Hodl, sell or buy? - Fundamental analysis of cryptocurrencies
To hodl, sell or buy? I guess most of us have been following the negative trend and felt a bit nervous lately. At least I have. Therefore I'd like share my opinion with regards to valuing cryptocurrencies! -I'd also like to start with apologizing for such a lengthy post. - I think there are two (mainly) possible reasons why people invest cryptocurrencies. 1. Because the hype and the hope for quick rewards and all the "moon" talk. or 2. Because of you as an investor understands and believes in the underlying blockchain technology. As I see it, if you'd invest in cryptocurrency for reason 1, I'd also panic and start asking around whether to sell or hodl. However, I'm in the space of cryptocurrency for reason 2. I've been researching and following the technology for long and in my opinion, blockchain technology really has something to offer that no current technology (by its own) can. Whether it be the blockchain characteristic of irreversibility being implemented in order to prevent corruption in a third world country. Or the blockchain characteristic of no need for a central actor implemented in order to enable cheap world-wide transactions. So with that said, I think people must start to understand what they're investing in (since different blockchains offer different characteristics) because that's where the fundamental analysis of a cryptocurrency can be conducted. This can be done by looking at WHAT problem the blockchain aims to provide a solution for (Zcash, for example, provides anonymous transaction) and HOW it's done (Zcash, for example implements zk-SNARKS). You must also look as to WHY this problem needs to be solved (Why is it important to provide anonymous transactions for example) and if a blockchain is the best technology to do so (in many cases people read about blockchain and forgets that a distributed database solves the problem as good as blockchain). The thing many investors seems to misunderstand is the nature of cryptocurrencies. The cryptocurrencies are Enablers of a blockchain design. Not the other way around (blockchain enables cryptocurrencies). Further, cryptocurrencies are just a unique token of which there are a limited supply. By having the right to "spend"/ send such a token you can utilize the blockchain from where the token originates. And if the blockchain can't perform something there's a demand for, the blockchain is redundant and the associated cryptocurrency should be valued as such. -- Looking at Bitcoin for example -- WHAT it does is that it enables "digital currency". More specific, from the Bitcoin white paper - A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. HOW it does what it does, from the white paper - Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. WHY does it need to do what is does? This is pretty much the use-cases of Bitcoin. Enabling micro-transaction, instant (almost) and cheap world-wide transactions and prevention of corrupt banks are some of my favourite use cases for Bitcoin (still demands further development of the technology to be fully realized). However, if you can't find any use cases of a blockchain design which you think there are any good WHY-answers to, you should stay away from investing in the corresponding cryptocurrency. So to summarize; If you can't see any need of utilizing functions provided by the underlying blockchain design, you should stay away from investing in the cryptocurrency. However, if you instead think there's a valid WHY and WHAT, and believe the HOW will by time enable why and what, maybe you should invest and HOLD! :-)
The above text regards valuing cryptocurrencies in general. However, before analyzing a cryptocurrency, find out what kind of cryptocurrency it is, since a cryptocurrency originating from an ICO should be valued differently compared to a cryptocurrency which is thought to be used as a mean of payment. As I see it there are four kinds of cryptocurrencies; 1. Storage of value 2. Mean of payments 3. Platforms/ dapp-blockchains 4. Crowdfunding/ dapp-specific
I appreciate feedback on my reasoning regarding valuing cryptocurrencies, and would like to discuss it further!
[link] [comments]
Read More
