Why Cardano’s Risk-Reward Ratio Is Negative

After conducting some research on Cardano (ADA-USD), I’m more upbeat on Ethereum and ether than Cardano and Ada.

Cardano (ADA) token with blue and orange digital background.
Source: Stanslavs / Shutterstock

Cardano’s cryptocurrency, Ada, does have the important advantage of being much more affordable than Ethereum’s (ETH-USD) cryptocurrency, ether. And Ada is reportedly much more environmentally friendly than Bitcoin (BTC-USD).

Still, Ethereum appears to have a meaningful first-mover advantage, and Cardano will have to overcome multiple hurdles to become the “ethereum killer.”

Meanwhile, I remain bearish on cryptocurrencies in general. But I have a proposal for a new type of cryptocurrency that may have a much better chance of working than any of the current offerings.

Cardano and  Ada Versus Ethereum and Ether

As I’ve noted in the past, it’s often difficult to determine which brand new technologies will be embraced and which will ultimately fail.

From a technological standpoint, Cardano and Ada don’t appear to be very different from other blockchain networks and cryptocurrencies, respectively.

Still, the blockchain and cryptocurrencies utilize relatively new technologies, while it appears that Ethereum and ether are currently much more widely used than Cardano and  Ada (I’ll provide some evidence of the latter point in the next section of the column).

So while both Cardano and Ethereum are quite risky, I think that Etherum appears to be the less dangerous choice for investors. Put another way, betting on a more established player in a new sector is less risky than betting on a challenger in a new sector.

Ada’s Obstacles and Advantages

As I mentioned earlier, it appears that Ethereum is much more widely used than Cardano.

According to Forbes, Ken Fromm, the ” director of education and development at the Enterprise Ethereum Alliance,” said:

 “The benefits of Ethereum are a tried-and-true network that has been tested through years of operation and billions of value trading hands,” says Fromm. “It has a large and committed global community and the largest ecosystem in blockchain and cryptocurrency.”

And in my previous column on Ethereum, I noted that the EU’s top lender is reportedly looking to sell bonds via Ethereum, while Goldman Sachs (NYSE:GS) is one of the managers of that transaction. Meanwhile, by allowing users of its Azure cloud to utilize Ethereum, Microsoft (NASDAQ:MSFT) is embracing the technology.

I haven’t seen any information indicating that Cardano is nearly as widely used or accepted by major institutions. as Ethereum apparently is.

Indeed, Cardano is widely referred to as a potential “Ethereum killer,” suggesting that Ethereum is much more entrenched than Cardano at this point.

Also important to realize is that there are multiple other potential “Ethereum killers” that Cardano will also have to overcome to be successful over the longer term.

On a positive note, Ada, as of June 3, was worth just $1.85, making it much more practical for every day use than ether, which as of June 7  was changing hands for over $2.700. And according to Motley Fool, Ada is a fairly “green” currency.

An Idea for a New Cryptocurrency

Based on the sources I’ve seen, the biggest rationale for cyrptocurrencies and decentrslized finance is that governments are devaluing their fiat currencies, while that trend is likely to continue in the future .

Yet Bitcoin and most other cryptocurrencies appear to be incredibly volatile, subjecting those who have poor timing when buying them to the same devaluation that the cryptos were meant to avoid.

I think that a new cryptocurrency based on a basket of fairly stable currencies and commodities should be launched. For example, the value of the new cryptocurrency could potentially be linked to some combination of the U.S. dollar, the Swiss franc, the euro, the Indian rupee, the Japanese yen, copper, gold, silver and platinum.

Interestingly, a number of central banks already use baskets of foreign currencies and commodities as stores of value. Using this basket technique, a cryptocurrency could avoid the tremendous volatility and rampant speculation that have often plagued Bitcoin and Ethereum, for example, so far.

And the idea of linking a currency to outside currencies and commodities is not unprecedented.  A number of countries have linked their currencies to the U.S. dollar in the past and some still do.  Moreover, for many decades, a number of the world’s major currencies were linked to the price of gold.

Importantly, a “basket” approach would also be something of a compromise between, on the one hand,  governments and banks — which want to preserve, respectively, their control over the monetary system and the revenue they derive from the current fiat currencies  — and advocates of decentralized finance on the other.

Governments would have some, but not total,  control over the hypothetical new cryptocurrency I have conceptualized, and banks would not have to worry that the money they make from exchanging currencies and hedging against currency fluctuations would entirely dry up.

The Bottom Line on Ada

The risk/reward ratio of Cardano and Ada seem quite negative at this point, and Ethereum appears to be a better choice.

But I think that the best way of achieving a stable cryptocurrency that banks and governments could live with is the “basket approach” that I described.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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