This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
Last week’s edition looked at three cryptos that could change the world. This week’s reader poll winner is slightly different:
3 Cryptocurrency Game-Changers
Instead of changing the way we live, these cryptos expand the way blockchain technologies work on a fundamental level. So strap on your seat belts: we’re taking a look at the 3 cryptocurrencies that are up-ending Bitcoin and the other legacy players.
3 Cryptocurrency Game-Changers
In 2009, then-anonymous author Satoshi Nakamoto published a 9 page paper outlining plans for a blockchain-based currency. Not since the 4 page U.S. Constitution (or the double-sided diner menu) has so much information been conveyed on so little paper.
Now we’re here at the end of 2021, with a $2.7 trillion asset that barely existed a decade ago. At the helm sits Bitcoin (CCC:BTC-USD), the most dominant cryptocurrency by value, which consumes almost as much energy as the country of Sweden.
But the crypto game is changing again. The rise of energy-efficient Proof of Stake (PoS) and “smartchain” coins now threatens to snatch Bitcoin’s crown. Investors need to pay attention to these altcoins before they rocket to the moon like my No. 1 pick Ethereum (CCC:ETH-USD) has done.
I’ve always said one thing to people looking for the next “Ethereum-killer:”
Buy the real thing.
My top crypto pick from InvestorPlace’s 2021 poll has risen 6.5x this year, more than tripling Bitcoin’s 2x rise.
But even my top dog could get outfoxed by a game-changing cryptocurrency. And at the top of my “Ethereum-killer” list is Solana (CCC:SOL-USD).
Now, I’ve had an admittedly on-again, off-again relationship with Solana. I suggested investors buy at $110 in September and take profits at $185 the following month (it’s since edged up to $210). SOL has become a magnet for “hot money” investors who love attaching unreasonable price tags to otherwise reasonable investments.
But when it comes to technology, Solana is a clear crypto to watch.
“Solana is one of the few currently existing public blockchains that has a really plausible roadmap to scale millions of transactions per second,” noted crypto trading billionaire Sam Bankman-Fried in an interview with Kitco News. “That is not where a lot of other blockchains have been focusing, including Ethereum.”
Most cryptocurrencies operate under one of two consensus protocols:
- Proof of Work (PoW). Bitcoin and Ethereum 1.0 award coins to miners who perform increasingly difficult calculations. These energy-intensive calculations are used to form a consensus.
- Proof of Stake (PoS). On the other hand, Cardano (CCC:ADA-USD) and Ethereum 2.0 use trusted validators to form a consensus, which skips the energy-intensive phase of mining.
Solana employs a third mechanism: Proof of History (PoH). This method adds a unique time-stamp to each output hash, and hashes can only be solved in sequence. And because each event gets recorded in a specific order, it’s possible to run multiple blockchains without “sharding,” a data management method that both Ethereum 2.0 and Cardano utilize.
In other words, Solana is one of the few blockchains that can potentially scale to run millions of transactions per second without breaking itself into smaller pieces. Though hot-money investors will continue to pump SOL up and down, there’s only one word to describe Solana’s long-term future:
In June, a U.S. Treasury report labeled stablecoins a potential “systemic risk” to the financial system. Opaque accounting means there’s little way to know if Tether (CCC:USDT-USD) or USD Coin (CCC:USDC-USD) are truly backed by the assets they claim to have.
South Korean-based Terraform Labs is looking to change that. Rather than use real asset backing (which can be faked), Terra (CCC:LUNA-USD) uses an ingenious two-token system that incentivizes arbitrageurs to maintain a fiat-currency peg instead.
“As Luna is minted to match Terra offers, volatility is moved from Terra price to Luna supply,” explains the white paper. Put another way, Terra pegs itself to fiat currencies by allowing a different cryptocurrency — Luna — to wag instead. It’s a total departure from forcing a price peg through asset backing.
This isn’t the first time I’ve urged investors to buy:
“The Terra ecosystem offers a stablecoin that provides instant settlements at low costs. And the best part? Currently sporting a $13 billion market cap, Terra’s size looks much like Cardano’s before the latter rocketed to the moon.”
— Moonshot Investor, September 1
Prices have gone up ever since. Today, Terra sits at a $24 billion market cap, making it the world’s No. 13 largest cryptocoin.
There are, however, three risks for investors to keep in mind.
Firstly, Terra has become the next hot-money Solana.
“Crypto is all about creating a buzz and there’s a lot of attention on the Terra ecosystem,” warned Antoni Trenchev, co-founder of crypto lender Nexo. It’s “the latest shiny thing in the crypto space.” Though I encouraged investors to buy in at the $30 range, its $66 value today makes buying far more expensive.
Secondly, LUNA is a deflationary token, making it vulnerable to staking-induced demand (and thus increased volatility).
And third, the cryptocurrency could face greater regulation as governments clamp down on banking rules.
Still, Terra is rewriting the rules for how stablecoins operate. And with any game-changing crypto, it’s going to be one to watch.
Shiba Inu (SHIB)
When I last explained the concept of tokenization in October, I had two applications in mind:
- Securing sensitive information. Medical records, legal documents, Grandma’s apple pie recipe, etc.
- Tokenizing hard-to-transact items. Carbon credits, digital art, in-game money, etc.
But what about tokenizing an entire currency?
If you had asked me a month ago, I would have pointed you to Tether, USDC or Wrapped Bitcoin (CCC:WBTC-USD), three of the largest token finance coins on the Ethereum blockchain. These serve as representations of existing assets, not as a fiat currency.
Things change. On Nov. 29, online retailer Newegg (NASDAQ:NEGG) announced they would begin accepting Shiba Inu (CCC:SHIB-USD) on their site, joining AMC Entertainment (NYSE:AMC) in their nod to Reddit investors.
This is game-changing news for Shiba Inu. Unlike older sibling Dogecoin (CCC:DOGE-USD), Shiba Inu is a token that relies on the Ethereum network. And should it gain acceptance as a real-world currency, SHIB would be the first major floating token to make the leap from “speculative plaything” to a legitimate payment option.
Now that SHIB is down 50% since my “sell” recommendation, I’m reversing the call back to “buy.” For those who don’t mind some bumps in the road (and a potential ride down to zero), Shiba Inu proves that meme tokens can be game-changers too.
What Makes a Game-Changer?
In 2017, I made my first NFT purchase: a Cryptokitty NFT, bought for $200.
At the time, it didn’t seem particularly game-changing. I would end up selling the jpeg image for $350 before the market fell out in early 2018.
But avantgarde technologies have a habit of sneaking up. Though the Cryptokitty craze eventually fizzled out, other NFTs have since rocketed ahead, with some changing hands for millions of dollars. One can even find work as a “Metaverse Real Estate Agent” these days.
Essentially, these new technologies are creating entirely new rules to fight old ones. Don’t like your old iPhone? What about telepathy instead? Or if your commute feels too long (and you don’t like Zoom meetings), how about a flying car instead?
And though most of these technologies fizzle out (much like my Cryptokitty did), the few that make it through will rewrite the rules of the game.
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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.