Nearly $1 billion was lost to cryptocurrency scams from the start of 2021 to the end of March 2022, according to a May report from the Federal Trade Commission. By the way, it was probably when Luna Classic effectively crashed to zero in a matter of days, wiping out a market cap that once exceeded $40 billion.
Bad actors and crashes are why the cryptocurrency sector is often mocked by investors. It is seen as a place for get-rich-quick speculators rather than serious allocators of capital.
Much of the criticism is fair. However, in some select cases, I believe cryptocurrency can indeed be a viable long-term investment. But first, you’ll want to understand the difference between cryptocurrencies and tokens. That’s why.
Investing in digital currencies
In my opinion, cryptocurrencies can be thrown into two buckets. One bucket is a digital currency. The other is the token bucket.
The differentiating factor between these two buckets is the target. Bitcoin (BTC 3.11%) is intended to be used as a payment method. The same goes for Bitcoin alternatives like Dogecoin (DOJ 1.71%). Their purpose is to facilitate financial transactions, although people more often “walk” these coins than use them as money.
The investment case for digital currency is conceptually no different from that behind currency (forex) trading. If you think the Japanese yen is going to outperform the US dollar, for example, you can exchange dollars for yen and wait for that to happen.
The same goes for Bitcoin. You can use it to buy something — in those limited places where it’s accepted — just like you can buy things with yen. But if you are investing in bitcoin, then you expect it to outperform the dollar.
At the most basic level, the value of every cryptocurrency is derived in the same way. If the demand is greater than the supply, then the price goes up. And that’s why Bitcoin is my digital currency investment of choice. There can only be 21 million bitcoins – supply is a well-known factor here. And if any digital currency is going to be in widespread demand, I believe Bitcoin has the best chance.
This is partly due to the power of the Bitcoin network. Miners have computers to process transactions. This computing power is measured by something called a hashrate. As of this writing, the total hashrate of the Bitcoin network is around 213 million tera-hashes per second (TH/s) – the most computing power of any cryptocurrency and more than double this time last year. In short, Bitcoin has the most computers supporting it, making it the most stable and secure (in theory).
With these strengths, I see Bitcoin continuing to receive high demand.
Investing in tokens
In contrast, tokens have use cases other than as a medium of exchange. Take Theta Network as an example here. Theta aims to use blockchain technologies to provide a decentralized content delivery network such as Quickly or Cloudflaredecentralized web hosting like Amazon and Alphabetand more. Theta (THETA 2.82%) is the governing sign while Theta fuel (TFUEL 1.59%) is the utility or gas token.
I think Theta Network is a really great idea. However, I’m not convinced that Theta Fuel would be a good long-term investment. Theta Fuel has 7% to 9% annual inflation. This new Theta Fuel is designed to pay nodes to keep the network running. Users buy Theta Fuel and then spend it to use Theta services – if you’re going to upload a video, for example, you’ll spend Theta Fuel to get nodes to host it.
It’s hard enough to create a search for Theta in the first place. Getting enough demand to offset the impact of token inflation is even more difficult. But again, Theta Fuel isn’t designed to necessarily increase its value. It is designed to purchase the use of the network. Imagine if the value of the token skyrocketed. Actually using it can become prohibitively expensive. That would be counterproductive and it hurts long-term adoption.
Each cryptocurrency has different elements controlling supply and driving demand – tokenomics. Understanding how Tokenomics works is a completely different exercise than simply understanding what a crypto project does.
Why it matters
The distinction between digital currencies and tokens is important, as investors will want to consider different factors in each case. With something like Theta, you’ll want to see more nodes joining the network so it can deliver the faster internet speeds it promises. In contrast, with Bitcoin, you’ll probably want to see growth in wallets, not miners. The Bitcoin mining network is already quite large and secure. But more people need to join the Bitcoin economy and hold and use it if the price is going to keep going up.
Cryptocurrency can indeed be a long-term investment in certain cases. You just have to know where to look.