4 core traits of cryptocurrencies

Cryptocurrency investing is in full swing. BitCoin, Ethereum, LiteCoin valuation spikes are seeing new records unstoppably. In light of Bitcoin’s latest surge, people started questioning whether it’s at its peak and whether it makes sense to dump it and switch to altcoins. I have developed a framework that might help you decide.

When it comes to cryptocurrency trading, there are four traits one should be looking at:

1) Liquidity: The ability for holders to cash out via exchanges and marketplaces.
2) Transactability: A factor of cryptocurrency’s default block mining time. The higher it takes time for a new block to appear, more difficult it is to use in everyday transactions, e.g. shopping for coffee, buying t-shirts, domain names, etc.
3) Anonymity: Whether public eyes can see what’s going on in the ledger, who is buying what, who is selling, etc. In contrast to popular opinion, most cryptocurrencies are not anonymous.
4) Programmability: The ability to develop trustless contracts on top of the public ledger. This is a state-of-the-art advanced concept introduced by Ethereum, which you can skip.

Your decision to invest should be based on how each cryptocurrency fares in each of these categories, and how much they each weigh.

In my opinion, liquidity is the most important parameter among these four. You want to make sure that when you need it, or in times of panic, which even happens with traditional markets, you can cash out your virtual money with no hassle. Bitcoin is a clear winner in liquidity. It is widely available on all exchanges and marketplaces, in most countries. Yet, Ethereum and LiteCoin are also catching up. The rest are still lagging far behind, so for me, they are a no-go.

Regarding transactability, the clear winners are Ripple and Ethereum. Ripple blocks appear in every few seconds, Ethereum’s does every 15 seconds. BitCoin, on the other hand, takes 10 minutes! This makes the former two currencies, available to use in everyday applications such as shopping. Because after all, you don’t want to wait ten mins for your cup of latte before your payment is settled, accepted and the barista starts working on it. However, it is worth noting that the cryptocurrency use-case in such everyday applications still remains to be seen. Today, they are popular as a value of store (similarly to gold) and money transfer (like wire transfers). That’s why I’d weigh transactability secondarily in my measure to diversify crypto-assets. Therefore while being transactable is a plus for Ethereum, it not a big loss for BitCoin.

Thirdly, anonymity, an interesting parameter to-say-the-least, is yet to be proven. There is no 1st-grade popular blockchain that’s anonymous because the trust has not been fully established yet. True anonymity in distributed systems is difficult, if not impossible. Also, the need for such high levels of anonymity can make these cryptocurrencies easy targets of investigations and seizures. Therefore, I put anonymity in a negligible category. However, it’s worth looking at ZCash to get a better sense of what it might look like.

Last but not least, programmability is a new concept by Ethereum, but again, it is yet to be proven and stabilize. Hence, its weight in decision-making is also negligible for the time being.

In conclusion, the sum of all these four traits makes Ethereum sound like a winner (hence 2700% surge) perhaps with a little lead ahead of BitCoin. However, the truth is, since liquidity is the number one parameter, and the remaining three are yet-to-be-proven, I think BitCoin is still the most solid cryptocurrency to invest. And, the other take is, innovations such as programmability and transactability will still push BitCoin’s value further up because it is the currency to liquidate, regardless what currency comes up with those innovations. Perhaps that’s why in light of Ethereum’s recent surge, BitCoin investors were also happy with some fantastic returns parallel to Ethereum’s.

Most importantly, do not invest in cryptomoney without a grain of salt, which we will touch at a later post. If there’s any trait that I might have missed, please let us know in comments.


Leave a Reply