As valuations reach new highs, the mood in cryptocurrency markets is increasingly being compared to the craze for dotcom companies at the turn of the century. When that mania subsided, companies without a business model and with multi-million dollar valuations went bankrupt.
The situation in cryptocurrency markets is not dissimilar. Not much is known about the overwhelming majority of 1,385 coins available in the markets today but they are still being bid up to multi-billion dollar valuations. As an example, Dogecoin, a cryptocurrency that was intended as a parody for the bitcoin boom, has a valuation of $1.6 billion, as of this writing. The coin has no clearly-defined use case or characteristic to justify that value. (See also: Bitcoin Vs. Litecoin Vs. Dogecoin.)
Nolan Bauerle, research director at CoinDesk, says 90% of cryptocurrencies today will not survive a crash in the markets. Those that survive will dominate the game and boost returns for early investors. And those returns are substantial, if one were to believe RBC Capital’s estimate of a future $10 trillion market for cryptocurrencies.
But identifying survivors in the cryptocurrency markets is easier said than done. No single currency has gained mainstream traction or is even close to achieving it. Even bitcoin, the world’s most valuable and popular cryptocurrency, is plagued with scaling issues, such as high transaction fees and slow networks. (See also: 3 Obscure Cryptocurrencies To Watch.)
Jake Brukhman, founder of Coinfund, a Brooklyn-based blockchain technology advisory and investment firm, says fundamental factors are not reflected in current valuations of cryptocurrencies.
“It’s just a bet that information and awareness will lead to adoption (of said cryptocurrency),” Brukhman says. According to him, forward-looking sentiments about decentralized networks are reflected in pricing for cryptocurrencies.
Christopher Grey, co-founder at CapLinked – an enterprise software company – identifies three areas that investors should focus on before putting their money into the asset class. (See also: How To Find Your Next Cryptocurrency Investment.)
The first one is experience of founders and project teams. The world of cryptocurrencies and blockchains may be nascent but its roots lie in established industries. For example, ethereum’s smart contract tokens are used to connect elements within established industries. As such, experience matters.
“If a project team member has no crypto or blockchain experience, an investor should ask: how does what they’ve done before make them qualified for this project? Have they been at least been involved in the same industry,” says Grey.
Investors should also peruse the terms of offerings. Two important points to consider in this respect are the amount raised and how much of it accrues to investors. Conventional metrics applied to stocks do not apply in this evaluation. This is because cryptocurrency markets are a reversal of typical market paradigms in that founders might ask for funding before they have a sustainable customer base or product traction.
“If someone wants to change the entire world of finance, and they’re only raising $5 million, that would be a big disconnect between what they want to do, and how much money they are raising,” explains Grey, adding that the opposite also holds true. In other words, the clearer the focus of a company, the better its prospects.
Finally, investors need to look at the technology itself. “If it’s just an idea, a white paper, without anything built, you’ll be stuck only believing in the team, and if that’s the case it better be a really good team,” says Grey. “If a team has built a product, how does it work?”
There is a caveat to this assessment. Brukhman says cryptocurrencies are among the least interesting applications of blockchain. “We don’t really have a good grasp of that,” he says, in a reference to how markets might be disrupted by cryptocurrencies. (See also: 5 Weirdest Cryptocurrencies.)
So, Which Cryptocurrencies Will Survive?
A good place to start is the top 20 most-traded cryptocurrencies. It is easy enough to determine some prominent survivors in this listing, if and when a crash does occur in cryptocurrency markets. Bitcoin is the original cryptocurrency and is fast emerging as a store of value. Its blockchain and codebase also spawned offshoots, such as Litecoin and Bitcoin Cash. Both are angling to become the preferred cryptocurrency for daily transactions. Ethereum’s world of decentralized applications or Dapps is fast gaining traction and is responsible for a slew of tokens, such as Populous, which are built off its platform.
Others, such as Dash, have also staked similar claims and have carved out niches in emerging markets such as Zimbabwe and developed economies like Spain. NEO might turn out to be the dark horse. It is aimed at the smart economy and is working closely with the Chinese government to grow the cryptocurrency ecosystem within the country. It has also announced a strategic partnership with Microsoft China and has worked with the likes of Japan’s Ministry of Economy.
Moving down the list, however, shows cryptocurrencies where investors will need higher risk tolerance. For example, TRON, a cryptocurrency that surged recently, does not have a product in place and its founder is relatively inexperienced. Similarly, Request Network claims to be the future of commerce but that vision itself is actually a recent pivot from one for an online money transfer aggregation service. The cryptocurrency’s white paper announces multiple use cases for its coin, from the Internet of Things to online payments and implementing business logic for government laws. But the startup has precious little to show by way of partnerships or experience in those areas.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin, bitcoin cash, and ether. It is unclear whether he owns other bitcoin forks.