Even in the middle of a crypto winter, a few altcoins have managed to defy the odds. For example, Toncoin (CRYPTO: TON) is up roughly 25% in the past month. Based on this recent surge, Toncoin is now one of the top 30 cryptos in the world, with a total market capitalization of about $2.1 billion. 

Toncoin is now trading for less than $2, and some traders are predicting that it has even more upside potential. There are two reasons you should be considering this potentially explosive altcoin for your crypto portfolio -- but also one reason Toncoin might be too hot to handle for many investors.

Telegram relationship

Toncoin is a decentralized Layer 1 blockchain designed by Telegram, a popular messaging app with more than 700 million users worldwide. Like other popular Layer 1 blockchains, Toncoin offers lightning-fast transaction processing speeds and near-zero fees. It also offers the potential for developers to create decentralized applications on top of the network. In this regard, Telegram functions much like Ethereum (ETH 1.05%).

However, Toncoin is a blockchain specifically designed for Telegram users. The only time you would interact with this blockchain is if you were already using Telegram. For example, in addition to sending messages to other users on Telegram, you might be able to send them crypto payments one day via a blockchain wallet. That's why the deep relationship with Telegram is so important -- it basically assures Toncoin a built-in user base of hundreds of millions of users.

Explosive growth

So why has Toncoin suddenly taken off? In partnership with Telegram, Toncoin launched a new auction initiative at the end of October that gives Telegram users the right to buy and sell Telegram usernames. The only catch, of course, is that they must use Toncoin to pay for those usernames. This has driven up the demand for Toncoin, since the most desirable Telegram usernames have a minimum auction value of 10,000 Toncoin, or about $17,500 in current U.S. dollars.

Excited, happy trader with laptop.

Image source: Getty Images.

This initiative is noteworthy because it sets up ongoing, recurring demand for Toncoin. You need to have Toncoin to pay for those usernames, so if you don't have Toncoin now, you need to go out and buy it. These usernames could become very important if Telegram eventually uses Toncoin for crypto payments.

Regulatory risk

There is significant downside risk to investing in Toncoin, however, due to this same relationship with Telegram. The Securities and Exchange Commission cracked down on Telegram back in 2018. That was when Telegram initially built the Telegram Open Network ("TON") and launched a $1.2 billion initial coin offering (ICO) for that blockchain project. That led to a very nasty legal squabble with the SEC, a hefty penalty, and a promise by Telegram to not attempt issue a crypto token until 2023. The Telegram Open Network eventually folded and disappeared under all this regulatory scrutiny in 2020. 

But then, in 2021, Telegram Open Network suddenly reappeared as Toncoin, which rebranded itself as The Open Network ("TON"). Telegram claims that The Open Network was founded by top coders unrelated to the original Telegram team. These coders simply used some of the open source code that happened to be laying around online, and built a new blockchain based on that. The chief executive officer of Telegram, Pavel Durov, has said he supports The Open Network, but is always quick to point out it's not part of Telegram. 

So it's interesting to see how the SEC is going to respond, and how the U.S. regulatory environment is going to affect both Telegram and Toncoin. For example, you can buy Toncoin on some crypto exchanges, but not on U.S.-based Coinbase (COIN -5.46%). And if you're a U.S.-based Telegram user, you can still send and receive messages, but you are blocked from participating in the Telegram username auction.

What to look for in 2023

Next year is going to be very interesting for Toncoin. Most of this has to do with the fortunes of Telegram, which could be planning an initial public offering in 2023. With any new cash infusion, Telegram could choose to reallocate some of this capital to blockchain and crypto projects, including Toncoin.

And, of course, there's the matter of how the SEC is going to respond to the re-emergence of Telegram in the crypto markets via Toncoin. When you throw in Telegram's presence in Russia, where it has been widely used to evade censorship,, you can see how Telegram's regulatory issues could become controversial both in the U.S. and worldwide.

For purely upside potential, it's hard to ignore the appeal of a blockchain built for social media networks with 700 million users. This could become a fantastic peer-to-peer way to exchange crypto. But once you start digging around into the details of Toncoin, it's also hard for prudent investors to ignore the potential red flags. For that reason, I'm keeping Toncoin on my radar for 2023, but can't recommend it as a buy. It is simply too risky for the average investor.