For long-term crypto gains, look to utility

With more than 4,000 cryp­tocur­ren­cies to invest in, it’s hard to know which coins to choose. How­ev­er, while all are prone to volatile price swings, experts point to one qual­i­ty above all oth­ers: util­i­ty. 

In the cryp­tocur­ren­cy world, util­i­ty refers to dig­i­tal tokens built on a spe­cif­ic blockchain ecosys­tem – often based on ethereum’s ERC-20 stan­dard – which grant token hold­ers cer­tain rights. For exam­ple, file­coin hold­ers are per­mit­ted to use its decen­tralised data stor­age net­work. Alter­na­tive­ly, a game devel­op­ment com­pa­ny could issue util­i­ty tokens to fund its next release, which hold­ers could spend on gam­ing acces­sories. 

“Any cryp­tocur­ren­cy is only as good as its use case,” says Katharine Wooller, UK and Ire­land man­ag­ing direc­tor at cryp­to wealth-build­ing plat­form Dacxi.

Many investors buy bit­coin because it’s the most well known name in the indus­try. But while bit­coin can improve finan­cial inclu­sion and enable bor­der­less pay­ments, experts con­sid­er its use case to be lim­it­ed – ethereum is the pre­ferred ecosys­tem for build­ing cryp­tocur­ren­cy projects. Ethereum and many oth­er cur­ren­cies offer direct util­i­ty in var­i­ous areas, which could boost their val­ue in the long run.

“The most vis­i­ble cryp­tocur­ren­cies are those address­ing or solv­ing spe­cif­ic prob­lems on a macro lev­el,” says Roman Matkovskyy, an asso­ciate pro­fes­sor in finance and account­ing at Rennes School of Busi­ness.

The tech­ni­cal jar­gon can be con­fus­ing. But if you’re a lay­man investor, you’re prob­a­bly only inter­est­ed in buy­ing coins on a cryp­tocur­ren­cy exchange and stor­ing them in a dig­i­tal wal­let. 

Still, it’s essen­tial to do your home­work and spend time research­ing and analysing a coin’s long-term intend­ed use, cau­tions Wooller. A white paper detail­ing a coin’s plans, pur­pose and tech­nol­o­gy, pub­lished before its ini­tial coin offer­ing, is freely avail­able online. 

But just because a coin has util­i­ty doesn’t mean suc­cess is guar­an­teed, Wooller stress­es. There must be suf­fi­cient demand for the ecosys­tem.

Building value from utility

On top of the 4,000-plus cryp­tocur­ren­cies already avail­able, there are more than 2,000 ‘dead’ coins that have failed, accord­ing to Coinop­sy, which tracks cryp­tocur­ren­cies that have been aban­doned by their cre­ators or have no trad­ing vol­ume at all. 

The major­i­ty of these dead coins strug­gled because there wasn’t demand for their ecosys­tems. 

Cryp­tocur­ren­cies, by their nature, have no under­ly­ing val­ue and their prices are dri­ven by sup­ply and demand. 

Future poten­tial growth will depend on how well they address the prob­lems they’re attempt­ing to solve and the accep­tance of cryp­tocur­ren­cies in gen­er­al, explains Matkovskyy. “If we agree on using them, val­ue will be cre­at­ed in the process.”

The fact that cryp­tocur­ren­cies are decen­tralised and not tied to a bank or gov­ern­ment means they’ve become a pop­u­lar hedge against ris­ing infla­tion and low sav­ing rates, espe­cial­ly since the start of the pan­dem­ic. They’ve far out­per­formed gold and oth­er assets in the past 12 months. 

Wor­ry­ing­ly, how­ev­er, there has been a recent trend for so-called meme coins, such as doge­coin and shi­ba inu, the for­mer ral­ly­ing more than 12,000% between the start of Jan­u­ary and ear­ly May. Retail investors have been pour­ing mon­ey into these cheap alter­na­tives to bit­coin and ethereum in the hope they’ll deliv­er explo­sive gains. 

The prob­lem? Meme coins are large­ly use­less. While still token-based and built on or con­nect­ed to blockchain, meme coins can’t be used for any oth­er pur­pose and hold­ers are not grant­ed any spe­cif­ic rights. Doge­coin, for instance, was launched back in 2013 as a joke, and shi­ba inu, cre­at­ed in August last year, began life as a satir­i­cal homage to doge­coin.

While any cryp­tocur­ren­cy invest­ment is risky, these meme coins are not con­sid­ered a long-term store of val­ue, unlike coins with util­i­ty. While they may have mass spec­u­la­tion on their side right now, they’re unlike­ly to sur­vive in the long term, argues Math­ieu Hardy, chief devel­op­ment offi­cer at cryp­to-focused fin­tech com­pa­ny OSOM Finance.

“Meme coins sym­bol­ise the antithe­sis of util­i­ty,” Hardy says. Once blockchain net­works gain crit­i­cal mass, he adds, “this spec­u­la­tion will die down, tak­ing the major­i­ty of meme coins with it.”

Pad­dy Osborn, man­ag­ing direc­tor of the Lon­don Acad­e­my of Trad­ing, says it’s clear that cryp­to with util­i­ty offers far supe­ri­or returns to coins with no intrin­sic val­ue or func­tion. 

“The chal­lenge,” adds Osborn, “is to iden­ti­fy these hid­den gems with­in this very com­plex and fast-mov­ing indus­try, before their price gets too expen­sive.”

Crypto of interest

So where should investors turn if they’re look­ing for the long-term gains of util­i­ty, rather than a quick prof­it?

For many experts, ethereum is the top choice. It pro­vides a plat­form for devel­op­ers to cre­ate apps and run them on a blockchain with­out the involve­ment of third par­ties. The price of ethereum could sur­pass that of bit­coin in sev­er­al years’ time, some ana­lysts believe – ethereum is slight­ly faster, has a high­er lev­el of inter­est from devel­op­ers, and promis­es more appli­ca­tions. 

Osborn high­lights three oth­er coins he thinks are worth watch­ing. Polka­dot is build­ing a net­work that can sup­port mul­ti­ple dif­fer­ent blockchains and enable them to work togeth­er. Inter­net Com­put­er is aim­ing to dis­rupt the inter­net space by build­ing a decen­tralised web plat­form that runs on a blockchain. And then there’s vechain, which helps com­pa­nies track their prod­ucts safe­ly and secure­ly through each stage of the sup­ply chain.

The speed at which cryp­tocur­ren­cies are being cre­at­ed means it’s impor­tant you keep up to date with any new devel­op­ments, advis­es Osborn. 

For Hardy, it’s hard to say for sure which coins will win out. How­ev­er, those with the great­est lev­el of user adop­tion and func­tion­al­i­ty are like­ly to last longer and will still be around after a mar­ket crash. “Util­i­ty is the lifeblood of the cryp­to ecosys­tem,” he says. “With­out it there’s only spec­u­la­tion.”