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Is Algorand a Good Investment, or Will Its Horrible Tokenomics Hold It Back?

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Smart contract cryptocurrencies have performed exceptionally well in the crypto boom. They pump when alts are pumping and don’t lose quite as much when the market dips. The majority of my crypto portfolio consists of smart contract cryptocurrencies (Ethereum, Cardano, Avalanche). Smart contract cryptos have serious potential for ubiquitous worldwide adoption.


Algorand is one of these cryptocurrencies. I love writing about great coins that are flying low on the radar. Algorand has smart governance and incredible backing. Algo aims to solve some key issues in crypto, and I have no reason to believe it can’t. The project has some downsides, though. My goal is for you to know as much as you can before pulling the trigger on any crypto. So let’s get to it.


What is Algorand?


Algorand has roots at MIT in 2017 where it was founded by cryptography and information security professor Silvio Micali. In the world of tech, MIT has a pretty strong brand- something that’s important when it comes to raising funding for a project. As you’ll see, Algorand has done this in droves.


Algorand’s test net launched in April 2019, and its main net launched in June of the same year. Algorand has raised over half a billion dollars in funding, an insanely high number given the project’s smaller market cap. Algo isn’t currently in the top 20 cryptocurrencies as of this writing.

Algorand is green


The Algorand project announced it has been carbon negative as of early 2021. They’re able to do this via carbon-offset planning with climate-concerned non profit orgs like ClimateTrade. Even if you’re not big on climate or the environment, you should know that investments with ESG concerns front and center tend to perform very well.


Algorand’s native token ALGO is a utility token, meaning the token is used for payment for services, usually transaction processing. Currently each ALGO transaction is performed in under 4 seconds, and costs a small fraction of the fees that Ethereum charges. This will still hold true even after Ethereum 2.0 is released.


The fundamentals of Algo


Algorand, like all other smart contract cryptocurrencies, is a proof of stake crypto. The Algo consensus bills itself as a “pure” proof of stake. Algorand’s website cleverly outlines three of the biggest tenants of crypto that create problems for many projects:

  • Scalability
  • Decentralization
  • Security


You’ll often hear these three referred to as the cryptocurrency trifecta. These are the issues that crypto is looking to solve. Cryptos like Bitcoin are decentralized and secure, but not scalable (as a form of currency). Other proof of stake cryptos like Avalanche may be scalable and decentralized, but less secure. Cryptos like XRP are highly scalable with transaction rates that can rival those of credit card companies, but are highly centralized. Algorand aims to be all three of the properties listed above. If attained, this is a huge prize.


Algorand has a voting system with proof of stake, but it only has 100 ‘relay nodes’ that act as hubs to the spokes of participation nodes. The Algorand Foundation gets to choose who the relay nodes are, which is a big red flag in terms of equity and decentralization. It appears cronyist.


I won’t go too much into the technicals of Algorand here since we’re taking a look from an investment prespective, but this video and this video by Guy over at Coin Bureau are excellent if you want a deeper dive into the tech.

Tokenomics


This is where things get a little iffy. When I refer to ‘tokenomics’, I’m referring to the basic supply and demand dynamics that push a coin’s price up or pull it down. If more coins are put into the circulating supply, and no other factors are driving up the price, investors will lose money. A project can have excellent fundamentals but shit tokenomics and investors get the shaft.


Tokenomics is where Algorand performs the worst as an investment. On its website it says that the project will produce roughly 800 million new ALGO per year, a king’s ransom in many respects. We’re talking double-digit inflation for the forseeable future. Compare this to Bitcoin, which halves the amount entering supply every four years. The short is that ALGO will need strong adoption from millions of users to offset these supply increases.


Algorand supply releases


The drawback to having tons of early investment in a project is that when that project gains traction and the price of its token increases, those early investors sell their coins and retail investors are left ‘holding the bag’. This has happened a fair bit with Algorand.

Source: Cryptoslate.com


Adoption of the Algorand Platform

The only thing that will drive the price of a coin up long-term is adoption of the Algorand platform by applications. For apps running on the platform, users will need to buy ALGO to participate. Algorand has done a wonderful job of setting up DeFi (borrowing and lending without a bank) apps on the platform. Algorand also offers grants to promising projects, much like the Y Combinator offers funding and guidance to promising business ideas. Both Terra and USDC have launched their stablecoins on Algorand, and both of these have big adoption rates.


Can Algorand reach 100 dollars?


By 2025, I don’t think a price of $10 dollars/ALGO is unrealistic, and I’m giving the project a 25% chance that it reaches at least $100 by 2025. The project has a good amount of clout from venture capitalists and top universities like MIT and UC Berkeley. If this project is able to survive all the downturns and reach a critical mass, I’d say it’s rather a function of when ALGO will hit $100 rather than if. Still, coin supply inflation troubles me. If there’s something I could change about this project, it would be the inflation. I would also aim to get the early investors out of the supply so there aren’t any rug pulls.

Conclusion


Algorand draws a lot of similarities to Cardano, and Cardano is one of my favorite coins. Both projects were founded by intelligent academics who hold PhDs in fields tangent to the crypto space. Both have a fair amount of institutional backing and funding. Both have fanatical communities that will deny any FUD all day long and tout the advantages of the coin. If Algorand (with its current cap of $11B) could get to the same level as Cardano (with is current cap of $68 billion), we could be looking at some big increases in price in the long term. I’m not a financial adviser, but from my experience I’ve seen that people are always too short sighted when it comes to the crypto space. When investing in a coin, try not to think too much about where we are in the market cycle, and what news is coming up for a coin. Think of the fundamentals and where this project will be in 5, 10, 20 years. Not financial advice, of course! It will help you sleep easier and get on with your life.

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