The original cryptocurrency, bitcoin, was launched in 2009. It now has a market capitalisation of more than $1-trillion, accounting for more than 60% of cryptocurrency market share.
The number of cryptocurrencies in circulation outside bitcoin (also known as altcoins) has surged to more than 15,000. More than 50 have a market cap above $1bn, and more than 350 have more than $100m. There is a significant opportunity in altcoins. How do you choose the right ones for your portfolio? Here’s what to look for.
Potential for adoption
Assessing cryptocurrency for investability is no different from assessing a traditional business. The unique selling point (USP) is a great place to start. Does it offer a practical solution for a genuine problem, and is it likely to get traction? For a startup, the USP is often outlined in the business plan. For a cryptocurrency, this information is in its white paper. Do a background check on the founders to see whether they can realise their vision.
Some cryptocurrencies have a finite supply — bitcoin is capped at 21-million
Token supply
The token supply refers to the number of a particular cryptocurrency in circulation and the total supply that will ever exist. This can affect a cryptocurrency’s value.
Some cryptocurrencies have a finite supply — bitcoin is capped at 21-million. A limited supply means a cryptocurrency may increase in value due to supply and demand. This is similar to precious metals such as gold, which also have a finite (albeit undefined) supply.
There may also be a burning mechanism, in which tokens are intentionally destroyed to control the supply and create artificial scarcity, thereby preventing price inflation.
In contrast, cryptocurrencies with unlimited supply or high inflation rates might struggle to hold their value. If new tokens are rapidly minted without a matching increase in demand, the value can drop due to oversupply.
Developer activity
Developer activity shows whether people are building and improving the project. A good source of information for developer activity is GitHub, a virtual hub where developers collaborate on computer software and track changes to the code. The frequency and quality of GitHub commits indicate a crypto project’s activity, transparency and developer commitment, reflecting its overall health and ongoing development.
Indices as a shortcut
In traditional investing, building a diverse portfolio that takes advantage of new opportunities within a specific industry is possible through an index fund. For example, the Nasdaq-100 index is a way of investing in the tech industry without knowing what the companies do or tracking their performance. The Nasdaq screens the stocks on the index to ensure its constituents meet certain standards.
This is also possible in cryptocurrency. The Luno Large Cap Bundle, for instance, tracks the CoinDesk Large Cap Select Index and aims to always include five of the largest cryptocurrencies by value.
However you choose to approach crypto, always do your research and never invest more than you can afford to lose.
De Wit is country manager for Luno South Africa
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