Tokens or blockchains: which is a better investment?

Past performance does not guarantee future results. But aggregated data can shed some light on which market is more profitable.

Tokens or blockchains: which is a better investment?

2017 has shown tremendous return on investment for digital assets. Where did those returns happen and how can we learn from the past and pick the best cryptocurrencies for the next year? Let's look at what the data shows us.

One of the simple forms of analysis is looking at the trading volume vs market cap of a cryptocurrency. Efficient, highly liquid trading is essential for an asset to be able to react to market news and to break the resistance.

The best investment advice at this stage is to not put all your eggs in one basket and to follow the rule of three D's: diversify, diversify, diversify! Cryptocurrency economics closely mimic those of social networks where the winner takes the lions share of the market. At this stage it makes sense to split your investment between multiple currencies that operate within the same business domain in order to capture that growth. Let's compare such domains and see which ones are posed for explosive growth in 2018.

Remember: when doing market analysis you cannot have any favorites. Pick a research methodology, conduct a blind experiment and be prepared to see surprising results. Analysis performed this way is a great way to discover undervalued investment opportunities.

Segment analysis

There are three fairly distinct types of cryptocurrencies on the market.

  • Cryptocurrencies that have their own blockchain, such as Bitcoin, Litecoin, Ethereum, Cardano.
  • Tokens that are issued on a bigger blockchain, such as Saturn, EOS, ZRX.
  • Centralized cryptocurrencies. These cryptocurrencies are ones where ordinary network participants are unable to produce blocks, and block creation (and thus control over censorship) lies within the hands of one or a handful organisations. Such cryptocurrencies may not be as decentralized and censorship-resistant as others, but in return for centralization these currencies typically have higher transaction throughput and lower fees. Examples of such cryptocurrencies are Ripple and Stellar.

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Since we are looking to find the best altcoins, for purity of experiment we've discarded some large cryptocurrencies that are in a league of their own, namely Bitcoin, Litecoin, Bitcoin Cash and Ethereum and Ripple. We will also exclude IOTA because this project is as unique as it is ambitious and is also in a league of its own.

The whole category of centralized currencies is very small and, apart from Ripple and Stellar, is quite insignificant. Let's compare the other two big categories based on market data. First, let's take a look at how the market cap of these categories has changed over time.

daily market cap by asset type

You can clearly see that coins and tokens have a pretty proportionate distribution. Coins have a market cap that is consistently 2-3x higher than that of tokens.

How do people trade these assets? Is there any difference in people's minds when it comes to trading assets from different categories?

daily trading volume by asset type

Again, a very consistent picture throughout months of trading. Apart from sharp spikes, probably caused by a sudden pump of one of the currencies, tokens and coins have roughly equal trading volume.

These two facts together show us that tokens are much more liquid assets and they are well suited to accommodate large investments.

Another important metric to consider is trading volume to market cap ratio, or VMR. The higher the VMR, the more liquid the asset is and the easier it is to sell some of your portfolio without affecting the market price.

trading volume to market cap ratio

Interestingly enough, starting November 2017, tokens have significantly increased in trading volume relative to their market cap. One way to explain that is that investors treat coins as a passive investment and hold them for long periods of time, while tokens enable investors to not only earn money passively, but also through active trading. Clearly, the world of tokens is much more dynamic.

Summary

Cryptographic tokens issued on blockchains such as Ethereum have created a distinct category within the cryptocurrency space. Every cryptocurrency investor should allocate a portion of their portfolio to tokens. Tokens also seem to be better than coins for day trading as they have much higher trading volume to market cap ratio, and thus have more stable prices.

Cryptocurrencies that have high VMR are typically those that are preparing for a big pump or those that have just recently experienced it. To finish off our analysis let's take a look at which digital assets have the highest VMR (and market cap greater than $10,000) aggregated over the last four days.

cryptocurrencies that have the highest volume to market cap ratio

Cryptocurrencies that have the highest VMR over 01/06/2018 - 01/10/2018

Happy trading!

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