Is this crypto legit? Here’s how to tell – Part I

Bitcoin broke $7,000, up from $6,300 just a day ago. With the latest increase, even the most bullish predictions about where the price might go in the next months don’t seem that unlikely anymore.

The increase is in part driven by an anticipated Bitcoin split on or around November 16. The split, called a “hard fork”, is causing heated debates between two opposing camps in the Bitcoin community. Less then two weeks before the event, both camps seem to have solid arguments why it should or should not occur.

Without getting too technical, the split, dubbed SegWit2x, might result in the creation of two blockchains. If it happens according to plans, Bitcoin holders at the time of the split are expected to be credited an equal amount of the new coin on the new blockchain.

Whether or not it pans out according to plans, the expected hard fork and Bitcoin’s price are fueling a growing interest in the entire cryptosphere of more than 1,600 tradable coins.

As in stock investment, or any other type of investments for that matter, asset diversification is key.

Index funds

To this end, a wave of new cryptocurrency index funds has come on the market recently. They are intended to help individual investors buy a pool of select cryptocurrencies, rather than invest in each of them one by one. With such services, investors can acquire a greater exposure to the market, rather than hold isolated coins, which, long-term, might be both risky and less profitable.

As a side note, in 2016 New Zealand investor, crypto-trader and blogger Willy Woo, made an experiment resulting in favor of Bitcoin. Bitcoin’s performance between 2013 and 2016 had beat the top 10 altcoins almost fourfold. Woo simulated the performance of fictional index funds investing in the top 10 and the top 20 altcoins by market cap respectively.

Bitcoin vs The top 10 ranked altcoins proportioned by marketcap. Credit: Woobull

It is important to note that the findings refer to a period when Bitcoin’s market cap was dominating the cryptosphere with over 90% for years on end. As a comparison, at the time of writing, Bitcoin’s market cap is a around 62% of the entire crypto market of almost 190 billion, according to data by Bitcoin’s market share was at its lowest point of below 38% in mid-June 2017, but has since then recovered after a more than 10-fold increase in price year-to-date.

This jarring volatility indicates the need of diversification in cryptocurrency investment. But one key questions remains: how to distinguish good coins from the bad.
Here we’ll outline the most important factors making a given coin legit and likely to increase its value over time.

How to tell?

Indeed – increases could be significant, going up to 60,000% and more for some currencies like TeslaCoin and Pivx. There are many others that have gone up by more than 1,000% in just a few months. It could be overwhelming.

“Good coins have a transparent technical vision, an active development team, and a vivid, enthusiastic community”, as summed up by Blockgeeks.

In a recent webinar, investor, entrepreneur and author James Altucher, outlined a detailed investment strategy when it comes to investing in coins.

In his opinion, 99% of the cryptos are a scam and will go bust at some point.

Yet, the fundamental factors underpinning the blockchain and the cryptocurrency concept are sound as they are hardwired in the computer code of those cryptos “and it doesn’t bode well to the future of the US dollar” and other cryptos, Altucher says.

You can’t print a trillion dollars worth of cryptocurrencies like you can with fiat currencies, Altucher says.

“You can’t print up a trillion and a half dollars without consequences, including people losing faith in the humanistic institutions behind it, like the Federal Reserve banks. In the U.S. alone, there’s $1.5 trillion in government-backed currency out there”, he explains.

Limited Supply, Unlimited Demand

Unlike fiat currencies however, supply of legitimate cryptocurrencies is limited. It is hardwired in the computer code that there could ever only be 20 million Bitcoins. Similarly, Dash, Litecoin, Ripple and others of the top coins are limited in supply.

Unlike them, Ethereum, Monero, NEM, etc. remain uncapped, meaning that there could theoretically be an unlimited amount of them produced over time.

Limited supply is, in Altucher’s opinion, one of the key indicators to consider when evaluating a cryptocurrency’s legitimacy.

As in broader economics, limited supply, accompanied by unlimited demand for a solution to a real problem could potentially result in values going up. The same holds true for cryptos.

(to be continued…)