Bitcoin’s (CCC:BTC) unexpected rise to $40,000 has created a cohort of fortunate investors. It’s also made an even larger group of jealous naysayers who wonder, in private, whether it’s too late to buy into mainstream cryptocurrencies.
As a relatively early investor in Ethereum (CCC:ETH), the #2 cryptocurrency, let me tell you this: when it comes to cryptocurrency, it pays to get in early. In 2010, Bitcoin traded for less than $0.08 per coin — a $100 investment would have grown to $50 million today. Meanwhile, investing in established coins offer far less upside. Today, JP Morgan’s lofty $146,000 target suggests just a 265% Bitcoin upside.
So, how can investors identify the coins with 1,000% return potential? While there no magic formula, all successful coins share three characteristics at launch: 1) superior technology, 2) a dedicated user base, and 3) a cheap entry point. Add in a bit of good fortune, and you too could be sitting on the next “millionaire-maker” cryptocurrency.
Cryptocurrencies: The Three Trillion Dollar Opportunity
In January, New York-based crypto exchange Bakkt estimated that cryptocurrencies could be worth $3 trillion by 2025. And they could be right. Today, people make three-quarters of all transactions electronically. And during the first wave of the Coronavirus pandemic in Q2 2020, the Federal Reserve bank of San Francisco found that almost two-thirds of people didn’t make a single in-person payment. Meanwhile, online payment companies from Visa (NYSE:V) to Ant Group have seen revenues and profits skyrocket. In Q3 2020, PayPal (NASDAQ:PYPL) announced its profits had doubled from a year before.
Yet, the financial system that powers transactions are decades old. The SWIFT network, the backbone of international financial transactions, was established in 1973. And the layered fees mean that even relatively small international transactions can cost hundreds of dollars. And that’s where cryptocurrencies step in. With their open ledgers, lower fees, and increasingly secure networks, digital currencies are blazing the path to a more open form of financial exchange.
“The technology has opened new opportunities for serving micro-transactions, lowering entry barriers, decreasing the costs of business operations and increasing competition in the market, wrote a team of researchers at the University of Manchester. “After the invention of smart contracts, its applications further expanded.”
There’s no guarantee that Bitcoin (or any cryptocurrency, for that matter) will survive in the long run. Unlike physical gold, cryptocurrencies only have a decade of history as a store of value. But blockchains, the underlying technology of all crypto coins, will likely succeed.
A Pile of 10,000 Cryptocurrencies
So, how to get started finding these “millionaire-maker” coins? Firstly, understand the pitfalls of spreading investments too thin. As with penny stocks, it’s tempting to buy a little bit of everything; kiss enough frogs, they say, and one might eventually turn into a prince. But when it only takes five minutes to create your own cryptocurrency, you’re bound to find a lot of duds. And with almost ten thousand cryptocurrencies available today, it would take close to a million dollars to invest just $100 in each coin.
That means finding the next “millionaire-maker” cryptocurrency involves choosing only the most promising altcoins and then making a meaningful investment. Lack the discipline, and you may end up with the digital equivalent of beanie babies — values that temporarily spike but then ultimately disappear. But succeed, and you could end up with the next +1,000% gainer on your hands.
So, to get you started, here are three lesser-known coins with the characteristics of the next Bitcoin in 2021:
- Cardano (CCC:ADA)
- Stellar (CCC:XLM)
- Polkadot (CCC:DOT)
In 2015, Ethereum co-founder Charles Hoskinson left the Ethereum Project to start a new cryptocurrency. The final product, Cardano, was a technological triumph. ADA, the currency of Cardano, launched with a market cap of $600 million and briefly touched $33 billion before pulling back during the 2018 cryptocurrency correction.
Three key factors make Cardano a coin to watch. Firstly, its technology combines the best of Bitcoin’s settlement technology with Ethereum’s “smart contract” technology. In other words, it solves both the problems of transaction costs and flexibility. Secondly, its low price-per-coin makes it highly accessible to retail investors. Its 52-week range hovers between $0.019 – 0.353, meaning you could buy thousands of coins for the price of a cheap vacation. (Just like penny stocks, a low price-per-coin helps drive volatility and upward momentum). And finally, Cardano has a strong fanbase behind it. Even though it’s quietly sat in the top-10 cryptocurrencies for the past several years, it’s a coin that could quickly grow ten times over.
In December, the Securities and Exchange Commission (SEC) charged Ripple and two executives with conducting unregistered business. By December 29, XRP (CCC:XRP) had lost two-thirds of its value as investors questioned the coin’s legality.
Meanwhile, Lumen (CCC:XLM), the Stellar Network’s cryptocurrency, has emerged as a clear winner. Founded by XRP co-creator Jed McCaleb, Stellar competes directly against XRP in helping financial institutions send money overseas. Its underlying technology, the federated byzantine agreement (FBA) algorithm, improves on XRP’s technology. And unlike Ripple, Stellar maintains clear boundaries between its network and currency.
With a total market capitalization of less than 1% of Bitcoin, it’s a coin with both a great deal of upside and a catalyst to keep things rolling.
In less than three years, Polkadot has become the #5 cryptocurrency in the world. And it’s not hard to see why. Founded by the co-creator of Ethereum, Dr. Gavin Wood, Polkadot solves crypto’s most significant issue: blockchain size.
Most cryptocurrencies have a single blockchain ledger that grows over time as transactions get added. Ethereum’s blockchain is now five terabytes — more than most personal computers can store. It’s a problem even for professional crypto miners. Today, it takes over 15 minutes for transactions on Bitcoin to clear.
Polkadot solves the issue by dividing information into multiple blockchains, known as parachains. And because users can run these smaller chains at the same time, transactions are both cheaper and faster. Polkadot has also rewarded investors handsomely. Since August, DOT has risen 350%, almost doubling Bitcoin’s gains. And with a capitalization of less than 2% of Bitcoin, it still has massive room to run.
Are Altcoins Right for You?
Will today’s cryptocurrencies have relevance ten years from now? While that’s still debated, one truth has emerged: its underlying blockchain technology is probably here to stay.
That means one thing is clear. As various cryptocurrencies lurch from boom to bust, those with the best underlying tech will continue to win. And with your choice of almost ten thousand altcoins, it will pay off to find the right one.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.