Sunday, September 12, 2021

Blockchain Investment -- Part I

It is inevitable that one day digital assets investment will be part of an investment portfolio alongside stocks.  Normally, people would say Cryptocurrency investment but for me, it is Blockchain investment.  Why ?

For every crypto coins or tokens, they are backed by a blockchain.  To be technically accurate, the cryptocurency protocol is built on the blockchain.  Without the blockchain, said cryptocurrency is basically worthless.  So, what exactly is a blockchain ?  To save me from doing a detail explanation, the benefit of the internet era comes good.  You can refer to Investopedia (here), Wikipedia (here) and many more writeup to fully understand what is a blockchain.  In short, we can see a blockchain as a distributed digital ledger that stores data of any kind.  There are some characteristics that one need to know as these shall be the essence to determine which blockchain is worth the investment :-

1. Decentralization
2. Transparency
3. Security
4. Scalability

As mentioned the above are the characteristics of a blockchain but how much better from one blockchain protocol to another is relative.  It is a known fact the Bitcoin blockchain has problem being scalable (ability to handle large amount of transaction data on its platform within a short span of time).  As such, Litecoin was created in 2011 as an alternative to Bitcoin to increase the scalability.  The Litecoin network is able to process a block every 2.5 minutes compared to Bitcoin of every 10 minutes.

After knowing the basic of blockchain, how this and cryptocurrency being linked up for investors to decide what to invest in ?  You can develop a fantastic blockchain protocol that promises do lot of things, give the cryptocurrency that tagged with it an unforgetful name and design but that still don't warrant it is worth the investment.  What's decide that is what type of projects could be implemented on that blockchain network or using the protocol of the blockchain.  These projects must be able to relate to the real world, that is help people in certain aspect of daily life or assist businesses to prosper, etc.

The followings are some of the writeup about how blockchains are or preceive being used in real world :-

and many more that you can easily find on the internet.  If that isn't enough, there are also books published which one could purchase and read about it.  Another source is to visit the official website of the specific blockchain and they will put up what are the projects currently using the protocol.  One of the latest event is the Cardano (ADA) smart contracts to be launched this month (to be exact 12th September 2021).  Its real world project is partnered with the Ethiopian government to track the educational progress of 5 million students on its network.  The project will give each student a tamper-proof academic record to help them to find a jobs or study abroad (refer here).  

Investing into a blockchain (cryptocurrency) is totally different from investing in a stock of a company.  In stock, one can check on the company's financial status (P&L and cashflow statement), evaluate the business model of the company (if company is selling a product, one can monitor how well received this product is) and so on.  Thorough study should be able to give one a guide of the risk and reward in investing the stock and also what kind of margin of safety one need to aim for when buying into the stock.  On the other hand, investing into a blockchain (cryptocurrency) will not have all these "luxuries" as a guideline.  Very often one has to use own judgement after studying and researching on the usefulness of the blockchain protocols.  

Investment decision should not be based on that cryptocurrency has an unforgetful name, the cuttiest design on the coin or the price level of the crypto.  High price today doesn't mean 5 years down the road it will turn into a gem.  Bitcoin Cash (BCH) hit an all time high of around US$2,400 in 2017 but till now it never return or surpass that level.  Its price still trading below 50% of that peak.  Similarly, a cheap price today doesn't mean 5 years down the road it cannot be a gem.  Ethereum (ETH) was like less than US$1 in 2016 and now it is worth at least US$3,000 per unit.

There are currently at least 20 different blockchains in the community, each headed by its native coins (BTC, ETH, LTC, ADA, DOT, BCH, BNB, USDT, ZEC, RVN, ETC, SOL, etc).  From a top down approach, one probably has to research on which one of the blockchain has the investment potential.  After zeroing in, one can either focus on the native coins (usually people will invest in the native coins) or those tokens that ride on that specific blockchain.  Sometime, those tokens could be the real gem as compared to the native coins.

There is a point worth to take notes of if one has an interested in investing in one of those ERC20 token, a protocol that ride on the Ethereum blockchain.  These tokens need ETH to swap and transfer out of a wallet.  ETH after the London Hard Fork (a set of five Ethereum improvement proposals, EIP-1559) in August 2021 has made the network fee (incur swapping and transferring ETH coins and ERC20 tokens) being sky high especially when the network is very busy.  Sometime the network fee can even cost more than the value of the holding.  As such, investing in any of the ERC20 tokens, getting some ETH has became inevitable eventhough it wasn't an initial consideration.  

Deciding which cryptocurrency to be invested in is subjective to each individual but the process of obtaining that asset is pretty much standard in the following steps  :-

1. getting a cryptocurrency wallet
2. registering for an cryptocurrency exchange to buy and sell the crypto
3. several methods of obtaining the cryptocurrency
4. what can be done to the holding

The above are actually what's this post is to be focus on.  However, detail writeup on each of those will be very lengthy.  As such, will need several installments to cover all those.  Next installment will touch on those in detail.

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