Is Cardano a Good Investment?

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Based on historical price action, Cardano has been a great investment. The digital asset received a ton of hype in 2021, and many fans hail it as the Ethereum-killer. Does Cardano actually have a shot at stealing Ethereum's marketshare in 2023? And, should it be in your crypto portfolio?

Is Cardano a good investment? Let’s take a look!

Cardano: Fundamental Analysis

Background

Cardano is a blockchain project with over 70% of the total currency, ADA, staked for network validation (a really impressive rate). Part of the reason that so much ADA is staked is due to the cryptocurrency's lack of decentralized applications (dApps) available on its blockchain. While Ethereum has around 5% of its total supply locked as validators, much more ETH is locked in DeFi applications.

The Cardano project began in 2015 in an attempt to solve some of the problems that Ethereum faced from its Proof-of-Work consensus model. Cardano was officially founded by Charles Hoskinson, who is a former co-founder of Ethereum. 

Some of Cardano’s key improvements are multiple processing layers for settlements and computations, proof of stake consensus and the ability to upgrade its network easily in the future. 

The Cardano settlement layer launched in 2017 and raised around $63 million through the ADA ICO. The settlement layer excludes smart contracts, so at this time Cardano could only be used for settling peer-to-peer payments. Since then, the ever-growing team of developers has been hard at work preparing for the launch of smart contracts on the Cardano Computation Layer.

Cardano Development 

Cardano currently has between 100 and 150 developers actively working on the project and pushes out around 700 commits per week. These factors make the cryptocurrency one of the most actively-developed projects in the blockchain space today, suggesting that they will be able to deliver on their ambitious roadmap. 

This amount of developers places Cardano among the most likely projects to steal market share from Ethereum. However, it's still not close to the size and pace achieved by Ethereum, Polkadot and Cosmos as seen below in the Electric Capital Developers Report from 2020. 

Cardano Smart Contracts 

One of the most common critiques of Cardano is its non-existent DeFi ecosystem. Since its release of smart contracts on September 12th 2021, investors are hoping to see an ecosystem be built-out soon. However, Cardano's smart contract upgrade didn't go smoothly, with its price dropping after applications were unable to operate on the new software.

Looking to the remainder of 2022, Cardano developers are looking to improve smart contract performance and scalability through new release deployments. As per Cardano’s communication director, there will be three major code drops this year with the first one being released in February and the following two slated for June and October respectively. Cardano smart contracts will run on the Cardano computation layer, which will support legacy Solidity contracts as well as its own language, Plutus. 

Partnerships

Cardano has already inked some notable partnerships with universities, governments and businesses including the University of Illinois, Ethiopia and New Balance. Hoskinson has pushed hard to see Cardano’s potential come to fruition in Africa, where he believes blockchain can make a huge impact. This is in part due to a large proportion of Africa's population being unbanked.

New Balance also has plans to use Cardano's network to track the authenticity of its shoes.

How Does Cardano Work?

Cardano is a proof-of-stake (PoS) blockchain that aims to address the scalability issues inherent to other Layer-1 blockchains like Ethereum. PoS is a consensus mechanism that is used to validate and secure transactions on a blockchain network.

In PoS, token holders stake (lock-up) their holdings in a specific node or wallet. These holders are then chosen randomly to validate transactions and add additional blocks to the blockchain. The more token a holder stakes, the higher the probability that they have a chance of being chosen to validate transactions. This processes is commonly referred to as staking. Compared to proof-of-work (PoW) blockchains such as Bitcoin or Litecoin, PoS blockchains like Cardano are far more cost-effective and efficient as they require less energy and computational resources to validate transactions.

PoS blockchains like Cardano, achieve security through an additional mechanism called 'slashing'. Simply, slashing refers to the process of having a portion of their staked tokens permanently confiscated as a form of punishment.This servers as a disincentive to validators that engage in malicious activities, as they stand to lose a significant amount of their staked tokens. Under this framework, PoS encourages validators to act in the best interest of the blockchain by aligning their financial interests with the network.

Cardano vs. Ethereum

Cardano and Ethereum are both leading Layer-1 blockchains networks. Layer-1 blockchains can be thought of as the foundation of a digital building. They serve as the underlying infrastructure for a blockchain based system that other projects and protocols are built on top of. Layer-1 blockchains are capable of validating their own transactions without the help of other networks.

Cardano and Ethereum both are built on a PoS consensus mechanism, which is more energy-efficient than PoW, and aim to support the development of smart contracts and dApps. However, while Cardano and Ethereum aim to achieve similar goals, they do so in very different ways.

Ethereum is largely focused on scalability, security and sustainability. While Cardano also focuses on these factors, it also prioritizes governance, interoperation and metadata. Another key difference is that Ethereum uses a 'shard' architecture to increase transaction throughput while Cardano uses a 'layer infrastructure. Shard architecture can be thought of as splitting a big job into smaller parts, with many people working on each smaller part simultaneously. This allows Ethereum to processes more transactions at the same time, therefore making the network faster. A layer architecture can be thought of as having different floors in a building. Each floor handles different information and tasks, which allows Cardano to process more transactions at the same time, making the network faster.

This being said, Ethereum has a far more developed ecosystem than Cardano. Cardano's smart contracts don't work yet, so there are no NFTs, decentralized exchanges, or decentralized lending platforms on its blockchain. Even once these programs are released, they will take time to gain the liquidity and adoption seen by Ethereum's blockchain.

Pros for Cardano

Cardano’s separation of the settlement and computation layers results in much lower transaction fees for payments.

Cardano now uses smart contracts, allowing it to be even more competitive with Ethereum.

Cons for Cardano

Cardano is fighting an uphill battle with an army a tenth the size of Ethereum’s. Competitor Solana also has a much larger development team and is growing even quicker. 

Low fees are nice, but low fees also indicate a low level of demand for space on the network. This might change when more smart contracts start flowing through the network, which demand more space than payments.

Pros for Ethereum

Etheruem’s network is already established and boasts over 1,500 active developers (over 10 times more than Cardano). Ethereum is the foundation of the DeFi movement, and it boasts a rich ecosystem already built on top of it. If Cardano wants to defeat Ethereum, they will need to pick up the weight of this entire ecosystem as well (This is why Cardano has already promised to support smart contracts written in Ethereum’s programming language, Solidity).

Ethereum is also far more decentralized than Cardano, making it much more secure.

Cons for Ethereum

Although Ethereum's transaction per second (TPS) is meant to increase as further upgrades are carried out, Ethereum’s lengthy transition to proof of stake has given its competitors time to catch up and gain market share. Ethereum’s high network fees also make it unusable for many of its potential users.

What Has More Room To Grow: ADA or BTC?

Bitcoin is a much safer investment than ADA, primarily because it backs the entirety of the crypto market. ADA is also widely speculated at this point, where Bitcoin has a very clear value that you either believe in or you don’t. ADA may have more growth potential if it succeeds with its smart contract integration. For Cardano to reach the market cap of Bitcoin, it would need to grow over 3000% in total market cap. 

Is Cardano Safe?

Generally speaking, Cardano is a fundamentally safe investment. However, just like other cryptocurrency, ADA is volatile and considered high risk by traditional standards. The team is considered reputable in the blockchain space, with founder Charles Hoskinson being a co-founder of Ethereum. Also, considering the project is a Layer 1, ADA is a coin on its own blockchain independent of other projects. It offers many options when it comes to staking, allowing traders to earn passive rewards while holding their ADA in staking pools.  

Best Hardware Wallet for Cardano

When owning a digital asset like cryptocurrency, it is often smart to get a hardware wallet to keep your private keys safe. 

Best Hardware Wallet: Ledger

Ledger is the most credited hardware wallet currently available. The device is primarily an offline hardware wallet. Ledger also connects to Bluetooth and USB, depending on whether you want to use your computer or mobile device. Ledger’s app also makes it easy to secure and manage your assets. The Ledger Nano X which comes in at $149, allows users to store over 5500 different coins and tokens including Bitcoin (BTC), Ethereum (ETH) and more.

Bonus section: Keep a look out for the Cardano smart contracts utility, as it has yet to be built out on the platform. It will be a bullish indication when developers begin building on Cardano

Where To Invest in Cardano

You can buy Cardano on many exchanges including eToro, Coinbase Global Inc. (NASDAQ: COIN) and Crypto.com. A digital asset exchange like one of these options is a great way for traders to start buying cryptocurrency. 

So, Is Cardano a Good Investment?

Cardano is without a doubt one of the more promising applications in the blockchain space today, with strong fundamentals and a lot of momentum behind the project. 

While touted by many as the Ethereum-killer, this is extremely unlikely. In my opinion, Cardano will carve out its own niche within the global blockchain ecosystem, but fail to flip Ethereum. If you are bullish on crypto and blockchain in general, then it makes a lot of sense to have a position in Cardano. If you own Ethereum, then Cardano is a great hedge that will more than likely result in a net increase in gains. It’s truly a win-win. 

Remember, this is just my opinion and not financial advice. Crypto investments are inherently risky and you should not invest any money you are not willing to lose. Crypto is extremely volatile, but I’m guessing that’s the reason you’re here to begin with. 

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