Five Factors Investors Need to Consider When Choosing Blockchains

July 29, 2022 11:50:00

Blockchain technology has been a big hit over the past couple of years because of its decentralized structure. This decentralization grants increased transparency, greater security and instant traceability as well as enhanced efficiency and speed, making blockchain a great addition to any business structure. Even though the cryptocurrency market has faltered in the past few months, blockchain technology isn’t going anywhere anytime soon.

Given the speculation around blockchain, especially regarding its integration into existing corporate structures across different industries, plenty of investors have considered investing in blockchain. However, as with all investing, there are important factors to consider before investing hard-earned cash.

Keep the following factors in mind as you consider which blockchains you should invest in:

Use cases. For what reason was the blockchain created? This should be the foremost question in your mind before investing. Study the project’s white paper to see why the blockchain exists and the market gaps it seeks to fill, along with the problems it is designed to solve. A blockchain’s use case is a good indicator of its future potential, so make sure you are well acquainted with the project’s use case.

Present and future transaction speeds. Did you know that different blockchains have different transaction speeds? Depending on how they validate transactions, different blockchains will handle transactions at different speeds. Bitcoin is famous for being slow, only processing seven transactions per second (TPS) with a confirmation time of up to 10 minutes.

Ethereum, on the other hand, has a TPS of 10 and a confirmation time of around six minutes; it is also expected to achieve 100,000 TPS after transitioning to proof of stake (POS) consensus mechanism.

Consensus mechanism. Simply put, a consensus mechanism is a system used to validate the authenticity of transactions and maintain the blockchain’s security. Both Bitcoin and Ethereum use proof-of-work consensus mechanisms, but Ethereum is slated to transition to proof of stake, which is 99.5% more energy efficient, requires less specialized hardware, is more secure against attacks and has decreased centralization risk.

Newer blockchains that use proof of stake use less energy and are more ecofriendly compared to blockchains that use proof of work.

Financial metrics. A deep dive into a company’s numbers will provide an indication of its future performance. You can gain an idea of the project’s popularity by looking up its market capitalization. Comparing a company’s market cap with its competitors will also give you a good idea of the project’s popularity. Projects with a higher total value locked (TVL) tend to have users with more faith in the blockchain.

Future roadmap. What is the blockchain’s roadmap for the future? What are the long-term plans for the blockchain? The team behind the blockchain should have created a future roadmap indicating long-term plans for the future. A future roadmap also keeps investors and enterprises informed about whether the roadmap aligns with their values.

Finally, you will want to take a look at the management behind the blockchain before making any investments. What are their credentials? Do they have relevant experience in the field? Avoid blockchains whose management hides behind pseudonymous identities or consists of dubious personalities.

When you consider all the factors above, you are also in a better position to determine whether industry entities such as Bit Digital Inc. (NASDAQ: BTBT) can be a sound investment choice or whether a more cautious strategy might be best.

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