Given recent events in the cryptocurrency space, I believe it's fair for investors to question whether anything will ever turn out as good as Bitcoin (BTC -0.84%). In a moment, we'll examine why certain cryptocurrency investing theses have legitimately been dismantled recently. This underscores the need for caution when approaching this space.
Bitcoin may be down more than 50% from its high. But its market capitalization is still north of $500 billion. Therefore, many investors understandably believe it's too late to enjoy life-changing gains from buying Bitcoin today, and are looking elsewhere. If that's you, then one cryptocurrency to consider is Theta (THETA 1.34%).
Image source: Getty Images.
Where we're at in the innovation cycle
In recent years, developers have tried boatloads of new ideas in the cryptocurrency space. And right now, we're rudely awakening to the shortcomings of most.
Take stablecoins, for example. TerraUSD and Luna were developed to maintain stablecoin price parity with the U.S. dollar while taking fiat reserves completely out of the equation. This algorithmic system worked for a while, but a fundamental flaw was exposed and crashed the whole thing. Now other stablecoins without reserves are similarly being exploited. In my opinion, the entire concept of stablecoins is breaking down.
Consider cryptocurrency bridges as another example. Layer-1 blockchains like Ethereum and Solana speak different languages. Yet users frequently interact with multiple blockchains. Bridges are translators, going from one blockchain to another. However, hundreds of millions in value has been stolen by finding and exposing bridge flaws.
It's amazing that after a decade of innovation, we're finding that (despite its shortcomings) Bitcoin still works better than almost anything else that's been tried so far. Many novel ideas in the cryptocurrency space simply aren't working, and this should give investors pause when buying anything new right now.
Why Theta has potential
Theta was created to solve a growing problem. The metaverse, synchronous livestream gaming, and higher-resolution videos all strain our internet infrastructure. And it'll likely only worsen. This is why content-delivery networks (CDNs) have growing businesses -- they speed up the internet by bringing it closer to the end consumer.
Theta could be faster than traditional CDNs because nodes are even closer to end consumers than traditional CDN infrastructure. And Theta intends to be a cheaper option as well -- traditional CDNs can be pricey.
Here's how it works: People can become network nodes by providing bandwidth and staking Theta tokens. For this service, they earn Theta Fuel (TFUEL -2.39%). Nodes sell this Theta Fuel to video platforms (like Theta.tv and Samsung VR). Video platforms pay Theta Fuel as videos are hosted and streamed. Some Theta Fuel is burned in the transaction. Some goes to end users to incentivize them to watch videos.
There are different levels for nodes, the most exclusive of which is the Enterprise Validator Node. Theta has some big players at this level, including Alphabet's Google, Sony, and Samsung. These companies are dreaming up big ideas. But these ideas will be bandwidth hogs. Therefore, it's clear why they're interested in Theta.
By the way, these tech giants might be tempted to develop their own solution to the faster-internet problem. But Theta's idea is patented, which might be why they're choosing partnership instead.
Theta's primary use case right now is video streaming. But the project intends to launch the fourth iteration of its main net before the end of the year. This new version is intended to open up new use cases for Theta, including web hosting. However, different applications have different blockchain needs, which is partly why we have so many layer-1 blockchains to begin with. Different chains solve different problems.
Theta plans to allow greater developer flexibility with subchains. Developers can build what they need. But all subchains are going to speak Theta's language, and will all use Theta Fuel as a standardized gas token. This eliminates the need for potentially problematic bridges.
Image source: Getty Images.
Why Theta could still fail
Theta is certainly a big idea that could be extremely valuable. But don't think I'm some crypto clairvoyant predicting life-changing gains in Theta -- as recently as last month, I believed Terra's Luna was a good buy. And it went to zero.
However, even if I'm a blind squirrel, I might still find an acorn occasionally by accident. Therefore, Theta skeptics here should focus on shortcomings in the message, not the messenger. And indeed, there's reason to approach Theta with caution.
I fear Theta's success is being driven by the wrong things so far. For this project to be viable long term, it doesn't matter which players are involved at the top. To the contrary, end consumers need to actually be using it -- watching videos, etc. However, there isn't much content available for streaming now. And the connection can be spotty, despite its mission to improve delivery speeds.
Weak user adoption could be because of node incentives. While Google and Sony are at the Enterprise Validator level, the network needs thousands more edge nodes to truly be better than traditional CDNs for everyone. Edge nodes earn Theta Fuel. But this token is down about 90% from its all-time high. Simply put, the incentive to provide edge-node services may be too weak. And weak incentives keep new nodes on the sidelines, and leave connection speeds wanting.
That said, maybe a simpler explanation is it's still very early with Theta, and user adoption will come.
To close, I consider cryptocurrency to be a speculative investment, worthy of only a very small percentage of a diversified investment portfolio. Within that small portion of the portfolio, I diversify my crypto holdings, but recognize many of the more obscure projects will likely fail. Theta could be one of those failures, which is why one shouldn't buy much here. However, I do like Theta more than most cryptocurrencies because of its potential and progress to date.
