Politics & Policy

Altcoin Investment for Dummies

There’s an embarrassment of riches in the cryptocurrency market, sort of.

If you’ve got a New Year’s resolution related at all to wealth, boy oh boy do I have news for you. This is it: Deep in the bowels of the Internet are unplumbed riches, additional cities of Cibola, veritable treasure troves of cold, hard, e-cash.

Maybe. But also maybe not, as the people who lost, in toto, between $10,000 and $20,000 after making a sensible-sounding investment in Dogecoin are acutely aware. Stolen meme money: This is not a joke.

We got here because of a mysterious person or persons with the pseudonym Satoshi Nakamoto, the creator of the software for Bitcoin. Bitcoin is an online currency that, despite lacking any real-world guarantor of value or central oversight, has become increasingly popular (and valuable) in the last year or so. I lived on Bitcoin for a week back in June (one of the less fun things I’ve done in my entire life; piece is here), and had about 0.6 Bitcoin left over at the end of the experiment. At the time, it was worth about $70. So I just left it in my Coinbase wallet (the online location for my cryptocurrency) and forgot about it. Right now, that lazily forgotten pile of e-money would sell for about $460. Not bad.

Over the course of 2013, Bitcoin’s dollar value rose by more than 5,000 percent. Again: Not bad. It’s one of those things that sound way too weird to be true until you make $400 by basically doing nothing. Bitcoin’s success has been followed by the proliferation of competing cryptocurrencies (“competing,” note the scare quotes, with varying degrees of success), which are called altcoins — altcoin is the term for any non-Bitcoin cryptocurrency, if Bitcoin isn’t alternative enough for you. Dogecoin, alas, is one of them.

Sam Patterson, author of Bitcoin Beginner: A Step-by-Step Guide to Buying, Selling, and Investing in Bitcoins, explains that you used to be able to “mine” Bitcoins using a graphics card, which is part of most people’s computers. But now that so many Bitcoins have been mined, the default way to go digging for Internet gold is by using ASIC mining hardware, a pricier and more energy-intensive technology. When that shift happened, Patterson says, some of the people who wanted to keep using graphics cards pushed for the use of a currency called Litecoin, which was compatible with their preferred-but-now-basically-obsolete Bitcoin mining method.

So Litecoin became comparatively popular, and its value largely followed the trajectory of Bitcoin’s. And, in its wake, there was a little Cambrian explosion of what Silva calls “Litecoin clones.” That includes most of the currencies you’ll see at Coinmarketcap.com, a site that lists more than 60 cryptocurrencies and their current market caps (i.e., the total value of all the outstanding coins). You read that right! Sixty-plus! It’s, for the portfolio-diversifying cryptocurrency investor, a veritable embarrassment of riches. Sort of. Most of those currencies are not great bets.

You can make money from investing in altcoins, but it’s a little squirrelly. After spending a lot of time on the phone with people who use Internet terms with which I am only vaguely vaguely vaguely conversant, here’s a little insight on the basics of altcoin investment (and take this insight for what it’s worth, as your correspondent once almost had a mental breakdown at H&R Block and sometimes eats candy for dinner).

Zachary Silva, who runs Cryptofinancial Strategies, believes short-term altcoin investments can make you a buck, but with a caveat: A lot of them, in the long run, look terrible.

“People are buying these coins in hopes that there will be another stupider person that buys it for a higher price,” Silva says. Optimally, you wouldn’t be that stupider person.

He thinks that Litecoin is a relatively safe bet, but doesn’t show huge potential for growth. The risk/reward ratio favors a currency called Worldcoin, he says. There’s a company called Scharmbeck that’s investing in making Worldcoin user- and merchant-friendly, and it’ll be one of the first altcoins to have a “wallet” you can access from your phone. Eventually, there could be ATMs, electronic checks, and other features. All of that will make Worldcoin more valuable.

Chuck Grimmett, a college classmate of mine and director of web media at the Foundation for Economic Education, is also a Worldcoin fan. He e-mails:

I think it has the potential to have a large price jump relative to Bitcoin over the next few months. I am still very optimistic about Bitcoin and continue to purchase and use it. That said, all cryptocurrencies are pretty volatile and could be subjected to harsh regulation at any time.

Others, including Satoshi Nakamoto Institute founder Michael Goldstein, are less bullish.

“If anyone is going to spend any money on altcoins, I tell them to go for Litecoin, but that’s not something I’d recommend,” he says. “I’d only recommend using altcoins for speculative purposes if you really love risk, you’re absolutely in love with risk, and you’re interested in watching money disappear.”

Patterson is not optimistic about altcoins’ ultimate investment potential either. “I don’t think they’re going to succeed long-term, most of them,” he says. “Maybe Litecoin.”

One caveat: If the demand for Bitcoin becomes big enough, it’s possible there could be real demand for alternative cryptocurrencies.

Regardless, he says it’s possible to make a quick buck in altcoin world. For instance, if you go to Cryptsy.com, a platform that lets you trade in a few dozen different altcoins, and buy maybe $5 worth of a few, you could end up making a bit of change. Some people have made 10 or 100 times their original investments that way, Patterson says.

“This is not me suggesting that people do that,” he adds. “If they want to do it, there’s no harm.”

So if you want to buy something riskier and more alternative than Bitcoin, capitalism has brought you a plethora of options. You no longer have to put all your crypto-eggs in one Internet basket.

— Betsy Woodruff is a William F. Buckley Fellow at the National Review Institute.


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