2021-03-23 15:53:41

We Need to Take Cardano (ADA) Very, Very Seriously

On Thursday, Coinbase Pro added Cardano (CCC:ADA-USD) to the list of its supported altcoins. ADA prices, the currency of the Cardano Network, immediately leaped 40% as idea-starved traders jumped on board. Prices have since pulled back from its $1.48 peak.

Source: RuskaDesign / Shutterstock.com

But don’t mistake Cardano for a flash-in-the-pan; it’s already one of the most technologically advanced cryptocurrencies on the market. And though the coin still has a long way to go, its newfound price strength gives its developers the ammunition to go after Bitcoin (CCC:BTC-USD) and Ethereum’s (CCC:ETH-USD) dominance. With Cardano now at just $1.15, It’s time to buy the dip and hang on tight.

Cardano (ADA): A Quick Primer on Technology

Cardano was always a promising coin. Its proof of stake (PoS) technology meant that the network could validate transactions without Bitcoin or Ethereum’s costly proof of work (PoW) system. Meanwhile, the coin’s blazing speed means that the network might eventually handle up to a million transactions per second.

Much of this comes from Cardano’s all-star development team. Established by Ethereum co-founder Charles Hoskinson, the Cardano network has since signed up other top industry veterans to develop its cryptocurrency network.

But another benefit comes from the coin’s relative youth. Hoskinson started work in 2015 after Bitcoin and Ethereum’s scaling flaws had already become apparent. And to avoid the same mistakes, the founding team settled on a PoS system known as the Ouroboros Protocol, where trusted players could validate transactions instead of solving a pointlessly complex cryptography problem. Ouroboros was never guaranteed to work – the Ethereum Project is still working on the switch to PoS. But ADA’s system has so far proved far more resilient to attacks than most initially feared.

More Ammunition for Development

So why buy Cardano now? Much of the excitement has to do with momentum.

When Cardano initially launched, the network reserved 5 billion ADA for its three development teams. At the time, the dollar-figure came to a modest $150 million equivalent – enough to make an impact but not enough to change the world. (For reference, Microsoft (NASDAQ:MSFT) spends 130 times as much annually on R&D expenses). Since then, ADA’s wild ride has turned that modest sum into a fortune. With the reserved ADA now worth almost $6 billion, these firms are put in an odd position that only Ripple Labs might have seen with XRP (CCC:XRP-USD).

And with more money has come better development.

Cardano looks set to launch a smart contract ability, the Goguen Mainnet, by the end of March. That would blow open the doors to the NFT world, a space dominated by Ethereum’s ERC-20 tokens. The change couldn’t have come soon enough. Minting new NFTs in Ethereum can cost anywhere from $100 to $600 to cover gas fees, meaning that virtually all inexpensive digital artwork today are sold at a loss. The electrical costs that miners spend, after all, must come from somewhere. On the other hand, Cardano costs pennies to transact. That makes ADA one of the few viable candidates to take on Ethereum’s dominance in NFTs.

Why Buy Cardano?

Much of this might sound like a hard sell – a bullish analyst trying to shove the latest hot crypto idea down your throat.

Nothing could be further from the truth.

I’m a great skeptic of new coins that do little to improve on old technologies. It’s the reason why I was an early investor in Ethereum, a currency that was so fundamentally different from Bitcoin that the two would barely compete in the real world. (Bitcoin acts as a “digital gold” store of value, while Ethereum’s transaction-focused approach is more like Apple Pay).

It’s also why people should steer clear of Bitcoin forks like Bitcoin Gold (CCC:BTG-USD) and Bitcoin Cash (CCC:BCH-USD). While these coins can add significant improvements to legacy coin performance, they’re typically not enough to give these coins a life of their own. It’s the reason why $1,000 invested in Bitcoin Gold and Bitcoin Cash in 2018 would have melted away into $160 today, while $1,000 in Bitcoin would be worth 25 times that figure.

Today, Cardano looks much more like Ethereum than Bitcoin Gold. It’s a technological leader that’s advanced enough to challenge the traditional banking system; the average ADA transaction costs less than 25 cents in transaction fees, far lower than the average 1.5% to 5% cut that conventional banks and credit cards charge. As the adoption of Cardano spreads, there’s a growing chance that ADA might even displace banks.

Problems with Cardano (ADA)

As with any excellent investment, there are also significant pitfalls:

  1. Development timeline. Much of the Cardano network is still under development. Cardano’s Basho release to manage scaling issues could be months (if not years) away.
  2. Second-mover disadvantage. Ethereum already has a strong first-mover advantage in NFTs; Cardano developers will need to work quickly on the Goguen release before Ethereum pulls away any further.
  3. Cryptocurrency risk. All cryptocurrencies involve systemic risk. They’re fundamentally worth zero and only have value because other people say they do.

That means investors should spread their bets across multiple asset classes and coins. Even the top cryptocurrencies could fall to zero if interest in them fades.

But for those looking for diversification and growth in their cryptocurrency basket? Cardano deserves a very, very close look.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.

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