With all the interest in cryptocurrency, investors are understandably concerned about its long-term viability as an investment choice. Much of that will depend on whether it ultimately gets adopted as a standardized currency.
The good news is that blockchain technology appears to be here to stay. As most alt-coins rely on the blockchain, there still appears to be a bright future for crypto. Though the “hype premium” has worn off, cryptocurrencies are becoming mainstream as more institutions adopt them.
If they haven’t already, investors should consider adding alt-coins to their portfolios. While the options may seem too numerous to choose from, you can use some historical clues to help guide your decision for investment.
Factors for Consideration
First, consumers drive payments, and they want easier and faster access to goods and services that are facilitated by spending. That’s why, for example, the U.S. dollar is accepted in the tourist spots of foreign countries such as Mexico: Removing the exchange barrier makes it easier for consumers to spend. This simple concept is also reflected in a handful of crypto projects looking to promote global currencies, because promoting a new form of payment requires getting it into the hands of the masses for spending.
Second is that goods and services need to be available for purchase in order for any currency to have value. In that respect, today’s crypto markets are comparable in concept to European markets before the advent of the euro. In those days, it wasn’t uncommon for families to keep Ziploc bags full of different currencies in their cars’ glove compartments so that when they crossed a border, they could buy things in whichever country they visited. The adoption of the euro later removed this hassle (and risk of theft) and streamlined the buying experience for most European consumers.
Though the world’s economies are already tied together, individuals continue to transact in government-issued currencies because nothing else has universalized buying and selling. For all our globalization, we are still in the “Ziploc bag” era of international transactions. Like the euro, cryptocurrencies represent a path to unite transactions across borders. As merchants are the purveyors of goods and services, their acceptance of a cryptocurrency is good indicator of a movement toward adoption in the market.
A Path for Crypto Adoption
Viewing through the lens of obstacles, the future may appear dismal for crypto acceptance, but the paths of the past may once again be successfully trodden in the rollouts of new cryptocurrencies. A template for this exists in the 1970s introduction of payment cards by Visa (V), in which the company mailed out unsolicited cards to the public to jump-start consumer demand for spending. It’s not an exact comparison, as Visa operates in fiat currency, but the principle remains the same. Applying these lessons, we can begin to approach the design of a crypto market in the same manner.
Knowing that consumer demand drives merchant acceptance, it becomes evident that putting cryptocurrency into the hands of the masses is the first step. Next, using an intermediary to accept cryptocurrency from consumers while settling to merchants in fiat currency not only shields merchants from the current concerns of cryptocurrency acceptance, but also allows an economy to emerge in the current environment of payments as a legitimate path for crypto.
Given this model, look for the merchant services industry to be disrupted as cryptocurrency offers an avenue to reduce fees around interchange. With popular companies like Square (SQ) adopting blockchain technologies, consumers are already gaining trust in this mechanism.
How to Make Smart Crypto Investments
Following this path, cryptocurrency is poised to become a major player on the consumer stage worldwide. A word of caution: Your investments can’t be based on hype; they need to be grounded in a clear understanding of the benefits of an investment vehicle. Cryptocurrency is no different. Let’s take a look at a few things to keep in mind when you consider investing in cryptocurrency.
1. Know the benefits.
Cryptocurrency carries the seeds of future fruits. First, it can reduce fraud because blockchain technology can be coupled with multiple-factor authentication and a crypto token to tie a consumer identity to a transaction and a particular cryptocurrency wallet. Consumers and merchants alike lose billions of dollars every year to fraudulent payment activity, so a solution to root out fraud should be seen as a bullish indicator for any investor who understands the space.
Next, most alt-coins are based on the decentralized model of bitcoin and are not regulated by any single government, thus enabling their use worldwide. Finally, cryptocurrencies can hedge against inflation because the total circulation is predetermined. As such, no new currency can be introduced to the supply, unlike what is seen with fiat-currency practices such as quantitative easing.
2. Look for utility.
Money always follows an innovation that works well and fulfills a need. Should it have been a surprise that Netflix (NFLX), whose initial streaming quality was mediocre, would put Blockbuster out of business? It wasn’t to those who were looking for utility from the internet, because Netflix delivered the future promise of superior value. In the same way, investors who focus on what a particular cryptocurrency can do will better predict where disruption will have the biggest impact as technology continues to improve.
3. Avoid speculative pricing.
Almost all cryptocurrencies are rising and falling on the basis of the speculative price of bitcoin. Simply put, there is nothing other than speculation by which to value most cryptocurrencies. Accordingly, look for opportunities to invest in cryptocurrencies that base their prices on something that can be measured.
Cryptocurrency is still in its early days, which is great news for investors. By looking for utility, following the innovators, and investing strategically, you can get ahead of this market shift and boost your portfolio in the years to come.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.