Why I Invested in Bitcoin and Ethereum

At the outset, everyone should understand that cryptocurrencies fundamentally differ from stocks. Stocks have intrinsic value — they represent a real piece of a physical business. In the short term, stocks can swing up and down for no apparent reason, but long-term, as a company’s intrinsic value increases or decreases, the stock tends to move in the same direction. By contrast, cryptocurrencies have zero intrinsic value — they’re just computer code. That makes future token prices hard to predict.

However, I believe there’s a fundamental economic principle we can use to our advantage. It’s the principle I used when deciding to buy bitcoin and Ether (the tokens for the Ethereum network) in 2018. And it’s the same principle anyone can use to today to guide their thinking about any cryptocurrency investment. 

Image source: Getty Images.

Supply and demand

In economics, few principles are as basic as the law of supply and demand. Price is determined by how much of something is available (supply) and how much people want or need it (demand). When it comes to cryptocurrencies, supply differs in each case. Bitcoin’s supply is well-known, and bitcoin aficionados argue this proves its future value. 

However, supply is only half of the equation. Remember Beanie Babies? Ty, the company that made them, periodically “retired” certain Beanie Babies, limiting their supply forever. This limited supply motivated some collectors to buy the toys hand over fist, causing their value to soar in the ’90s. Some even fetched thousands of dollars. However, Beanie Babies prices quickly plummeted after their brief heyday — most still sell for a fraction of what they sold for in the ’90s. But supply hasn’t changed; they still don’t make the discontinued ones. Demand changed. People don’t want them as much anymore, so they’re worth less.

Many cryptocurrencies have known supplies. That’s extremely useful. But an educated opinion of future token value requires a prediction for future demand. Thinking through both supply and demand led me to buy an equal amount of bitcoin and Ether over the thousands of other options. In my opinion, they’re the two most likely cryptocurrency candidates to be in demand going forward and the ones I would buy today (but more on that in a bit).

Image source: Getty Images.

Why I bought Ether

I bought Ether because the Ethereum blockchain has real-world utility. While tokens can be used for digital payments, more practical things like smart contracts and applications can be built on top of the Ethereum blockchain. Think of it like a tank of gas. Sure, the tank of gas has value. But it also has a practical use. Continuing this analogy, some cryptocurrencies are just tanks of gas in engine-less worlds. But Ethereum’s blockchain is a gas-powered engine.

Ethereum isn’t the only blockchain network like this, but it’s arguably the best known. That’s important because blockchain networks benefit from a network effect. In other words, the…