Not All Cryptocurrencies Are Created Equal

If you’ve switched on a television set, browsed through social media, or even just exchanged idle conversation with your colleagues, you’ve likely found an increasing number of everyday people talking about investing in cryptocurrency, largely due to success stories from early adopters. But ask a few average crypto-enthusiasts some questions and you’ll receive a plethora of conflicting stories about what cryptocurrency is, why it is needed, and how the cryptocurrency market works. And that’s the scary part.

Investing in anything carries a certain amount of risk; investing in a very new, unregulated digital currency that isn’ttied to a government or accepted globally is exceptionally precarious. Then there is the fact that new cryptocurrencies are being created and put on the market at a rapid clip, making the space even more bloated and confusing.

So how do you know which cryptocurrencies are a smart investment?

Expert Kai Chen of Olympus Labs suggested that investors need to truly understand the types of cryptos on the market, what they do, and what their long-term value will be before putting their money into any of them.

“We have a lot of different cryptocurrencies and they are definitely not created equal,” he said. There are actually more than 5,000 different cryptocurrencies on the market right now, which can all be broken down into three main categories:

1. Coins

Coins are digital currencies that use encryption techniques to regulate the generation of units of currency and verify fund transfers. Bitcoin is the earliest example of a decentralized currency and is probably the one you’ve heard the most about.

“It traces back to Bitcoin," said Chen. "That’s the original cryptocurrency. People look at it as a long term value—the way they see gold — we’ve seen it called digital gold.”

Since the value of Bitcoin is skyrocketing daily, many investors likely may not have enough to invest in a whole coin. That's led many curious about Bitcoin to buy fractions of the currency, called satoshi. These fractional coins are a good option for those new to cryptocurrencies, particularly since Bitcoin continues to push new all-time highs on a near weekly basis. Buying at the top is a risky move in any investment, and many analysts warn that the Bitcoin bubble could be about to burst.

2. Utility Tokens

Utility tokens are units of services that can be purchased for various purposes. If you’re looking for a convenient way to buy online, move money around or make foreign transactions, utility tokens might be your jam.

“There’s another whole category called utility tokens. These are represented by Ether, which is the second largest cryptocurrency by market capitalization,... and they are used for a certain purpose, whether it’s to call a cab, or to buy something online,” said Chen.

3. Tokenized Securities

Tokenized securities represent shares of a business. “Security tokens,” explained Chen, “essentially represent some sort of a stake in a company or a security that will give some kind of value back, like paying a dividend, something that’s giving you monetary returns.”

Because blockchain technology is so new, it can be hard for even those on the inside to distinguish whether their tokens are utilities or securities. Many developers are turning to the Coinbase tool, a securities law framework for blockchain tokens, to figure out what category their token is in.

These three major types of cryptos are generally presented to the public as an ICO, or initial coin offering, to raised funds. This is kind of like an initial public offering with a crypto twist (and without the regulation). Basically, companies create their own digital currency to attract investors who are looking for the next big crypto score.

“One term that we’re hearing a lot is ICOs," explained Chen. "It’s a new token that’s being created that represents something or does something.” As you wade through thousands of cryptos, here are some things to keep in mind:

The ICO Boom is Coming to an End

“The ICO market has changed a lot,” said Chen, “in the past year, if you guys have been investing in ICOs, pretty much the market was doing this...” he points his arm straight up in the air. “The only question that people cared about was when can you list on exchange? Because once the token gets listed, it will pop, you’ll sell it, take your money out and put it into the next one. So you’re flipping your money very quickly.”

This type of in-and-out investing won't be viable much longer. Chen advised, “It’s already ended. 1. Because there are so many projects there’s just not going to be as much money geared toward each one, and 2. people are becoming smarter about their investments.”

Moving forward as an investor in crypto, the investment philosophy for ICOs has changed. You’ll need to start looking at other factors, such as long-term outlook and whether the ICO has a good team, a viable idea, a white paper and a potential application for society at large.

Tokens Must Have Real and Crucial Value

Chen cautioned that investors should consider whether the token has any real value before investing in it. “Is it needed? This is one question people forget to ask themselves, like why do they have a cryptocurrency? Why do they have a token? Why was it created? What does it do in their business?”

In the ICO scramble, many companies are creating a token because they know people will throw money at it. But these tokens have no real value, they’re not tied to the business and probably don’t have lasting potential.

Investors Must Think Long-Term

Kai Chen's emphasis remained on applicability and "proof-of-use," how a cryptocurrency might function in the real world, if any investor was considering a sustained investment. “Focus on the long term value of the project and what you think it will deliver for society." Chen said. "There are so many projects out there and some are just great at marketing. Don’t focus on the hype, don’t focus on the marketing, focus on what they’re actually doing.”

Whether you want to put all your money in Bitcoin, dabble in Ether, or invest in an ICO, do the research and you’ll get a perspective of your own. No one can say for sure which way cryptocurrency is going to go, so be smart about your investing decisions and try to remain neutral if you see dramatic fluctuations.

This is no longer an overnight sensation, investing in crypto is a long game.