As Bitcoin’s meteoric rise continues to amaze and excite investors, the search for “the next Bitcoin” is well underway. For the original cryptocurrency, scarcity is one of the key elements to its value. With a hard cap of 21 million coins, only so many will ever be mined. That limited supply, combined with rising demand, has been one of the main factors for its price increase over the years. As investors increasingly look for the next Bitcoin, it is important to identify what principles have made Bitcoin a success.
The Scarcity Factor
Bitcoin’s scarcity is one of the backbones of its design. Unlike fiat currencies, which central banks can print at their discretion, Bitcoin has a controlled monetary policy. Scarcity further strengthens its value proposition. It serves as a hedge against inflation and a hedge against currency devaluation.
The idea of scarcity as a driver for value isn’t new. Precious metals, such as gold and silver, have historically been considered stores of value, in part, because they are scarce. Bitcoin takes this principle to the digital world where it is not easily imposed creating a scarce digital asset with built in scarcity.
With the demand for Bitcoin always increasing, the limited supply of Bitcoin becomes something incredibly important. As a result, the combination of limited appreciation and explosive price appreciation created massive appetite from the institutional and retail investor.
Identifying Potential Contenders
Replicating Bitcoin’s precise success is uphill battle. As we have already discussed above, not many cryptocurrencies possess the attributes that would take them to extraordinary levels. These advantages include strong underlying technology, a talented community, and a clear use case.
Projects that address key pain points in the blockchain ecosystem are ones that have potential to take off. These challenges encompass issues of scalability, privacy, and interoperability. Ethereum is currently the most popular platform for smart contracts and dApps. It sets itself apart from Bitcoin by providing more utility than just being a store of value.
It’s key to remember that the crypto market, like any other financial market, is full of volatility and speculation. Not every project will be successful, and as with any investment, a diligent search should be conducted before investing in any digital asset.
Investment Strategies and Risks
Investing in cryptocurrencies carries inherent risks. The market continues to be plagued by rapid price swings, regulatory uncertainty, and security dangers. Reinforcing the principle that investors should only invest capital they can afford to lose.
Diversification is one of the oldest and best known strategies for risk mitigation. Smart investors won’t bet the farm on one place. In reality, they need to diversify their investments into multiple cryptocurrencies and multiple asset classes.
Due diligence is essential. Investors need to do their own due diligence on the technology, team, and community relative to each project before placing their bets. Second, they need to have a good sense of the regulatory landscape within their particular jurisdiction. Further, they should understand that there may be significant tax consequences when investing in cryptocurrencies.
