Despite my long-term support for cryptocurrencies such as Cardano (CCC:ADA-USD), lately, I’ve been skeptical about the sector. What’s more, I own some ADA-USD coins yet that hasn’t stopped me from expressing doubts. Confused? Allow me to explain.
Back in February as the crypto market was entering its (presumably) final stretch of this rally, I dumped out of a significant portion of my holdings. More recently, I trimmed some of my positions in alternative cryptocurrencies or altcoins as they’re known in the community. Though I could have held on for more gains, I ultimately felt that I had to exit with something.
Thanks to various investments like Cardano — and more importantly the hard decision of calling it quits — I became a legitimate homeowner, as in no mortgage. I look at it as the best investment I’ve ever made. And while I may have regretted leaving some upside on the table, I can tell you I don’t regret the decision today.
This is a long and windy way of saying that with my remaining crypto holdings like Cardano, I’m playing with house money. It’s an awesome feeling, the same high I get with some popular meme stocks. Even as a stakeholder, I write from an honest perspective because I don’t really care what happens next.
Check that — I do care but I’m not shaking with anxiety every time I check the Cardano price (or whatever your favorite crypto is). While I don’t want to get too personal, I think it’s important that you know where I’m coming from.
I’m trying to write these stories from the basis of the current risk-reward narrative. That is to say, if you bought Cardano now at the time of writing price of $1.58, would that be a good deal?
From my perspective, I don’t think so and here’s why.
For Cardano, Separate the Fundamentals from the Speculation
First, everyone who is even loosely considering about buying Cardano should consider the volatility. According to Yahoo Finance, the 52-week range for ADA is between 7.6 cents to $2.46. That’s a 32X differential, meaning that you’re in for a ride but who knows if it’s going to be a good one?
Second, and more importantly, investors need to separate the speculation component of Cardano versus its fundamental proposition. True, in some cases, the two trajectories share a logical relationship. For instance, many investors believe in Cardano because of its proof-of-stake (PoS) protocol versus proof of work. Certainly, ADA has benefitted from this belief.
However, you can tell that the blockchain industry is still in its infancy because the sector fails to address a key driver of decentralized platforms: who is going to pay for them? If you think about it, that’s the million-dollar question regarding this newfound fascination of PoS protocols.
As Coindesk contributor Christine Kim wrote in 2019, the new PoW protocol for Ethereum (CCC:ETH-USD) would be profitable for crypto miners but just barely. Of course, the Ethereum 2.0 protocol received much praise for its blockchain users but mixed opinions among miners.
Put another way, blockchain platforms need a modicum of inefficiency to make it worthwhile for miners to do their thing. Otherwise, if a platform is too efficient, there’s less need (demand) for miners. In turn, that dissuades miners for lack of profitability. Soon enough, the much-celebrated decentralized protocol becomes a digital ghost town as the mines dry up, so to speak.
For now, Cardano attracts all kinds of contributors to the network because the price is high. But what happens when the price invariably corrects? If it’s anything like prior bouts of volatility, the miners will leave — including selling their high-end mining equipment for whatever they can get.
Blockchain Proves Humans Are Rational
One of the mistaken notions that I see among new crypto investors is the idea that the blockchain is a miraculous innovation with the potential to solve all of humanity’s woes. No. What it is, is a business solution whose administration shifts from central responsibility to decentralized accountability.
In principle, this sounds like the most efficient solution for any business challenge. But that only looks at one side of the equation. The other side is that the public contributors providing the solutions must be paid.
At a very basic level, blockchain participants contribute something to the network, whether that’s computing power, digital equity (i.e. stake) or storage capacity. None of these things are free and they all cost real money (as in U.S. dollars in our case).
In exchange for providing that computing power, equity or capacity, network contributors receive cryptocurrencies. The allure is that these coins could be worth a heckuva lot more than the cost of contribution. On the other hand, the danger is that these coins could plummet in value.
In my view, it’s the ultimate counterparty risk. Trading cryptocurrencies is a game of nuclear football. By passing risk around on each other’s books, you can make a ton of money based off people’s speculative beliefs. But at some point, the nuclear football goes boom.
With so much bullishness baked into Cardano and other cryptos, I didn’t want to push my luck. You are of course free to make your own decision.
On the date of publication, Josh Enomoto held a LONG position in ADA and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.