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By iainbelcherSeptember 23, 2022In Uncategorized

Investing In Cryptocurrencies – Article 1

We currently live at a crossroads. The economic systems that emerged over the last century, which sustained some forms of stability, are now ironically becoming too big to not fail. Blockchain technology as an antidote to centralized controlled currencies is experiencing exponential adoption. The finite, secure, and decentralized characteristics of blockchain currencies are attractive compared to fiat currencies (currencies distributed and controlled by governments) and their undesirable features. Time will tell whether cryptocurrencies and blockchain solutions truly prove themselves to be the revolutionary and improved economic infrastructure that convinced proponents argue for. What is undebatable, however, is the existence of radical financial opportunities due to rapid adoption and volatility in cryptocurrency markets. Every new cryptocurrency project is a potential opportunity to invest early and experience a kind of rapid appreciation that makes traditional stocks look objectively boring. But not so fast. The projects that make it – so to speak – are massively outnumbered by the many more that fail. Because of this, sayings like “only invest what you are willing to lose” are tossed around the cryptocurrency space like water, often in the face of struggling investors. Given that money is currency – it flows. Blockchain currency is a deluge – stepping into which can take you to lands you could only dream of, but could also drown you. Low market cap cryptocurrencies are the Wild West, with no shortage of both unbelievable opportunity for massive success, but also risk, scams, fraud, “rug pulls”, and project failures. These articles explore the raging river of cryptocurrency investing – specifically in low market cap cryptocurrency investing. Readers interested in cryptocurrency investing will learn how far the rabbit hole goes. For those interested in getting involved – I hope to arm you with the information and toolkit to not only stay afloat, but to surf in the turbulent crypto waters.

Readers interested in cryptocurrency investing will learn how far the rabbit hole goes. For those interested in getting involved – I hope to arm you with the information and toolkit to not only stay afloat, but to surf in the turbulent crypto waters.

An understanding of the concept of market capitalization is critical if an exploration into this subject is to begin properly. Market Capitalization, often shortened to Market Cap, refers to the total overall value of a company – in Dollars. The easiest explanation of this concept is to imagine how much money it would take to purchase every share or token of a given stock/cryptocurrency. Market Cap provides an excellent data point to situate projects within the industry, and to make informed investment decisions. Market Cap plays an interesting role in the potential price appreciation of a project, determines its unique relationship to the market, and allows for more in-depth risk/benefit analysis. The key point to understand when getting a sense for the market terrain is that the bigger a project market cap gets, the more market energy it will take to double the valuation of the project – which mirrors the trading price of project tokens and cryptocurrencies. For instance, Bitcoin has a current market cap of $435 billion USD. For the Bitcoin price to double, it would take another $435 billion. Now let’s look at a smaller project – in this case, Energy Web Token ($EWT). Energy Web, the 300th largest cryptocurrency, has a current market cap of $75 million. With the market buying power that would take Bitcoin to double in price, Energy Web would 5,800X its current price. I know. That is an enormous difference. For a $100 investment, that shift would be worth $200 if invested in Bitcoin, and $580,000 if invested in Energy Web Token. This gives you a picture of the more lucrative investing potential of choosing lower cap coins. But this isn’t the only thing to consider. Firstly, the larger cryptocurrencies by market cap have established themselves as major players in the industry. Just as it would take immense market pressure to double the project’s valuation, it would also take immense market pressure to collapse the project’s asset prices. This makes larger cap cryptocurrencies a more conservative and “safe” investment compared to smaller cap cryptocurrencies.

Bitcoin Dominance

Another piece to consider when it comes to large vs small cryptocurrencies is Bitcoin Dominance. Bitcoin dominance is a tool used to determine, within crypto, what percentage of the total volume of buys/sells is occurring on Bitcoin vs Altcoins. When Bitcoin Dominance grows, altcoins get “rekd” (token values fall), and when Bitcoin dominance falls, altcoins “pump”. Furthermore, the lower the market cap a project is valued, the more not only Bitcoin Dominance affects the project, but also Bitcoin price action in general.

To start exploring the concept of Market Cap, head over to a cryptocurrency indexing website like Coinmarketcap.com or coingecko.com and investigate the list of coins on the homepage. They are listed according to their market cap size, organized high to low. By clicking through to a coin, you should toggle the “Market Cap” chart and view the project market cap over time. Compare that to the price over time. To deepen your understanding of the concept, head over to marketcapof.com where you can find out what a project price would be if it had the market cap of another project on the market: i.e., what would EWT price be with the market cap of BTC. Keep in mind, this isn’t as accurate as you can be by calculating it yourself. To do so, divide the market cap of the larger cap by the market cap of the smaller cap, then multiply the current price of the smaller cap by that number – and voila, there you have it. This does not factor in the change in circulating supply. Before we get back to market cap, we will discuss circulating supply…now.

 

Circulating Supply

Circulating supply is fairly straightforward, but how it relates to investing is important to cover. As the name implies, the circulating supply is the total supply of any cryptocurrency or token currently on the market. This equates to the number of tokens available to buy or sell. The number of tokens in circulation can change dramatically over time due to many factors. Most often, projects generate a finite number of tokens at their TGE (Token Generation Event), and prevent the possibility of minting more in the future for security reasons. Some factors that affect circulating supply are:

  1. Utilitarian tokens: Many projects use their token as a fundamental element of their digital solutions. For these projects, tokens will be added or removed from circulation over time as the needs of the solution change. More often, projects have large numbers of tokens that are slowly added to circulation rather than removed.
  2. Reward tokens: Reward tokens come in the form of tokens added to circulation, which reward individuals for participating in the project in some way. For example, Bitcoin has a finite number of tokens that will ever be minted. However, those who participate in validating transactions on the blockchain are rewarded in Bitcoin for the effort and computational energy they supply. When a specific block has been reached, the staking rewards are halved in an event known as the halving event. This continues until there are no further Bitcoin tokens that can be added to circulation, as the unchangeable programming of Bitcoin prohibits it. Reward tokens are used to encourage user participation in the decentralized operation of a project. Reward tokens can come in the form of a main project token, or a separate token minted specifically for rewards. Different ways to earn income via rewards through activities like Yield Farming and Staking will be explored in a future article.
  3. Token Burns: Token burns are planned events where tokens are removed from the supply. Token burns can be used to incentivize and reward long-term holders and supporters of a project. The incentive goes as follows: hold on to your tokens, when the burn occurs, there will be a deflationary pressure, resulting in a price increase.

So how does circulating supply affect prices? Simple. As much as government employed economists reassure taxpayers that there is no correlation between printing fiat currency through central banks and the effects of inflation, the truth is…. there just is. Increasing the number of tokens or coins into a circulating supply will mathematically decrease the value of the currency. Imagine you are stuck on a desert island with no land in sight. How you got there is unimportant to this thought experiment, but go nuts. Let’s say you have no idea when or how you can get off the island. What you do know is that you have a finite number of coconuts for food and water. Now, how does the number of coconuts on the island affect how valuable each coconut is to you? Think about it. If you have 10 coconuts, each coconut is incredibly valuable…. You will be rationing, protecting, and utilizing those coconuts in every way possible. But now imagine you had 500,000 coconuts. Is one coconut still as valuable to you now compared to the other scenario? Likely, not. Every time a coconut is added to the pile, the value of each individual coconut diminishes – this, in a nutshell (or coconut shell), is how inflation works.

Now when you are exploring cryptocurrencies by market cap, also begin to factor in the circulating supply of the token. Further, check out the project websites and other materials and find out what the plan is for the token supply over time. You will often find this information in the Tokenomics materials. We will talk about Tokenomics more in the future. So, it is important how much of a token is out there, and how the supply will change over time, but also how useful that token is. This is known as Utility.

Utility, utility. What is the point? Well, for starters, no better project exemplifies a clear utility than the original – Bitcoin. Bitcoin allows for a permanent, unbreakable, transparent, and validated blockchain of transactions. This allows for a decentralized currency that cannot be manipulated or corrupted by third parties. With the uncertainties and various external factors influencing the stability of traditional markets, Bitcoin is a needed solution. Furthermore, the more Bitcoin is adopted at-scale, the more the utility grows. For instance, it is quickly becoming recognized as a store of value. A basic understanding of Bitcoin as a technology is fairly pervasive, but many fall prey to a misunderstanding about the rest of the market – namely, what the point of other cryptocurrencies is. Naturally, people wonder why there are so many other tokens if Bitcoin works so well. The truth is – novel technological solutions. There has been a boom in emerging innovative blockchain technologies in similar scope to the boom in emerging projects during the early internet days of 1990’s. All projects attempt to solve unique problems, and whether that solution is effective at scale, better than alternatives, and relevant into the future is up to the market and individual project teams. For example, here are some projects solving unique problems:

These projects should not be interpreted as picks for investing, but are examples of the kinds of innovation emerging in blockchain:

Ethereum:

What makes Ethereum different to Bitcoin? Most importantly – smart contracts. Smart contracts allow other projects to deploy program-like contracts (code) on the Ethereum blockchain, while still enjoying the many technical advantages of the Ethereum architecture. Most medium and low-cap cryptocurrencies are deployed contracts on the Ethereum network and are known as ERC-20 tokens. Smart contracts allow for a wide variety of applications – for instance, decentralized exchanges are made possible. We will get into “DEX”s later on in this article series. Cryptocurrencies, aside from Bitcoin, are often colloquially known as “Altcoins”.

https://ethereum.org/en/

Polygon:

Alright – so smart contracts are undoubtedly the future. The use-cases are endless, and the potential for revolutionary tech to emerge via smart contracts is remarkable. However, as a blockchain, validating transactions on the Ethereum network becomes labor intensive as soon as there is decent traffic on the network. And let me tell you – traffic can get insanely high. Transactions on the Ethereum blockchain have soared to hundreds of US Dollars at peak congestion in the last year. While Ethereum has moved to Proof of Stake as supposed to Proof of Work as their consensus mechanism (don’t worry, we’ll get into this more down the line), it is yet to be seen how much improvement will be seen regarding network efficiency. Enter Polygon. Polygon brings incredible Layer 2 solutions to empower Ethereum projects as they navigate the various limitations of the Ethereum Network. This allows projects to scale, reduce transaction costs, increase security, and much more. I believe a combination of Ethereum with layer 2 solutions like Polgyon will emerge as the true winner for blockchain infrastructure in the years to come.

https://polygon.technology/

AIOZ:

AIOZ decentralizes media processing. A CDN or a Content Delivery Network is a network that processes and delivers media to be played across the web. There are only a handful of major CDN providers that deliver content to the entire internet. This has a number of shortcomings, including reduced speeds, single points of failure, centralized control, and poor stability. AIOZ decentralizes this infrastructure by allowing users to allocate their own computational power as processing nodes, while earning tokens as rewards. What is created is a massively powerful and effective CDN with benefit over centralized networks.

https://aioz.network/

OCEAN:

Ocean Protocol is a fantastic example of new technological solutions coming on to the scene, which focuses on developing the infrastructure for Web3, in particular – Ocean focuses on data. Ocean Protocol facilitates decentralized data marketplaces from which projects and individuals can acquire and utilize data sets stored as incorruptible (non-fungible) tokens. This allows for the use of off-chain data (data outside of a blockchain) on-chain for numerous use-cases. Users are also empowered with the ability to turn their own data into assets and voluntarily manage how their data is used and who is able to use it. Data NFT’s also allow individuals to monetize their own data consciously and transparently. For instance, a musician could share rights to a song, where all participants receive royalties automatically when that song is interacted with.

https://oceanprotocol.com/

Market Capitalization, circulating supply, and utility are fundamental to an understanding of the cryptocurrency landscape. But this is only the beginning of our journey into the rabbit hole of cryptocurrencies, and cryptocurrency investing. Next up, we explore the risks and rewards of diving into cryptocurrency investing. Then, we begin to prepare our toolkit should you want to take the next step, and get involved. Let’s go!

Stay tuned for part 2

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