less energy than Ethereum, but that hasn’t stopped it from preserving its title as the most valuable cryptocurrency on the planet. Some believe it might end up being a one-world currency, creating exceptionally high need. But to me, that sounds improbable. People don’t seem to be using bitcoin for deals however rather as a growth investment or as a digital store of value.
In my viewpoint, bitcoin’s need as a store of worth is far less than what it would be as a currency or some other everyday utility. That stated, bitcoin’s benefit might still be great given its supply is far more minimal than that of Ether. Consider there can only ever be 21 million bitcoin tokens. By contrast, Ether and many others have no supreme ceiling. Ether has yearly mining limits, which keeps brand-new supply rather in check. However bitcoin’s mining process is a lot more limited.
Every time there’s a deal on the bitcoin network, decentralized computer systems process it and the fastest computer is rewarded with new bitcoin tokens. Nevertheless, every couple of years the bitcoin benefit is cut in half, most just recently in May. This means miners are rewarded with 6.25 bitcoin tokens right now, as opposed to 12.5 earlier in the year.
Because there’s less bitcoin coming into circulation now, the price of bitcoin could go up if demand stays constant. An unexpected development this year is new demand is all of a sudden gathering from corporate entities. For example, Square just purchased over 4,700 bitcoin tokens. And growing business need, paired with the brand-new supply being halved, has actually assisted drive the cost of bitcoin higher in 2020– up over 160% year to date.
What to do
After considering the problem of supply and demand, here’s my cryptocurrency investing thesis: Both bitcoin and Ether have high chances of being used in the future. And their supplies are limited enough to send the worth of these tokens higher as need rises. I think that applies as much today as it did when I purchased bitcoin and Ether in 2018.
When I bought, I committed to holding for at least five years. I made that dedication due to the fact that, with 2 very speculative investments, I recognize this will likely be an unstable flight and I wish to guarantee I have actually given sufficient time for my thesis to play out. Nevertheless, because this is speculative, I acknowledge the value of cryptocurrencies could drop to no. Accordingly, I only invested a small amount. And even though it appears my thesis is playing out, I will not consider adding more even as rates increase. Because cryptocurrencies do not have intrinsic value, the danger is just too asymmetric for me.
If you like the promise of cryptocurrency however do not want the outsized danger, there are other methods to invest in the pattern. Particularly, there are stocks taking advantage of blockchain technology. This enables you to buy shares in real companies producing real profits from cryptocurrencies, rather than hypothesizing on things outside of your control.