Nearly $1 billion was lost to cryptocurrency scams from the the start of 2021 through the end of March 2022, according to a May report from the Federal Trade Commission. Incidentally, May was when Luna Classic effectively crashed to zero in a matter of days, erasing a market capitalization that had once exceeded $40 billion.
Bad actors and crashes are why the cryptocurrency sector is often ridiculed by investors. It's viewed as a place for get-rich-quick speculators, not serious capital allocators.
Much of the criticism is fair. However, in some select cases, I believe cryptocurrency can really be a viable long-term investment. But first you'll want to understand the difference between cryptocurrencies and tokens. Here's why.
Investing in digital currencies
In my opinion, cryptocurrencies can be thrown into two buckets. One bucket is digital currency. The other is the token bucket.
The distinguishing factor between these two buckets is purpose. Bitcoin (BTC -0.19%) is meant to be used as a method of payment. The same is true for alternatives to Bitcoin like Dogecoin (DOGE -0.80%). Their purpose is to facilitate financial transactions, even though people more frequently "hodl" these coins instead of use them as money.
The investment thesis for a digital currency is conceptually no different from the one behind foreign exchange (forex) trading. If you believe the Japanese yen is going to outperform the U.S. dollar, for example, you can exchange dollars for yen and wait for it to happen.
The same is true with Bitcoin. You can use it to buy something -- in those limited places where it's accepted -- just as you can buy things with yen. But if you're investing in Bitcoin, then you're expecting it to outperform the dollar.
At the most basic level, the value of any cryptocurrency is derived the same way. If demand is greater than supply, then the price goes up. And this is why Bitcoin is my digital currency investment of choice. There can only ever be 21 million Bitcoins -- the supply is a well-known factor here. And if any digital currency is going to have broad demand, I believe Bitcoin has the greatest chance.
This is partly due to the strength of the Bitcoin network. Miners have computers for processing transactions. This computing power is measured with something called the hash rate. As of this writing, the total hash rate of the Bitcoin network is about 213 million tera-hashes per second (TH/s) -- the most computing power of any cryptocurrency and up more than double from this time last year. In short, Bitcoin has the most computers backing it, making it the most stable and secure (in theory).
With these strengths, I could see Bitcoin continuing to receive a lot of demand.
Investing in tokens
By contrast, tokens have use cases other than as a medium of exchange. Take Theta Network as an example here. Theta aims to use blockchain technologies to provide a decentralized content delivery network like Fastly or Cloudflare, decentralized web hosting like Amazon and Alphabet, and more. Theta (THETA 18.67%) is the governance token, whereas Theta Fuel (TFUEL 10.18%) is the utility or gas token.
I think Theta Network is a really great idea. However, I'm not convinced Theta Fuel would be a good long-term investment. Theta Fuel has 7% to 9% annual inflation. This new Theta Fuel is created to pay nodes for keeping the network running. Users buy Theta Fuel and then spend it to use Theta's services -- if you're going to upload a video, for example, you'd spend Theta Fuel to get nodes to host it.
It's hard enough to create demand for Theta in the first place. Getting enough demand to offset the impact of token inflation is even harder. But then again, Theta Fuel isn't designed to go up in value necessarily. It's designed to buy use of the network. Imagine if the token's value soared to the stratosphere. It might become cost prohibitive to actually use it. That would be counterproductive and hurt long-term adoption.
Every cryptocurrency has different elements controlling supply and incentivizing demand -- tokenomics. Understanding how the tokenomics work is a completely different exercise from simply understanding what the crypto project does.
Why it matters
Distinguishing between digital currencies and tokens is important because investors will want to look at different factors in each case. With something like Theta, you'll want to see more nodes joining the network so it can deliver the faster internet speeds it promises. By contrast, with Bitcoin, you'll probably want to see growth in wallets rather than miners. Bitcoin's miner network is already quite large and secure. But more people need to join the Bitcoin economy and hold it and use it if the price is going to keep going up.
Cryptocurrency really can be an investment for the long term in certain cases. You just need to know where to look.