Many investors are scared of cryptocurrencies, and I can see why. Here are a few reasons why there are so many people who have not bought any crypto yet.
The technology is exceedingly difficult to understand. Pretty much every coin has a website, and a white paper explaining the technology. If you're not a computer programmer, much of that is going to sound like ancient Greek. Plus, there are thousands of coins, each one representing a blockchain network, and each one with its own technology. It can be bewildering trying to figure out which tech is superior.
And if that's not enough to scare you off, these companies (or non-profits) are private. That means they don't have to share their financials with you. There's little to no regulation from the Securities and Exchange Commission, no quarterly reports or annual reports or S-1 filings. If you like government regulation, and I guess some people do, the crypto universe has been described as the Wild West, and there's a lot of truth to that. So that's scary. Can you trust the numbers? Plus a lot of us -- most of us -- are comfortable with dollars, and we feel like dollars are going to be around for a long time, and that's good enough. We don't really need any more currencies.
Image source: Getty Images.
On the flip side, crypto has been on the market for almost a decade now, and investors have made an insane amount of profits in a short amount of time. There have already been a couple of major crypto crashes. So far, the sector has always come back and zoomed higher.
Bitcoin Price data by YCharts
One major risk is the government could come in and regulate it to death, or kill the crypto industry in other ways. The problem there is that 50 million Americans own crypto now. So any government that wants to kill these new currencies runs the risk of infuriating millions of voters.
I think crypto is here to stay. It reminds me of the early days of the internet. In fact, I think peer-to-peer networking -- the tech revolution underneath the hood of your crypto coin (aka blockchain) -- might very well supplant and replace the tech mega-caps out there. George Gilder wrote a book on that idea, called Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy.
So I'm convinced there's a massive amount of money to be made here. Yes, tremendous fortunes have been made already, and the valuations are sky-high. But the really big money -- the hedge funds and the big banks -- have barely dipped their toes in the crypto waters. It's the crazy kids and the tech weirdos and the risk-takers that are the crypto millionaires of today. And a lot of big money is salivating at all the profits they have missed.
Solana Price data by YCharts
Over the last several months, almost all of my investments have been in crypto coins, not stocks. And I have a suggestion if you want to invest a little money in this sector (and get in before the big boys do).
Make sure you own the tier 1 crypto that the entire crypto universe will build on
Many people of course own Bitcoin (BTC +2.12%). It's the first crypto, and the most famous. There are numerous Bitcoin millionaires running around, many of them under 30 years old.
I feel like I missed out on Bitcoin. Most people describe Bitcoin as "virtual gold." I've never bought gold, and I have no real interest in owning gold as an investment class. Bitcoin to me is actually kind of boring. It's been around for almost a decade, and it's valued at $700 billion. Bitcoin does remind me of gold, or silver, or bonds. These are boring asset classes that are just a play on money.
Institutions are starting to buy Bitcoin now in big numbers. Check out Silvergate Capital (SI 12.63%), which is the bank at the forefront of the institutional crypto trade. A large number of institutions are trying to get trading accounts set up at this crypto-friendly bank. That conference call is a great place to track how the institutional crypto trade is coming along. In the case of crypto, the "smart money" has been the last in line to buy any.
Ethereum (ETH +2.08%) is different from Bitcoin. Right now, Ethereum is the backbone of the crypto universe. It was the first real tier 1 blockchain, with smart contracts that allowed other crypto exchanges to build on its platform. Over the last five years, Ethereum investors have had insane returns. In that time frame, the S&P 500 has gone up 99%. The value of the Ether coin has risen 25,000%.
Ethereum Price data by YCharts
You want to make sure you own the backbone of the crypto universe. If you're going to profit from this thing going forward, make sure you own the critical tier 1 crypto that is the foundation of it all. Right now, that crypto is Ethereum. So a lot of institutions are buying Ethereum now, too.
A major problem is that Ethereum's technology is old and does not scale well. Ethereum, like Bitcoin, relied on proof of work to validate a transaction on its blockchain. This is an incredibly slow process. Try to imagine buying some art on the blockchain, and you have to wait for your payment transaction to clear because some mathematician somewhere has to solve a math problem. I've only been investing in crypto for a few months now, but I've developed the opinion that proof of work stinks as a method of validating transactions. It's slow and resource-intensive, and architectures like proof of stake make a lot more sense.
That's why the entire crypto industry has shifted to proof of stake. Ethereum, with its sorry speed of 15 transactions a second, has seen the writing on the wall, and it's shifting to proof of stake, too. But it might be too late.
The super-fast blockchains have arrived
What happened in 2021 is that a couple of new tier 1 coins, Solana (SOL +3.27%) and Fantom (FTM +16.78%), emerged. These two blockchains are super-fast, and there's a very real possibility that one of them will supplant Ethereum and become the most important tier 1 network out there.
I'm running out of room, but that's OK because I've written extensively on these tier 1 networks in other places. My first crypto buy was Solana. And after several months of trial and error and buying a lot of coins that I probably should not have bought, I discovered Fantom. So those are the super-fast tier 1 blockchains in my portfolio. And if you want to cover your bases, you can round out your basket by buying the original tier 1 superstar, Ethereum. And those are the three coins newbies might want to buy first.
