For long-term crypto gains, look to utility

Cryptocurrencies with utility are a smart investment for the long haul, according to industry experts
The long-term viability of meme coins such as Dogecoin have been questioned by experts

With more than 4,000 cryptocurrencies to invest in, it’s hard to know which coins to choose. However, while all are prone to volatile price swings, experts point to one quality above all others: utility. 

In the cryptocurrency world, utility refers to digital tokens built on a specific blockchain ecosystem – often based on ethereum’s ERC-20 standard – which grant token holders certain rights. For example, filecoin holders are permitted to use its decentralised data storage network. Alternatively, a game development company could issue utility tokens to fund its next release, which holders could spend on gaming accessories. 

“Any cryptocurrency is only as good as its use case,” says Katharine Wooller, UK and Ireland managing director at crypto wealth-building platform Dacxi.

Many investors buy bitcoin because it’s the most well known name in the industry. But while bitcoin can improve financial inclusion and enable borderless payments, experts consider its use case to be limited – ethereum is the preferred ecosystem for building cryptocurrency projects. Ethereum and many other currencies offer direct utility in various areas, which could boost their value in the long run.

“The most visible cryptocurrencies are those addressing or solving specific problems on a macro level,” says Roman Matkovskyy, an associate professor in finance and accounting at Rennes School of Business.

The technical jargon can be confusing. But if you’re a layman investor, you’re probably only interested in buying coins on a cryptocurrency exchange and storing them in a digital wallet. 

Still, it’s essential to do your homework and spend time researching and analysing a coin’s long-term intended use, cautions Wooller. A white paper detailing a coin’s plans, purpose and technology, published before its initial coin offering, is freely available online. 

But just because a coin has utility doesn’t mean success is guaranteed, Wooller stresses. There must be sufficient demand for the ecosystem.

Building value from utility

On top of the 4,000-plus cryptocurrencies already available, there are more than 2,000 ‘dead’ coins that have failed, according to Coinopsy, which tracks cryptocurrencies that have been abandoned by their creators or have no trading volume at all. 

The majority of these dead coins struggled because there wasn’t demand for their ecosystems. 

Cryptocurrencies, by their nature, have no underlying value and their prices are driven by supply and demand. 

Future potential growth will depend on how well they address the problems they’re attempting to solve and the acceptance of cryptocurrencies in general, explains Matkovskyy. “If we agree on using them, value will be created in the process.”

The fact that cryptocurrencies are decentralised and not tied to a bank or government means they’ve become a popular hedge against rising inflation and low saving rates, especially since the start of the pandemic. They’ve far outperformed gold and other assets in the past 12 months. 

Utility is the lifeblood of the crypto ecosystem. Without it there’s only speculation

Worryingly, however, there has been a recent trend for so-called meme coins, such as dogecoin and shiba inu, the former rallying more than 12,000% between the start of January and early May. Retail investors have been pouring money into these cheap alternatives to bitcoin and ethereum in the hope they’ll deliver explosive gains. 

The problem? Meme coins are largely useless. While still token-based and built on or connected to blockchain, meme coins can’t be used for any other purpose and holders are not granted any specific rights. Dogecoin, for instance, was launched back in 2013 as a joke, and shiba inu, created in August last year, began life as a satirical homage to dogecoin.

While any cryptocurrency investment is risky, these meme coins are not considered a long-term store of value, unlike coins with utility. While they may have mass speculation on their side right now, they’re unlikely to survive in the long term, argues Mathieu Hardy, chief development officer at crypto-focused fintech company OSOM Finance.

“Meme coins symbolise the antithesis of utility,” Hardy says. Once blockchain networks gain critical mass, he adds, “this speculation will die down, taking the majority of meme coins with it.”

Paddy Osborn, managing director of the London Academy of Trading, says it’s clear that crypto with utility offers far superior returns to coins with no intrinsic value or function. 

“The challenge,” adds Osborn, “is to identify these hidden gems within this very complex and fast-moving industry, before their price gets too expensive.”

Crypto of interest

So where should investors turn if they’re looking for the long-term gains of utility, rather than a quick profit?

For many experts, ethereum is the top choice. It provides a platform for developers to create apps and run them on a blockchain without the involvement of third parties. The price of ethereum could surpass that of bitcoin in several years’ time, some analysts believe – ethereum is slightly faster, has a higher level of interest from developers, and promises more applications. 

Osborn highlights three other coins he thinks are worth watching. Polkadot is building a network that can support multiple different blockchains and enable them to work together. Internet Computer is aiming to disrupt the internet space by building a decentralised web platform that runs on a blockchain. And then there’s vechain, which helps companies track their products safely and securely through each stage of the supply chain.

The speed at which cryptocurrencies are being created means it’s important you keep up to date with any new developments, advises Osborn. 

For Hardy, it’s hard to say for sure which coins will win out. However, those with the greatest level of user adoption and functionality are likely to last longer and will still be around after a market crash. “Utility is the lifeblood of the crypto ecosystem,” he says. “Without it there’s only speculation.”