The cryptocurrency market, once approaching $3 trillion, is in for a rude awakening. Big companies in the industry fail, causing investors to lose confidence and cash out their holdings in full (if they are able to do so at all). The important question now is which digital assets are even worth owning, if any.
The only cryptocurrency I would have buy right away is Bitcoin (BTC -1.81%). Here’s why.
Simplicity is key
Many crypto enthusiasts are excited about the promise of another popular cryptocurrency like ether. The main innovation of Ethereum was the introduction of smart contracts, which are self-executable computer programs that run when two parties fulfill their goals of a given transaction. Bulls believe this technology has the potential to disrupt major industries, with financial services topping the list.
Cardano is another smart contract cryptocurrency that a Proof of Stake System trying to compete directly with Ethereum. Cardano also has a very thorough and complex development structure with five separate phases in its pipeline. Again, both Ethereum and Cardano could be used daily by individuals and institutions in a decade for a range of use cases.
But the number of complicated upgrades required for Ethereum and Cardano, with certainly more updates to be added to the mix in the future, creates plenty of room for error. And the “finished” versions of these blockchains could look very different than many think.
Bitcoin, on the other hand, is incredibly simple. And this is entirely intentional.
Bitcoin was created during the Great Recession to allow two independent parties to send and receive money electronically without an intermediary. And its supply will be capped at 21 million coins. That’s it. This is the basic knowledge that every newbie needs to understand. There are certainly some implications for these properties of Bitcoin (see below), but this is the most important information investors should know.
Bitcoin is completely different than any other cryptocurrency out there, and that’s exactly why I like it. There really is no place for a central authority to change the direction of the network and malicious actors have yet to hack it. The simple setup of the network was deliberately created. I consider this a feature, not something Bitcoin lacks.
To be clear, I don’t fully understand the technicalities of Bitcoin either, but I am much more comfortable with it and its capabilities than other cryptocurrencies. And I think its stability deserves a premium.
A better form of money
At high levels, Bitcoin has the potential to change the nature of money, which has three functions. Money should be a store of value, a medium of exchange, and a unit of account. Throughout its history and likely for the foreseeable future, Bitcoin is gaining ground as a legitimate store of value.
Gold remains a fitting analogy. For thousands of years, the shiny precious metal has been considered a safe place to park one’s wealth. It has some industrial uses, but gold is mainly used in jewelry and as an asset, so its value is derived from the fact that other people think it’s worth something. Why can’t Bitcoin be viewed similarly?
Bitcoin possesses key characteristics that actually make it a better store of value than gold. Bitcoin can be easily transported across borders. A bitcoin is divisible to eight decimal places. Bitcoin can be used in transactions. And most importantly, Bitcoin is absolutely finite. Once 21 million coins are mined, no more can be created.
While bitcoin is more portable, divisible, transactable and finite than gold, gold has a much longer history. But I can’t understand why bitcoin can’t start to beat gold’s $12.5 trillion global market cap in a world that’s set to become increasingly digital.
Whether Bitcoin satisfies the characteristics of medium of exchange or unit of account has yet to be determined. And we may not know for (at least) a decade. But even if bitcoin’s only real use is that it’s a new way for individuals and institutions to store wealth digitally, I still believe the upside is massive, especially after the price has fallen since its peak before 13 months has fallen by 75%.
That makes it the only cryptocurrency I would buy right now.
Neil Patel has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin, Cardano, and Ethereum. The Motley Fool has a disclosure policy.
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