Apr 7, 2022

4 Traits of a Good Crypto Investment

Bram Berkowitz

f you haven’t noticed (although it would certainly be hard not to) blockchain and cryptocurrencies are becoming more ingrained in the mainstream financial system every day. 

In 2021 alone, VCs invested an astounding $33 billion in crypto-focused startups, showing just how much potential they see in the space. And if you check the boards of many different cryptocurrencies and blockchain projects, you’ll see a number of high-level venture executives on their board of directors or listed as advisors. 

However, with more than 18,000 cryptocurrencies and no shortage of volatility, it can be tough to know what makes a certain blockchain network or cryptocurrency a good investment. 

So we thought we’d help break down four critical traits that make up a good crypto investment.

1. Real-world utility

With so many cryptocurrencies and blockchain networks, the ingenuity that first brought the concept to the masses – a peer-to-peer network for digital currency – is no longer as unique as it once was. 

Now, almost every cryptocurrency can do it. But as the pioneer of blockchain and the first cryptocurrency, Bitcoin will probably always be relevant. But for new entrants, being able to send money to anyone on the internet without needing a bank account is no longer a differentiator. 

Rather, it’s better to find blockchain networks with real-world utility, where perhaps the technology can disrupt a certain industry. One could argue that Ethereum, with its smart-contract capabilities and decentralized applications, was the first to really do this. 

Smart contracts are digitized and automated self-executing contracts that have a range of use cases. Another example we can think of is Theta Token, which is essentially a peer-to-peer network that uses excess bandwidth on personal computers to improve the quality of video streaming. 

Just like with any startup, you want any new blockchain network to be disrupting, innovating, and creating a unique competitive edge or having a first-mover advantage.

2. Technical advantages

Not every blockchain network will have a distinct competitive advantage. And you know what? That’s okay! Blockchain technology is still new. While the advent of the technology is incredible, many experts and founders have noted that most blockchain networks are still not quite advanced enough to really scale and operate as a large payments network.

For instance, Ethereum has experienced issues with high gas fees, which is the cost to complete a transaction on the network. One reason for this is because of congestion on the network. 

And while Ethereum has started to make some headway on this issue with its massive set of upgrades (that are supposed to be completed later this year), there is still work to do. 

Many networks are attempting to solve some of the problems that have led to these congestion issues and prevented networks from scaling. Some factors that go into this are bandwidth, throughput, transactions per second, and more. 

As such, it’s good to try and find new tokens that are solving structural issues for the industry and have technical advantages. 

3. Supply and demand

Starting at the US Federal Reserve’s founding, the dollar has lost 95% of its purchasing power over 100 years between 1913 and 2013. The primary causes of this value loss are the decoupling from gold and the increase in the number of dollars in circulation.

As such, the dynamics of supply and demand are key. If there are too many tokens for the market to absorb, then it’s difficult to drive up demand for those tokens and therefore drive up prices.

Ultimately, what makes a good cryptocurrency are those that adhere to sound economic principles while appealing to consumer ease-of-use.

For instance, one of the big selling points for Bitcoin is the fact that there will only be 21 million tokens created. Bitcoin is the largest cryptocurrency in the world and recently had a market cap of roughly $842 billion. Some even think Bitcoin may be a hedge against inflation because of its finite supply and have taken to calling it “digital gold.” 

There are a bunch of tokens out there like Dogecoin that have an infinite supply of tokens. Now, this doesn’t necessarily mean the token will fail, as Dogecoin has done quite well for a cryptocurrency without any real-world utility or technical advantage – some cryptocurrencies rise by creating fervent communities. 

But predicting which cryptocurrencies will do this can be difficult, which is why we don’t consider it a strong trait when evaluating an investment. 

4. Who’s backing the token?

We probably consider this the least important trait on this list, but it’s not totally inconsequential. Go into a token’s website and see who is on their board of directors or listed as an advisor. We wouldn’t recommend following someone blindly without doing other due diligence, but maybe you see another investor you admire connected to the company. That may lead you to ask: What is it about this investment that fits into their investing philosophy? 

You may also see a large well-known corporation backing a crypto project. Maybe that company sees the technology as helpful to its overall business one day. 

Again, it’s not the end-all-be-all because good investors make bad investments all the time, but it’s something to further investigate.

So before you decide which cryptocurrency to invest in, simply run through each of these four traits and make sure your potential investment ticks the boxes for each.

And whilst there’s no definitely no ‘safe bets‘ in the crypto world, the hope is this blog post might help you pick a strong investment with solid fundamentals.

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