The race for the next Bitcoin

Feature of the Brazilian site IstoÉDinheiro (This is Money)
All Credits to Priscilla Arroyo

Bahian designer Gabriel Mattos Vaz, 31, had never invested until June 2017. At that moment, however, Bitcoin’s appreciation caught his eye. During the first half, the virtual currency had appreciated 160.9%. Vaz decided to bet some money on the deal. He did not regret it. Since its contribution, Bitcoin has appreciated by 560%. In the accumulated of 2017, until the 20 of December, the rise is of 1,609%. This has encouraged him to do something that is beginning to become a fever in the cryptomanes market: to find out what the next Bitcoin will be. “Today, I see a more extended return when I invest,” he says. “I buy the coins that I believe have the greatest potential for appreciation in the coming months.”

This search is not exclusive to the designer. In the discussion forums, novice and experienced participants exchange theories about who will be the next headline visitor. The capitalization of the virtual currency market jumped 3,600% in just 12 months. Its value advanced from US $ 16 billion at the end of 2016 to US $ 602 billion on Wednesday 20. Almost half of this, US $ 296 billion, corresponds to the movement of Bitcoins. The other $ 310 billion is divided among the 1,300 crypto-coins in circulation. Which are the most promising?

To answer this question, a good start is to draw a parallel with the stock market. The beginner runs the risk of being confused with the multiplicity of variables used in the analysis, but it is possible to simplify. Before choosing a stock, the investor has to assess whether the company is profitable or not. Second, it has to calculate the inherent risks that can make the company fail to be profitable. The same reasoning holds true for virtual currencies, with a big difference. Companies produce products or provide services. Good or bad, these productive activities generate more or less return. Virtual currencies do not “produce” anything. Its value depends on the technology on which its development is based. Thus, an investment in a virtual currency is, in a simplified way, a technological bet. The underlying rationale here is that as it develops, the currency will be used by more people or companies and will appreciate. “Investors should choose currencies based on the technologies they believe to be the most promising,” says Fausto de Arruda Botelho, CEO of Enfoque Consultoria.

For him, one of the strongest candidates to be the new darling on the market is Ethereum. It is the second most liquid virtual currency with a market capitalization of $ 77 billion. Ethereum, negotiated with the ETH code, promoted a revolution by enabling the closing of smart contracts through the decentralized programming network, the blockchain. This technology enables fast and secure transactions very cheaply, which has been attracting the attention of the financial market. Major banks, such as JP Morgan and Spain’s Santander, are considering using Ethereum to transfer securities to other institutions and central banks. The interest of the finance giants made Ethereum rise from $ 7.93 in January to $ 859 in December, up 10.733%, appreciating much more than Bitcoin’s.

Another currency that has attracted interest is Monero, traded under the XMR code. It offers an advantage compared to Bitcoin and Ethereum: transaction privacy. Despite making room for illegal uses, the possibility of not having your data crawled is an attraction even for those who have nothing to hide. “Privacy protection can guarantee demand,” says Gabriel Aleixo, co-founder of AStar Labs, a blockbuster computer company. For Aleixo, the tools that allow companies to target Internet advertising can be used to track who bought what, when and by how much. Defending oneself from this corporate gossip attracts speculators. “Large corporations are already developing tools to track blockhouse networks to ensure compliance of their procedures,” he says.

There are other candidates, all much more risky than Bitcoin, because they depend on technologies still restricted to a few initiates. One of them is the recently launched Iota, which began trading in June with the Miota code. It differs from the others because it is not based on the blockchain, but in a new technology known as Tangle. The goal of Tangle is to create a secure system to allow communication between devices, the so-called “Internet of Things”, considered the new digital frontier. Since its launch, Iota has climbed 790% and the total outstanding is $ 13 billion, occupying sixth place among the crypto-coins.

The field is vast and there are new things every day. There are at least 30 currencies with a market capitalization of over US $ 1 billion, which makes them potential candidates for sustainable valuation. Like any new market, investments are risky. Technologies can change and make the gains evaporate in seconds.

There are other problems. These businesses operate in a gray legal zone and present legal risks. On December 19, the Securities and Exchange Commission (CVM) suspended a public offering of collective investment agreements related to Bitcoin’s mining operations. Miners and investors say that crypto-coins are not financial assets.
If they were, they would be subject to supervision by the CVM. The local authority and the Central Bank (BC) have not yet commented on this. However, Ilan Goldfajn, BC president, showed skepticism. “Do not mortgage your home to buy those virtual coins,” he said on Dec. 13. “It is the typical bubble, the typical pyramid, which at some point will stop rising and will fall again.” These and other factors must subject investors in Bitcoin, and in other currencies, to many shocks. “A significant correction in this market is not ruled out,” says Botelho. A lot of caution in testing that market, therefore.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.