The cryptocurrency market has exploded, with coins going 100x left and right. Algorand performed excellent in 2021, but is Algorand a good investment in 2022?
In my 2022 assessment, Algorand had promising technology and real-world use cases, but I still preferred Bitcoin and Ethereum.
Let's break it down, and analyze Algorand as an investment in 2022:
The Economics of Algorands Coin - ALGO
The ALGO cryptocurrency has a high circulating supply, which contributes to a low price per coin. A separate analysis covers Algorand's supply mechanics and inflation.
The current circulating supply of ALGO is roughly 6.5 billion coins, which is a lot:
This naturally causes the price per coin to be low, compared to other projects like Ethereum.
What's more important to understand is the rate of inflation that ALGO will experience.
Algorand will have a relatively normal inflation rate between 5% and 6% annually in the next 5 years or so. After 2030 inflation will end as all the coins will be in circulation.
They plan to distribute an average of 388 million coins per year until 2030.
Just like the U.S. Dollar is devalued by money printing, this drives the price down, which is bad for investors.
Take a look at the future inflation rate of the ALGO below.
The orange line is the inflation rate, with values at the right vertical axis. The blue pillars are the circulating supply each year, with values at the left vertical axis:
The inflation rate in 2022 will be around 6%. This means that the circulating supply of ALGO will increase by 6%.
Remember, the way to calculate the price of ALGO is to divide the market cap by the circulating supply.
If the supply increases while market capitalization stays constant, the price per coin decreases.
As investors, it's important to look at fundamental factors like the inflation rate and the supply mechanics of ALGO.
It's easy to look at the inflation and think: "Why the heck are they suppressing the price with 6% per year!? Are they working against me!?"
No, they are not "working against you". There is a reason for the issuing of new coins, creating inflation, and it's good.
Is Algorand a Bad Investment Due to its Inflation Rate?
Inflation is generally bad for the value of an asset. However, it's not that simple. We have to look at why Alorand has chosen this type of distribution for their coins before concluding anything.
In fact, ALGO's inflation could support the investment case if the incentives increased adoption.
Hear me out:
The high inflation rate means that a lot of new coins are being distributed. These tokens are being used as incentives for developers and ALGO stakers.
No inflation means no incentive to stake your ALGO (because there can be no rewards) and no incentive to "build stuff" on Algorand.
If Algorand manages to attract a lot of developers and business, as well as stakers, the high inflation rate makes the blockchain more secure (due to more stakers) and the ALGO coins more valuable (due to more adoption).
In other words, inflation is good for business, which again is good for the value of the ALGO coins.
So far, this strategy seems to work well. They have a lot of traction when it comes to bringing business and stakers to the Algorand ecosystem:
The Algorand Ecosystem:
The ecosystem built around and on top of Algorand was a positive factor in my analysis.
In theory, more projects built on Algorand could increase demand for ALGO.
At the time, Algorand had many projects built on it and others in the pipeline.
This is taken from the Algorand website:
**I would like to mention one use case that I really like:
Marshall Islands’ Sovereign Digital Currency Will Be Based on Algorand**
Even though the Republic of the Marshall Islands only has a population of 55 000, it's a big deal that they're building their national currency on the Algorand blockchain.
If the project succeeded, other countries might follow, which could support demand for ALGO.
Technical Analysis on Algorand as an Investment for 2022
Let's look at the price charts, and see what they tell us about the possible outcomes for Algornad this year.
I kept the technical analysis simple, using the framework in Bitcoin Technical Analysis: How to Read Bitcoin Price Charts Like a Pro.
We're going to look at algorand priced in USD, BTC and ETH. This way, we get a few different perspectives and a more complete understanding of the price moves of the cryptocurrency.
ALGO / USD Analysis:
ALGO / USD
I'm writing this right after a huge correction/crash. We've found support on the yellow line, in the $0.8-$0.85 range.
If this line breaks, the next support is likely to be right above the $0.5 level - red line.
If the support we're at right now breaks, we're likely to reach $0.5, which is a 39% drop.
The upside potential is hard to tell at the moment.
Let's move on to ALGO / BTC:
ALGO / BTC Analysis:
ALGO / BTC
This chart tells us that ALGO is trending sideways relative to Bitcoin. This might change of course, but generally speaking, it has been the case for almost two years now.
In other words:
Over this interval ALGO did not outperform Bitcoin significantly, so the added risk did not look justified to me.
Let's take a look at the ALGO / ETH chart:
ALGO / ETH Analysis:
ALGO / ETH
This chart just looks bearish... ALGO is trending down relative to ETH.
Remember, this chart shows the ratio of ALGO / ETH. Even though this is trending down, the USD price of ALGO might go up.
This chart only tells us that ETH is outperforming ALGO, not that ALGO is decreasing in terms of USD.
The question I asked was whether I could justify holding ALGO instead of Ethereum. At the time, my answer was no because ALGO was trending down against ETH.
To conclude our technical analysis of Algorand:
I'm going to be honest; in 2022 I would rather invest in Ethereum or Bitcoin. The increased risk of holding ALGO can't be justified as its trending down against ETH.
The case I still saw for ALGO was trading its swings against BTC within the yellow trend channel above.
Even though the technical analysis was far from optimal, I still viewed the Algorand project itself as strong. Let's look more at Algorands fundamentals:
The Team Behind Algorand
When analyzing a potential cryptocurrency investment, it's important to take a look at the team behind it.
We'll look at the three leadership positions, Founder, CEO and COO:
Founder: Silvio Micali
This guy has been a key figure in the development of modern cryptography and has been a faculty member at MIT since the 80's.
In addition, he has received a bunch of awards, including the Turing award and the Gödel Prize.
In other words:
Silvio Micali, the founder of Algorand, has deep expertise in cryptography.
CEO: Steve Kokinos
Steve Kokinos has founded and run several successful businesses in the past.
The most recent is FuZe, which has over 700 employees and serves over 1500 enterprise customers.
What mattered to me:
Steve Kokinos, the CEO of Algorand, has a lot of experience and know-how when it comes to running successful businesses.
COO: W. Sean Ford
W. Sean Ford is responsible for product management, engineering, marketing and global community development.
He came from LogMeIn, where he was responsible for global marketing strategy, product marketing, eCommerce, communications, brand leadership, and demand generation.
He has a ton of prior experience in leadership positions, including CMO and COO of Zmags, and as vice-president of Global Business Unit (GBU) marketing at Oracle.
In other words:
W. Sean Ford, the COO of Algorand, had substantial business experience across several companies.
Algorand Team Conclusion:
I saw Algorand's balance of technical and business experience as a strength of the project.
My 2022 Investment Conclusion
After looking at several different ways of analyzing Algorand as a potential investment in 2022, this is what I have to conclude with:
I considered Algorand a credible investment in 2022 because of its technology, ecosystem, and use cases. However, I still preferred Bitcoin and Ethereum.
My preference was to build Bitcoin and Ethereum exposure before adding Algorand.
Technical background: How Algorand Solves "The Blockchain Trilemma"