Bitcoin, a better-known cryptocurrency and arguably the current gold standard for cryptocurrency investments, gained over 1300 percent in 2017. More than a dozen other cryptocurrencies outperformed Bitcoin with gains ranging from 3300 percent to Ripple’s astounding 36,000 percent gain. Since then, crypto enthusiasts have been trying to figure out the next best cryptocurrency they can get their hands on.
Top Six Cryptocurrencies:
- Best for Retail Adoption: Bitcoin
- Holds Most Market Enthusiasm: Ethereum
- Best for High-speed Transfers: Ripple
- The Best for Blockchain: EOS
- Best ALternative to Bitcoin: Bitcoin Cash
- Fast Transaction Time: Litecoin
The first cryptocurrency was Bitcoin, invented in 2009 by a pseudonymous developer named Satoshi Nakamoto. The market doesn’t know the true identity of Satoshi Nakamoto. But the groundwork laid by the invention of Bitcoin paved the way for other digital currencies.
It also led to the growing acceptance of cryptocurrencies as both an investment opportunity and a means of exchange. A way to securely transfer money from one currency owner to another digitally. Without the use of traditional banks or financial institutions.
Cryptocurrencies exist to function as money, an alternative to the world’s fiat currencies. Many of which are at different stages of inflation erosion or are at risk of government seizures. Greece, a country with a 45 percent income tax rate, takes over 900 bank accounts a day.
Cyprus’s island nation, a budding financial center, suffered the consequences of Greek debt defaults. Forcing Cyprus’s government to seize the depositor’s funds to remain solvent. Venezuela’s inflation rate is currently over 46,000 percent, which creates a financial crisis that threatens families’ survival.
Cryptocurrencies offer several advantages when compared with traditional banking, money transfers, and fiat currencies.
- Privacy. The design of many cryptocurrencies is around privacy and obscures the sender and receiver of cryptocurrency funds. Only cash provides similar anonymity.
- Decentralization. Cryptocurrency owners use a wallet to access their currency and receive or send funds from a specific wallet address that uses a secret key for access. Some also use an exchange to store currency, although the practice brings additional risk. The currency’s record exists on the blockchain with a copy stored on every full node, a computer that keeps a ledger locally and syncs with other computers online. Your money isn’t in a single bank or even several. The decentralized nature of cryptocurrency ledgers makes cryptocurrencies less vulnerable to seizure or localized risks, like fires or hardware failures. The data storage isn’t just off-site. It’s copied worldwide to all full nodes.
- Scarcity. Bitcoin has a fixed supply. Over 17 million Bitcoin are in existence. However, there will never be more than 21 million bitcoin. It’s built into the currency code. Fixed supplies give Bitcoin and other cryptocurrencies similar characteristics to gold, silver, or other precious metals that have historically been used as money. Unlike U.S. Dollars, British Pounds, or any other fiat currency, after the full supply is in circulation, the supply will never grow, devaluing the currency’s buying power.
- Intelligent contracts. Some cryptocurrencies have a unique feature that can not be duplicated with fiat currencies. Ethereum is among the best examples with its robust support for “smart contracts”. Essentiallythe use of programs that live on the blockchain is to manage transactions as well as many other uses, some of which we may not have yet imagined. At a base level, these contracts can be used to replace arbiters or escrow services. The Smart Contract can manage the transaction details and only release the payment if the predefined conditions are met.
- Cost of the transfer. The cost associated with cryptocurrency transfers can be a pro or a con, depending on the type of currency, type of transfer, and transfer speed. Bitcoin, for example, can become prohibitively expensive if you need fast clearance for a transaction. Costs are less problematic for less time-sensitive transactions. Other types of cryptocurrencies, such as Ripple, are fast and inexpensive to transfer, leading to increased adoption of Ripple-based transactions and related technology by financial institutions.
Cryptocurrencies come with a list of considerations that can help investors make safer investments. It’s fair to say that there is no safe cryptocurrency at this early stage. However, with careful planning, you can assemble a portfolio that limits your risk while still providing you the opportunity to exit the trade if needed.
- Adopting the market. Awareness of Cryptocurrencies is growing, but most of the focus has been on Bitcoin. Relatively few retailers accept payment cryptocurrencies, but there are a few. Overstock.com announced in 2017 that it would accept cryptocurrencies as payment. Payments will be limited to Bitcoin, Ethereum, Litecoin, Dash, and Monero, giving the other 1,500 + cryptocurrencies the cold shoulder. Pizzaforcoins.com accepts over 50 cryptocurrencies, allowing cryptocurrency owners to buy pizza from local establishments and have it delivered. Market adoption of cryptocurrencies for payment has been slow. There isn’t a variety of options, but the cryptocurrency market can change quickly.
- Obsolescence, man. As many as 1,000 cryptocurrencies have already failed, with more currencies to follow. The most common type of failure is at the Initial Coin Offering (ICO) or shortly thereafter, with many coins finding a crowded market for coins with similar characteristics to existing offerings, causing skepticism among investors. In some other cases, the ICO itself was just a cash receipt, with the founders running off with investor funds. The ICOs are currently unregulated.
- Abandon Cryptocurrency Projects. Most of the investment money for cryptocurrencies is concentrated on a relatively small group of coins. Without investor interest, projects can be abandoned, leaving investors with essentially worthless digital coins.
- Risk of regulation. As far as cryptocurrencies are concerned, the regulatory risk has two sides. In the U.S., cryptocurrencies are not regulated at the federal level. This allows states to introduce cryptocurrencies or blockchain technology rules and regulations that serve as the backbone for cryptocurrencies. On the other hand, some investors and finance experts have expressed concern about cryptocurrencies’ future regulation, leading to a drop in demand or eliminating demand.
- Risk of liquidity. Investors and lesser-known cryptocurrencies may find fewer buyers, creating challenges when looking to leave a position.
- Risk of volatility. Few investment classes can compete with cryptocurrencies when it comes to price volatility. Prices can rise or fall dramatically in a single day, making or breaking a fortune.
- The risk to third parties. Mt. Gox, the hacking of a bitcoin exchange based in Japan, and the world’s leading exchange in 2014, lead to a loss of nearly half a billion dollars in bitcoin. Overall, an estimated 850,000 Bitcoins belonging to investors were missing, ultimately forcing the exchange to default.
- Secure keys. Cryptocurrencies are often stored in a digital wallet, secured by a long code or a long series of words. Unlike your bank account or investment account, there is no recovery process if you lose your password. Your cryptocurrency wallet and its contents are no longer accessible without your password.
What to look for
Weiss Ratings, a leading independent financial institution rating agency, recently introduced cryptocurrency ratings, identifying Bitcoin, Ripple, EOS, NEO, and Steem as its top five cryptocurrency ratings. Weiss also spotlights a dozen cryptocurrencies that he identifies as the weakest.
- Adoption Rate. Cryptocurrencies are highly speculative investments. The biggest gains are sometimes found among newly introduced coins or coins whose technology has found the market, as was the case with Ripple. More cautious investors may choose to look at the adoption rate, focusing portfolio investment on cryptocurrencies currently used in real-world transactions.
- Market Cap. In many ways, the market cap for a given cryptocurrency goes hand-in-hand with liquidity. Fledgling cryptocurrencies may not ever find the market, preventing investors from exiting the position profitably.
- Promising New Technology. Ethereum and Ripple both owe their stratospheric gains in 2017 to the innovative technology built into their respective platforms, differentiating cryptocurrencies from the crowded market of often similar offerings.
- Security or Anonymity Features. Technology such as smart contracts, found in Ethereum and several other cryptocurrencies make transactions more secure by enabling a set of rules for each transaction. Like Monero, some cryptocurrencies place a strong focus on anonymity, obscuring the sender and receiver of funds’ identity.
- Industry Utility. Ethereum and Ripple are again good examples of cryptocurrencies with utility beyond a simple medium of exchange. Ripple, in particular, attributes its rise in popularity and a price appreciation of 36,000 percent in 2017 to acceptance within the financial industry as a tool to transfer money around the world inexpensively and faster than by traditional methods.
When choosing a cryptocurrency for investment purposes, hoping that it may someday become a monetary trade tool, there are some things to look for and evidence that it is sometimes more prudent to wait for the establishment of a cryptocurrency market.
What to look out for
- This is Redundant Technology. Many cryptocurrencies are built on open-source code, making it relatively easy to clone an existing one, possibly making minor changes to the code or features. In such cases, the new currency may not offer enough unique benefits to justify the investment or suggest that the currency will be widely adopted.
- Limited interest in the market. The cryptocurrency market has its well-known heroes, but it also has its share of duds. Well-intentioned cryptocurrencies never get off the ground, poorly supported, or niche currencies that a more accurate description is a hobby than a currency. Staying with currencies that have shown signs of continued market interest is a safer bet.
- Low Market Cap. Just as a market cap helps us instantly distinguish between a Dow Jones stock and a Penny stock, a higher market cap points to a more vibrant market and greater liquidity. Thinly traded cryptocurrencies or those with a low market cap could be a trap that’s difficult to escape if you need to exit.
- Limited Exchange Support. Like the concerns regarding market cap, a cryptocurrency with little support on exchanges can make it difficult to trade, often requiring several steps and conversions to make a single trade. Cryptocurrencies with wider support for popular exchanges make it easier to build or exit a position.
How to Choose the Best Cryptocurrencies
Most daring investors can purchase new cryptocurrencies at or shortly thereafter, following the example set by many of today’s Bitcoin millionaires. However, there may never be a “next bitcoin” and the estimated 1,000 cryptocurrencies that have vanished from the digital ether point of risk to early investors. We have taken into consideration:
- More established cryptocurrences with a larger market cap
- Technology Promising
- Those traded on a number of exchanges (providing enhanced liquidity)
- Historic performance and recent trends
The granddaddy of all cryptocurrencies, Bitcoin was first and is the most well-known cryptocurrency on the market. It also benefits from the largest market cap and is among the most highly traded cryptocurrency, assuring liquidity in the short term. Bitcoin is the king in retail adoption, leading all other cryptocurrencies in terms of acceptance as a payment medium.
Down significantly from its all-time high of over $20,000 per Bitcoin, BTC may have plenty of room for growth despite an increasingly crowded field of competitors.
As the currency and platform that made “ smart contracts ” part of the cryptocurrency market ‘s vocabulary, Ethereum has seen massive gains since its introduction in 2015. Currently trailing only Bitcoin in regard to market capitalization, Ethereum has become one of the most widely discussed cryptocurrency projects in the world.
A consortium of some of the biggest names in the business, including Microsoft, Intel, Chase, and J.P. Morgan are building business-ready versions of the software that drives Ethereum. With momentum and market enthusiasm behind the Ethereum project, there’s no reason to think Ethereum has run its course and investors should consider Ethereum as part of a cryptocurrency portfolio.
Ripple diverges from much of its cryptocurrency competitors in many ways. It is an invention of Ripple Labs, and the Ripple token is being used in high-speed and low-cost money transfers worldwide.
Ripple Labs has announced several partnerships with leading money transfer services, with more financial market partnerships expected in the future.
Unlike many cryptocurrencies that trade on hopes and dreams, the use of Ripple is in the real world today, showing signs of future adoption within the financial market community. Ripple rise in value by over 36,000 percent in 2017, but similar gains may not be likely going forward.
Another cryptocurrency with smart contracts like Ethereum, and which is gaining in popularity, is EOS. The creation of EOS being the first blockchain operating system, offering decentralization on applications that live on the blockchain and parallel processing. It enables faster transaction speeds and better scalability than some competitors. Transactions on the EOS network are free.
Many competitors, including Ethereum, have a transaction fee for transferring coins or tokens from one wallet address to another. EOS concluded its year-long ICO in May of this year, raising a total of $4 billion. The longer-duration ICO was done to create an orderly market for EOS without the dramatic run-up and sudden crash common to cryptocurrencies when launched.
YTD performance for EOS is flat, with less volatility than has been seen with some competitors. Enthusiasm for the project remains high, and EOS is one of the most actively traded cryptocurrencies on exchanges.
Bitcoin Cash (BCH)
Bitcoin Cash, a fork of the original Bitcoin project, is one to watch, as it’s the fourth-largest cryptocurrency by market cap.
If forced to level criticism against Bitcoin in its current form, slow transaction speeds are among its primary challenges.
Bitcoin cash was developed using modified code from the Bitcoin project that allowed larger block sizes, promoting faster transaction times and better scalability.
Although not yet as widely accepted or as widely known as Bitcoin, Bitcoin Cash is still a promising alternative to Bitcoin with an enthusiastic market following.
Now accepted as a payment method at Overstock.com, Litecoin may also have a bright future. Long-term investors in LTC have been rewarded with up to 20x returns, although a spike in late December 2017 sent LTC’s price to over $350.
Litecoin now trades at around $84. Although showing signs of consolidation remains actively traded and is consistently one of the top 10 cryptocurrencies according to market cap. Litecoin boasts a faster transaction time than Bitcoin, largely attributed to its use of a different algorithm to add transactions to the blockchain. Increased transaction speed also enhances scalability.
Final Thoughts on the Best Cryptocurrencies
Cryptocurrencies are still in their formative years. If you’re new to cryptocurrencies, you may be better served by investing only risk capital and by building a portfolio of widely traded cryptocurrencies. Initial coin offerings can be tempting, particularly with the parabolic rises common to ICOs. Almost as common is a precipitous fall following the ICO.
More established currencies help prevent volatility and provide better liquidity than found with newly minted cryptocurrencies. It’s important to learn where a cryptocurrency can be traded and how big the market is for that cryptocurrency.
Many early investors have found themselves without a viable way to exit the position. If cryptocurrencies are here to stay, some outstanding opportunities are likely to appear among the most commonly traded currencies. While also minimizing risk due to abandoned projects or lack of liquidity.