Investing in Blockchain? Diversifying Across Several Niches is the Rational ApproachJun 17, 2018, 1:50AM
It is true that blockchain will disrupt several industries. We consider an investment process by which you invest in various industries.
For anyone taking a first glance at Coinmarketcap, the prospect of starting out as a crypto investor is daunting. Which coins are which? How do you read the charts and graphs? You've heard of Bitcoin, Ethereum, maybe a few other coins, but what about the hundreds of others? Are you bearish or bullish? Investing in markets is complicated to begin with. The crypto market is a whole other beast for a newbie trying to make sense of a new industry in rapid flux.
Truth be told, there is very little sense in the crypto market. To a new investor, there is nothing more valuable than the knowledge that no one really knows what they are doing. It is an industry in the process of self-invention. It pays to understand that, thus far, it is, therefore, a market ruled by public perception and mood, more so than rational, predictable metrics.
Investing 5% or 10%, or more if you’re particularly gung-ho, of your capital into cryptocurrencies is a good idea, but do not expect to come out of investing unscathed. Lamborghini-owning Bitcoin millionaires who, by virtue of patience, (or the sheer luck of having bought Bitcoin early on), have made their profits from the much-revered tactic of "hodling". Those who stand to gain most from this industry's growth are those who choose where to invest wisely and then lock in for the long haul.
Not So Different from the Stock Market
Despite the unpredictable nature of this peculiar market, it bears a strong resemblance to stock market investing. You won’t be looking at price-to-earnings ratios or other figures so as much as applying broad investment principles.
For example, does the project offer a service or product that the world needs? Can you imagine users switching from related non-blockchain based services to a blockchain-based one? More generally, does the use case actually require blockchain technology at all?
While there are numerous ways you could ask yourself these and related questions, they all share one common trait: common sense.
Spreading out your capital also resembles common sense stock market strategies. You don’t put all of your eggs in one industry or sector - you hedge them against investments in multiple industries in order to minimize losses should one of your bets be off. It is always advisable to start out thinking about how to minimize your losses, not how to maximize your gains.
As the healthcare, technology, and energy industries are thriving in the stock market, a rational investor would divide his or her funds between stocks in various companies in each of these sectors.
The same principles apply to cryptocurrency investing - you should spread your investments across several of the industries that distributed ledger technologies will inevitably disrupt. Below, we run through some of the most promising niches, with example projects, and some notes as to how to maximize blockchain and cryptocurrency investments in these sectors.
If there is one thing above all others that blockchain technology is good at, it’s disintermediation: it removes the middleman. Blockchain eliminates the need for intermediaries to carry out all of the procedures between the service provider and the end user.
There are few industries where the middleman carries a heavier portion of the burden than in the supply chain industry. With multiple businesses still functioning with paper records, and single-location or centralized supply chain databases, inefficient inventory management and a lack of traceability are rampant. Blockchain is a technology that can provide solutions to all these problems at once.
Whether or not blockchain will exert a major influence on supply chain is not a question—it has shown it will. The question is how to choose which project to invest in. Ideally, you want to look for a project that has done their research, has tested their products in the field with proven results, and has developed strong business partnerships in the industry. Look for adoption from major shipping-heavy companies like Walmart, Amazon, IBM, Fed-Ex etc.
There is a fork in the road ahead between cloud computing and blockchain-based distributed computing. The problem with the former is that it is controlled by centralized entities who can charge exorbitant prices for their services, are subject to hacking, and to misuse of clients data in their control.
With blockchain projects in this niche, users on the network can earn tokens by renting out their computing power. There is a great desire for computing power too, as most of the economy now requires it. Scientific calculations, Artificial Intelligence, and media production all require great deals of computing power, and some blockchain projects can allow them to do that at a fraction of the cost.
Golem Network is by far the most well known in this niche, but SONM is also moderately popular. The former has just released its Beta version and you can actually rent out your computing resources to earn tokens at this very moment.
Prediction markets are blockchain-based betting grounds where users come together to make predictions on events such as sports matches. Prediction market services often make use of AI and machine learning models to provide odds and betting parameters. These systems offer an unbiased analysis of the potential for a given event to occur. Many in blockchain, such as Vitalik Buterin, the founder of Ethereum, have acknowledged the potential for DLT technology to improve the accuracy of machine learning as well as the immediacy of crowdsourced opinions, both of which should disrupt this niche dramatically.
Augur is one of the most hotly discussed predictions markets and is about to go live soon. You could consider investing in it before it goes live, or wait to see how it plays out.
Currency is of course where the whole blockchain phenomenon began. Blockchain technology was developed for Bitcoin to facilitate the world's first digital peer to peer asset transactions.
While Bitcoin still dominates the market, and public opinion about cryptocurrency, it is far from the only coin in the space. True, it is the ‘digital gold’ that has become something of a standard for the market, but there are several other coins that are disrupting the industry in different ways. For example, Ripple can make transactions between banks faster. OmiseGO makes it possible to transfer funds between wallets (and will be first to implement the much talked about Plasma Network). Stablecoins like MakerDAO’s Dai offer some protection against volatility.
It can be hard to make any forecasts with these coins, however, tough as it already is. The main obstacle here is scalability, so you must watch out for how the project is developing, for which we have provided some guidance already.
Ideally, you want to zero in on projects with strong technical architecture, an understanding of regional regulatory standing, and niche use cases like remittances. The safest bet is obviously Bitcoin, though projects like OmiseGO and Ripple are also highly regarded.
Suggestions for Building a Solid Portfolio
These industries are only a very small sampling of the industries where blockchain could have a tremendous impact. There are many more, and we hope to cover all of the countless ways blockchain can render the business more efficient and equitable.
Before getting started in blockchain investment, there are three things that you must know.
- Never ever invest without doing your own research and investing only as much as you are willing to lose. There is no telling what can happen, and specific can only be tentative recommendations. There is certainly a possibility that a new project might arise and challenge existing competitors in a niche.
- Begin with investing in Bitcoin and Ethereum. These are by far the most likely coins to go mainstream, and if and when the market goes mainstream, these will be the first to get there. A possible start would be to invest in Bitcoin or Ethereum the first two months and move onto other coins from there, in small stages.
- Invest in traditional assets as well. Combining that with digital assets is true diversification.
Now, assuming you have a certain amount of Bitcoin and Ethereum, you will want to select a project or two from each niche to add to that. For example, perhaps you might think computing is a good niche to invest in, and would consequently invest some in the Golem Network project.
This is the long game. There is no predicting whether Bitcoin will hit $250,000 or $1 million, but it will likely rise in the foreseeable future. Short term trading in the crypto market is highly risky and is not recommended unless you really know what you are doing.
The portfolio and the niches suggested above are relatively safe bets in the medium and long-term. If you can apportion some funds to the projects mentioned here every month, there is a solid chance you stand to turn good profits over the years to come.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.