Many traditional investors are intrigued by cryptocurrencies, but it’s difficult to determine where to start and what trends to watch. While bitcoin has captured headlines with its meteoric price increase and volatility, there are more than 1,000 other cryptocurrencies and crypto-assets; with around 50 more initial coin offerings hitting the market each month. Analyzing these can be challenging compared to conventional stocks, bonds, options, and futures. At CoinShares Research, we aim to help separate the signal from the noise, and provide fundamental investment research for crypto-finance investors. By way of an introduction – let’s start with a quick education on 3 core crypto-asset concepts.
What is a Crypto Coin?
Cryptocurrencies and cryptoassets are denominated in coins, most of which are mined as a part of the transaction verification process. Mining exists to prove ‘loyalty’ to a system by requiring provably expensive input work in order to be allowed the privilege of verifying transactions (for which miners receive newly minted coins as a reward). As more and more miners compete for the freshly minted coins, the difficulty level automatically resets such that the block verification times always average out to the same length of time. More miners means a more secure protocol and an increased cost of “forging” coins by tampering with the transaction history.
Traditional investors might conceptualize this as mining gold in a world where gold becomes increasingly difficult to mine as the remaining finite supply dwindles.
What is a Crypto Exchange?
Cryptocurrencies are traded on various exchanges. These are online platforms that enable a person to exchange one cryptocurrency for another crypto or fiat currency
One could think of these exchanges like traditional stock exchanges, currency exchanges, or brokers, but they aren’t typically regulated by governments or insured in any way. Needless to say, investors must ensure that they’re doing business with an exchange that is secure and reputable.
Some of the most important factors
to consider when evaluating a cryptocurrency exchange include:
- Liquidity – How liquid is the order book of the exchange?
- History – Is the exchange credible and secure with a strong track record?
- Regulatory Exposure – Is the exchange regulated by any governments, or do they have self-imposed regulations?
What is a Cryptocurrency ‘Network’?
The network represents the group of people using the coin, mining the coin, relaying and verifying transactions, and maintaining the underlying software.
Traditional investors should consider a cryptocurrency’s network characteristics for the same reason that they wouldn’t invest in a company just because of its market capitalization alone. An illiquid penny stock could have a large market capitalization, but that market capitalization is meaningless beyond pure speculation if there is no underlying business to support it. A cryptocurrency’s network can be, to some degree, compared to a company’s operations – it’s the valuable asset behind the hype.
Some important factors to consider when evaluating cryptocurrency networks are:
- Mining – What are the relative sizes of the mining networks between coins? Are they growing?
- Creators – Who are the developers supporting the cryptocurrency? How is new code created? What is the governance model?
- Technology – What type of cryptography does the cryptocurrency rely upon? Is the technology experimental or established?
The Bottom Line
Investors have become increasingly interested in cryptocurrencies, but it can be (and is) overwhelming to analyze them from an investment standpoint. That’s why we have built a professional research arm to help investors understand the complex dynamics of cryptocurrencies and help them make better investment decisions. To see the type of research we offer, read our most recent research here: H2 2017 Crypto Report.
Coinshares (UK) Limited is an appointed representative of Sapia Partners LLP, which is authorised and regulated by the UK Financial Conduct Authority (FRN: 550103). This document has been prepared and issued by Coinshares (UK) Limited and is being provided for information purposes only. It is not intended as an offer or solicitation to enter into any proposed transaction or investment. Investors’ capital is at risk, and investors should only invest if they are able to afford the loss of all capital invested. There is no guarantee that the investment objectives will be achieved and past performance should not be construed as an indicator of future performance.
Crypto-currencies can be extremely volatile and subject to rapid fluctuations in price, positively or negatively. Investment in one or more crypto-currencies may not be suitable for even a relatively experienced and affluent investor. Each potential investor must make their own informed decision in connection with any such investment (after having sought independent financial advice thereon).