Despite my longstanding support for cryptocurrencies like Cardano (CCC:ADA-USD), I’ve been skeptical about the sector lately. I also own some ADA USD coins, but that doesn’t stop me from expressing doubts. Confused? Allow me to explain.
As early as February, when the crypto market entered its (presumably) last leg of this rally, I dumped a significant portion of my holdings. More recently, I’ve trimmed some of my positions in alternative cryptocurrencies, or altcoins as they are known in the community. Although I could have held for more wins, in the end I felt like I had to get out with something.
Thanks to various investments like Cardano – and especially the tough decision to give it up – I became a legitimate homeowner like no mortgage. I consider it the best investment I’ve ever made. And while I may have regretted leaving some benefits on the table, I can tell you that I don’t regret the decision today.
This is a long and awkward way of saying that I am playing house money with my remaining crypto holdings like Cardano. It’s a great feeling, the same high I get on some popular meme stocks. As a stakeholder, I also write from an honest perspective because I don’t care what happens next.
Check this out – it matters to me, but I don’t shiver with fear every time I check the Cardano price (or whatever your favorite crypto is). I don’t want to get too personal, but I think it’s important that you know where I’m from.
I am trying to write these stories based on the current risk and reward narrative. That said, if you were to buy Cardano now at the time of the $ 1.58 price writing, would that be good business?
From my point of view, I don’t think so and here’s why.
For Cardano, separate the basics from the speculation
For starters, anyone who is even thinking loosely about buying Cardano should consider its volatility. According to Yahoo Finance, the 52-week range for ADA is between 7.6 cents and $ 2.46. That’s a 32X differential, which means you can take a ride, but who knows if it’ll be good?
Second, and more importantly, investors need to separate the speculative component of Cardano from its fundamental proposition. True, in some cases the two trajectories share a logical relationship. For example, many investors believe in Cardano because of its Proof-of-Stake (PoS) protocol versus Proof of Work. ADA has certainly benefited from this belief.
However, you can find that the blockchain industry is still in its infancy because the sector fails to address a key driver of decentralized platforms: who is going to pay for it? If you think about it, that is the million dollar question about this newfound fascination with PoS protocols.
As Coindesk employee Christine Kim wrote in 2019, the new PoW protocol is for ether (CCC:ETH-USD) would be profitable for crypto miners, but only barely. Of course, the Ethereum 2.0 protocol has received a lot of praise for its blockchain users, but opinions are mixed among the miners.
In other words, blockchain platforms require a certain level of inefficiency to make it worthwhile for miners to do their thing. Otherwise, if a platform is too efficient, there is less need (demand) for miners. That, in turn, scares miners off due to a lack of profitability. The much-acclaimed decentralized protocol will soon become a digital ghost town as the mines dry up, so to speak.
For now, Cardano is attracting all types of contributors to the network because the price is high. But what happens when the price inevitably corrects itself? If it’s past volatility bouts, the miners will leave – including selling their high-end mining equipment for whatever they can get.
Blockchain proves that people are rational
One of the misconceptions I see among new crypto investors is the idea that the blockchain is a miraculous innovation with the potential to solve all of humanity’s problems. No. What it is is a business solution whose management shifts from centralized responsibility to decentralized responsibility.
In principle, this sounds like the most efficient solution to any business challenge. But that’s only looking at one side of the equation. The other side is that the public contributors who provide the solutions have to be paid.
At a very simple level, blockchain participants contribute something to the network, be it computing power, digital equity (i.e. participation) or storage capacity. Neither of these things are free, and they all cost real money (as in our case in US dollars).
In return for the provision of this computing power, this equity capital or this capacity, the network participants receive cryptocurrencies. The appeal is that these coins could be worth a lot more than the cost of the contribution. On the other hand, there is a risk that these coins will lose their value.
From my point of view, it is the ultimate counterparty risk. Trading cryptocurrencies is a nuclear football game. By transferring risk onto each other’s books, you can make a lot of money based on people’s speculative beliefs. But at some point nuclear football will boom.
With so much bull hit in Cardano and other cryptos, I didn’t want to challenge my luck. You are of course free to make your own decision.
At the time of publication, Josh Enomoto held a LONG position at ADA and ETH. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s posting guidelines.
As a former senior business analyst for Sony Electronics, Josh helped Enomoto broker key contracts with Fortune Global 500 companies. Over the past several years, he has provided unique, critical insights into the investment markets as well as various other industries including law, construction management, and healthcare.