Investing in Bitcoins or Other Crypto-Currencies

Posted on: March 10th, 2014 by jms 1 Comment

As an investment, all crypto-currencies are extremely risky. There is no guarantee that any one of the available crypto-currencies today will be around tomorrow, and most of them will likely dissipate once the quirks are figured out and market dominance is established. However, the appeal to invest in one or many of these crypto-currencies is stronger than ever. The opportunity to walk away with a very large return on investment is too hard to ignore, and this leaves many of us looking for the next big boom in other crypto-currencies similar to what we’ve seen with Bitcoins.

 

While opportunity may exist among certain crypto-currencies, a few things should be considered before throwing money into any form of crypto-currency simply because the price is right at the present moment. It is important to keep in mind that there is a false sense of opportunity that has been created because of the Bitcoin boom. It has become far too easy to make assumptions about what other virtual currencies will become just by looking at what Bitcoin has become. Unfortunately, the same rules don’t apply to all virtual currencies. Here are a few reasons why Bitcoin is the way to go if you want to invest in crypto-currencies:

 

  1. Bitcoin has the market or Network Effect. Thousands of merchants around the world have already incorporated Bitcoin into their sales strategies, and many of them have already started to create unique ways for customers to save when using Bitcoins for purchases. The reason is clear. Merchants can save on transaction costs by accepting Bitcoins, and those savings can be passed on to customers to encourage the use and market capitalization of Bitcoins. Of course, this is possible for any type of crypto-currency, but Bitcoin has already claimed the thrown on market capitalization and there’s enough financial and infrastructure support behind it to keep that trend going, and more importantly, to keep other crypto-currencies from disrupting the market in any way.
  2. Bitcoins are Scarce. With the network effect, this will generate more  demand over other crypto-currencies. The value will go up as demand increases. Even if other crypto-currencies can gain enough market share to compete with Bitcoins, the vast amount of available “coins” we see with these other crypto-currencies will cause them to be less valued over time. Supply and demand is a key factor for an investment opportunity like this to be worthwhile. Simply put, if there’s too much supply with these other crypto-currencies, the demand will never grow like it will for Bitcoins.
  3. Trust is also key. Bitcoins seem to be more secure than some other forms of crypto-currencies. Dogecoin, another popular crypto-currency, was hacked back in December. What is even more newsworthy, is the fact that two Bitcoin exchanges have also since been hacked, yet Bitcoin itself has held its value through the turmoil. Trust in the security of Bitcoin alone still exists. The inevitable government regulations will also create additional trust for a more widespread market. When there is less risk of losing you’re entire investment due to a hack, people will be more likely to invest, and in turn increase demand.
  4. Bitcoin was first to market. This is very important with any new product or service. Being first to market is a critical component to success. Bitcoin has set the stage for all other crypto-currencies. When we think of crypto-currencies, we think of Bitcoins. Then we may ask if other forms exist. This is huge because it is a form of brand positioning that separates Bitcoin from all the rest. By being first to market, Bitcoin not only grabbed hold of the market, it also branded itself as the only considerable option in the marketplace long before any other type of “currency” was developed. This will have long term positive effects for Bitcoin.
  5. Bitcoin set out to disrupt the financial market, and it has succeeded. Whether Bitcoins will be considered a real currency is not as important as the ultimate effect it has already made on the way online transactions will be handled in the future. No one knows for sure if Bitcoin will be the crypto-currency of tomorrow, but one thing is certain, crypto-currencies are here to stay. Even Google’s Jared Cohan thinks so. Bitcoins effect on the financial world is unmatched. This makes Bitcoin the clear choice for growth potential, at least for the foreseeable future.
  6. Bitcoin has venture capitalists like Marc Andreessen paving a way for its ultimate success. It has also seen large investments from the Winklevoss twins and Peter Thiel’s company Founders Fund. Other crypto-currencies like Ripple are also backed by venture capitalists, including Marc Andreessen. If there is another crypto-currency worth considering as an investment, it is probably Ripple’s XRP. But for now, Bitcoin still has most of the financial and marketplace support behind it.

 

So there you have it. At the end of the day, Bitcoin has the necessary support behind its potential for success. Other crypto-currencies are simply trailing behind. Though there may be opportunity for some, ultimately there’s no real value added by any of these other “currencies”, and that will be the deciding factor. Bitcoins are expensive, and for the cost of fractions of Bitcoins we can purchases thousands of other types of “coins”. Likewise, for the price of a solid mutual fund I can probably buy thousands of shares in some unknown penny stock that will never see any real growth, if it lasts at all. So as an investment, it is still my humble opinion that Bitcoin is the better option, even at the higher price point. I do believe fractions of Bitcoins will still ultimately be worth more than thousands of other crypto-currencies, with the only exception possibly being Ripple’s XRP.

 

Ripple has more to offer because it’s not just another crypto-currency. Ripple is a payment system that offers instant and nearly free global financial transactions for any fiat currency. This is value added that Bitcoin systems do not currently support. Although, Ripple’s XRP (the actual crypto-currency) has less to offer. What gives it value in my opinion, is its exclusive tie into the Ripple system and is intended to be a “bridge currency” between the exchange of two other currencies. Ripple also claims the most market share behind Bitcoin and can currently be purchased at $0.014. At this price point, I can justify the investment in a technology that does add value to the future of online transactions.

 

For now, no one can know for sure what the future holds for crypto-currencies, and any investment in this new technology is a very risky one to put it mildly. My advise is, invest only what you are willing to lose and not a dime more. You may just get lucky, but it is still very unlikely that any new or existing crypto-currency that offers nothing new beyond more “coins” in circulation, and possibly a slightly more efficient protocol, will ever gain the widespread acceptance and support that Bitcoin already has.

 

 

Other Resources:

 

http://www.entrepreneur.com/article/232078

 

http://techcrunch.com/2013/04/11/now-backed-by-andreessen-more-opencoin-looks-to-build-a-better-bitcoin-and-a-universal-payment-ecosystem/

 

https://coinmarketcap.com/

 

https://ripple.com/guide-to-getting-xrp-and-activating-your-ripple-account/

 

https://coinbase.com/