How to survive the Bitcoin and cryptocurrency crash

The world’s most popular cryptocurrency heroes have been savagely lashed overnight with around US$200 billion in value wiped off the market at one point, fuelling speculation that the Bitcoin-led bubble is finally popping.

It’s like the doomsday warnings from market luminaries like Warren Buffett about how things will end badly for investors are coming home to roost, with the top 20 cryptocurrencies crashing by over 10% in the last 24-hours.

Investors can take some comfort in knowing that it’s the value of cryptocurrencies, or cryptos, that is under a cloud and not the viability of these digital tokens.

The question is how do you know which are the ones that will survive any shakeout given that many are probably doomed to fall over at some point.

One way I suggest investors approach this dilemma is to use a fundamental framework that I am dubbing “the three S’s”: Structure, System and Services.

  • Structure: This refers to the properties of the crypto, such as the total number of coins, how much new supply of coins come on to the market within a given period, how these coins are minted, how secure are the coins from cyber theft and what rights do users/investors have. These issues can affect the value of the coins much the same way as how the capital structure of a company can impact on shareholders.
  • System: This refers to the financial backbone that supports the cryptocurrency and relates to questions on how and where users can purchase and trade these coins. It is essential that the system is robust, secure, transparent and operated by reputable counter-parties.
  • Service: This refers to the “usefulness” or functionality of the coin. The more things the coin can be used for, the greater the opportunity for market adoption.

I am not advocating one crypto over another, or any cryptos for that matter. I think it’s too early to invest in this market, even though I am convinced that we are only at the start of the digital currencies revolution.

It’s a bit like investing in medicinal marijuana in the very early days or even the internet in the 1990s. It’s all about the land grab right now and it’s hard to work out which are the players with a real and viable business.

I suspect mainstream investors will probably have to give the market another 12-months before dipping their toes into the water, although this won’t stop punters from spinning the roulette wheel of crypto fortune in the meantime.

But even if you do have a high tolerance for risk, you are probably better off looking at a niche sector that the experts at the Motley Fool are backing as the next investment wave to catch.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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