Cryptocurrency is a new kind of investment that offers the potential for high returns and some security, but you should never invest more than you can afford to lose.
There are already many thousands of articles about cryptocurrencies. Most of them are surprisingly bad, not just because they’re written by people who don’t understand the technology, but because they’re written by people who don’t understand why anyone would want to learn about it.
Cryptocurrencies are a new kind of investment that offer the potential for high returns and some security, but you should never invest more than you can afford to lose.
The amount of money involved is tiny compared with conventional investments: if you invested $100 in Bitcoin at the beginning of 2017, it would be worth about $16,000 today. The amount of money involved is also tiny compared with alternatives like gold or stocks: investing $100 in Bitcoin means you have to put up with a decent chance that you might get back less than $100.
If you want to get rich quickly by investing in cryptocurrency, it’s probably best to stick with Bitcoin or Ethereum. But if you want to get rich slowly by investing in a currency that some future society will pay big bucks for – well, that’s not really much different from getting rich
You have heard about Bitcoin and Ethereum, and maybe about other cryptocurrencies as well. All you know is that there are several thousand of them, and they are all quite different from each other.
So which ones should you invest in?
It’s tempting to look for good stories. It’s natural to think that something with the word “cryptocurrency” in its name must be interesting. But it’s not that clear-cut. The thing you want is the price of the cryptocurrency relative to a base currency, like the dollar or the Euro, and then you watch how things change over time; that’s what we want to know here.
You could just look at market cap (the total value of all the coins multiplied by their coin price). We call this Market Cap/Price. There are lots of cryptocurrencies with big market caps but very small prices, so they don’t move much. On the other hand, there are many cryptocurrencies with small market caps but large prices, so they move a lot when something happens in their world.
There are no obvious really big stories in the world of cryptocurrency right now. There are some interesting things happening in some of them, but not enough to make them easy to pick out from the crowd – though it may happen before
Cryptocurrencies got a lot of attention in 2017, but 2018 is going to be a big year for them.
There are two basic kinds of cryptocurrencies: those that depend on the blockchain and those that don’t. If you’re into blockchain, you’ve probably heard of Bitcoin (the original) and Ethereum (the second most popular). But there are over 2,000 other currencies out there.
Here’s a list of the top 10 cryptocurrencies for the year. I’ll discuss them in more detail below.
The first thing to understand is that there is not just one kind of cryptocurrency. There are lots of them.
There are many ways to divide cryptocurrencies into different categories, but the most popular are as follows:
Bitcoin and its rivals are currencies. They have no real-world value. Bitcoin is a currency, and so are other cryptocurrencies with similar characteristics, such as Dogecoin.
These currencies tend to have low transaction fees and fast confirmation times (in other words, they are used for microtransactions). However, they also have some disadvantages. They can be difficult to store securely (they can be hacked or lost), and their supply is limited (they don’t have the ability to change their supply), both of which make them suitable for only small amounts of money.
This leaves us with two other types of cryptocurrency:
Wealth-generating currencies These currencies provide a store of value without being usable for transactions; and/or they provide voting rights in a decentralized network. These cryptocurrencies tend to have lower transaction fees and slower confirmation times (so they’re better suited for large transactions). But they have the disadvantage that they’re not useful as a currency, so they may be hard to store securely or difficult to spend (if you don’t hold enough wealth
The first thing to understand is that cryptocurrencies are not like gold. Just as gold is valuable because you can use it to make other things, cryptocurrencies are valuable because you can use them to make other things. Cryptocurrencies are more like credit cards, which also have value because you can use them to pay for other things. Gold and silver have a much lower value as currencies because they can’t do anything else.
As with any investment, the best way to tell if something is a good investment is to check if it’s been done before. Now there are lots of competing cryptocurrencies, so not all of them will necessarily be successful. But some cryptocurrencies have a good chance of working well as currencies because they solve real problems in the world. So in this list, I focus on the currencies that do something useful – and that seem to have the most promise of being adopted by large numbers of people.
Number one: Bitcoin
Cryptocurrencies have been the most talked about investment in recent years.Unfortunately, most of the attention has been to bad effect. Cryptocurrencies are typically not very safe investments. The hype around them has made people think they are risk free, and many investors have bought at the top, only to lose money when it all crashed down.
It’s easy to see why this happened. Cryptocurrencies have a reputation for being highly volatile, and so many people think that once they are in, they should never get out. And because these currencies are new and unfamiliar, many people have invested with little idea about what is involved.
But why should cryptocurrency be any riskier than the stock market? Or even than a normal brand-name investment?
The answer is that cryptocurrencies create a new way of making money. In principle, it could be as safe an investment as anything else. But in practice, there are all kinds of things that can go wrong with it. For example, they can be hacked; they can lose their value; or they can stop working properly.
So if you want to invest in cryptocurrency but don’t want to take the risk, how can you do it right?
The best investment decisions are not made by the smartest investors. They are made by those who are willing to think about things in a new, unconventional way. And the best investments are those that offer a greater return than the risk.
We can see this at work in the prices of stocks and bonds, which are supposed to embody their owners’ views on the relative value of future cash flows. But that has never been true in practice. In fact, for several decades long-term investors have done better if they’ve ignored money-market rates and simply bought high-quality common stocks or long-term government bonds.
And so it is with cryptocurrency: at first glance, it looks as if it should be an obvious choice for an investment portfolio. It is digital money that can’t be stolen or lost, has no central authority behind it, and is therefore immune to government interference. It can’t be inflated away out of existence by a government or a bank, like dollars can be. The value of bitcoin rose threefold over the last year; that’s real money. But hold bitcoin for more than two years and you’ll see less than half that gain.*
Cryptocurrency is clearly a cryptoasset