Introduction
Cryptocurrencies have essentially provided investors with a new method to hedge their investments and diversify their portfolios. However, many traders deal only in cryptocurrencies which narrows their options for diversification.
Therefore, cryptocurrency investors need to remain alert about the market performance to ensure that they remain above the dangerous waters. Under these circumstances, investors must find the cryptocurrencies that warrant their safety and security.
In this article, the reader will get all the information about blue chip cryptocurrencies and how they are useful considerations for investment.
In the financial circle, most people have heard about the term Blue Chip. Some companies earn this informal title from the investors, and in the same manner, some stocks also rose to this type of investment rating.
Any company, stock, or cryptocurrency that have earned the title of Blue Chip mean that it is deemed to be higher in value in comparison to its contemporaries. In TradeFi, Blue Chip entities offer advantages like brand value and a proven track record.
In most cases, Blue Chip stocks have a market value of billions. Furthermore, they are also often considered to be leading organizations in their respective sectors. Some examples of Blue Chips are Coca-Cola, Boeing Co., and IBM Corp, among others.
The main reason that investors took an active interest in Blue Chips is to earn hefty dividend income. However, the idea that Blue Chips are going to outlast every market shock is unrealistic and investors should opt to diversify their portfolios beyond Blue Chips stocks and companies.
Origin of Blue Chip Terminology
The term Blue Chip was coined by a financial analyst working at Dow Jones during the 20th Century. He took the reference from the game of poker played in the 19th Century with red, white, and blue chips. Usually, the blue chips held the highest value among others.
Therefore, the Dow Jones analysts used the term to describe the stocks that were performing better and created higher yields in comparison to their counterparts. Since the 1920s, many stockholders have used the term, and it is now adopted by the DeFi sector, with some labelling high-performance cryptocurrencies as Blue Chip.
What is a Blue Chip Cryptocurrency?
A Blue Chip Cryptocurrency is a digital asset that has indicated consistently better performance in comparison to other alternatives. Taking a quick look at the cryptocurrency market, some coins stand out immediately, for example, Bitcoin, Ethereum, and BNB, among others.
The first common factor that these cryptocurrencies share is the highest market cap and top rankings.
Bitcoin is the first-ever blockchain, and it is also the most popular cryptocurrency in the world.
Ethereum network is known for its ability to host dApps and DeFi protocols. Meanwhile, the BNB token is native to the largest cryptocurrency exchange in the world.
However, cryptocurrencies are relatively younger in comparison to the century-old stock market. Therefore, even Blue Chip Cryptocurrencies have yet to live through major market and economic crises.
How do Blue Chip Cryptocurrencies Work?
Blue Chip Cryptocurrencies can be seen as having a sizeable market share in the aggregate capitalization of the crypto markets. It means that since the launch of Bitcoin in 2008, these cryptocurrencies have remained largely dominant forces in the market.
Bitcoin market dominance has always been greater than 50% of the entire crypto market cap. At the same time, blue chip cryptocurrencies have managed to remain operational despite massive price volatility and negative forces such as bear market runs.
Another important quality found in a Blue Chip cryptocurrency is that they harbour a good reputation among investors. The investors in the sector plan to invest and hold these currencies for the long term.
At the same time, there is a considerable amount of institutional interest invested in these currencies. Additionally, Blue Chip cryptocurrencies also offer practical use cases for their consumers that keep them free from speculative trading influences.
For example, Ethereum has a large invested interest on account of the dApps ecosystem and NFT marketplace. NFTs are digital ownership tokens that allow users to create and trade unique artwork or other data files online.
The Comparison Between Blue Chip Stocks and Cryptocurrencies
Cryptocurrencies are closer to commodities in nature rather than stocks. However, some trading terminologies are adapted from the stock market to the cryptocurrency sector. To make sure that investors are aware of the distinctions and similarities between stocks and cryptocurrencies, here are some important comparative parameters to consider:
Index Listing
In most cases, Blue Chip stocks are part of the top indexes such as Dow Jones and S&P 500. For example, Blue Chip companies like Amazon, Google, Disney, and General Electric have all remained listed in top stock market indexes for a long duration.
It is important to note that indexes can delist a stock if it is not performing up to par anymore. Therefore, a long-term index listing is a prerequisite for Blue Chip qualification for stocks. On the other hand, there are currently no cryptocurrency indexes in DeFi.
However, Cardano’s parent company IOG has recently announced working with the researchers at Edinburgh University to create a smart contract for an automated listing of top performers in the crypto sector.
Market Cap
Market cap is usually not seen as a defining factor for the performance of a cryptocurrency. However, in the stock market, there is an informal benchmark of $% billion market cap for a stock to qualify as a Blue Chip.
It is important to note that the market cap is never a fundamental or technical indicator requirement to measure the success of a stock or a cryptocurrency.
However, it can reflect other related performance indicators such as trading volume and holding reserves. Therefore, most cryptocurrency aggregators classify currencies using their market cap, such as CoinMarketCap.
Liquidity
Liquidity is the ability of an investment product to be able to convert into cash as soon as possible. When there is more liquidity, investors feel safer in placing their bets because it is easier to dissolve their positions at any given time.
Blue Chips intrinsically have such a great invested interest and demand that they enjoy massive liquidity. On account of massive demand, it is easy for investors to purchase or sell the stock at any given time. Having a healthy amount of market liquidity is an important Blue Chip requirement for both stocks and cryptocurrencies.
Goodwill
When it comes to financial objects, goodwill is everything. At its base, gold is just a shiny metal that cannot be eaten or used for generating heat like wood. However, gold has been deemed a valuable commodity for thousands of years, and its value is deeply rooted in the collective mindset of humanity; therefore, it never loses its high market evaluation.
In the same manner, Blue Chips stocks have been able to maintain a good reputation among investors for various reasons. In the same manner, cryptocurrencies like Bitcoin and Ethereum have printed a positive image in the minds of investors.
However, for stocks and cryptocurrencies, it is important to harbour goodwill out of real utility to avoid speculative trading forces.
Pioneers
Many pioneer stocks are not present in the market anymore. For example, Netscape was an internet software company whose stock traded from 1995 to 1999 until it was acquired by AOL.
However, the browser manufacturing company dissolved in 2003 as a result of overwhelming competition. It indicates that many pioneer stocks have disappeared from the markets. In contrast, the cryptocurrency market has been around only for a little over a decade.
Thus far, pioneering currencies such as Bitcoin and Ethereum have remained dominant in the market.
What Makes a Cryptocurrency a Blue Chip?
Thus far, there are no formal requirements to award the status of Blue Chip to a given cryptocurrency. However, there are certain factors that investors and financial experts consider to exert a Blue Chip status on the crypto coins. Some of these important factors are given as under:
Operational Duration
The operational duration for a given cryptocurrency can make all the difference for its Blue Chip status. Contrary to popular belief, being a Blue chip does not mean that a cryptocurrency has to be brand new.
On the contrary, most Blue Chips are some of the oldest entities in their respective sector. Even if there is a disruptive technology such as Blockchain, the Blue Chips are still some of the longest-trading and operating cryptocurrencies in the sector.
By way of remaining operational at an optimum level for long durations, these cryptocurrencies can whether the challenges such as headwinds of fundamentals and economic factors.
Background and Foundation
The idea of goodwill and verified reputation has been attached to the Blue chip name by default. Traditionally, the companies that enjoy these ratings enjoy global recognition in their fields and are considered to be industry leaders.
The sound reputation of these companies ensures the trust of the investors in their products and grants them a warranty that most investors are going to hold on to their positions for a long duration.
In the same manner, cryptocurrencies such as BTC and ETH are also the most popular crypto in the world, with millions of investors trading them every day. At the same time, the reputation of their founders is also predominantly positive in the crypto community.
Institutional Interest
Institutional interest plays a huge role in granting Blue Chip status to a cryptocurrency. When there are only retail investors market can go in any direction.
According to Benjamin Graham, investing in the short term is a voting game, while in the long run, it is a weight game. It means that a heavy presence warrants stability and better yields for a trading product.
John C. Bogle shares in his book “Common Sense of Investing” that in his 45 years of trading career, it was impossible to find a person who could measure the market sentiment accurately. It shows that it is impossible to perceive the market sentiment with numerous retail participants.
Having institutional investors can lessen the burden of market analysis and also ensure greater political support for the stability of a trading product such as cryptocurrency. Bitcoin harbours support from some institutional moguls such as Tesla, Grayscale, and CME Futures, among others.
Market Capitalization
Market Capitalization is seldom seen as a measure for measuring the successful track record of a cryptocurrency. However, in the stock market, there is a minimum requirement of around $5 billion market cap for a Blue Chip qualification.
Meanwhile, two visible cryptos, Blue Chips such as Bitcoin and Ethereum, fulfil the traditional obligation with a market cap reading of $1 trillion and $500 billion simultaneously.
Liquidity
If there is a good reputation for a cryptocurrency, it means that it will enjoy a massive demand in the sector. As a result, the currency is going to have sizeable liquidity for investors to grant them a safety net and mitigate trading risks. The trading volume of Bitcoin is measured in billions of dollars every day.
Therefore, there is always massive liquidity available for the investors unless they wish to sell millions of Bitcoins in one go. In the same manner, all the Blue Chip cryptocurrencies are highly liquid, and investors are unlikely to get stuck when trying to trade them anywhere in the world.
Connectivity
If a cryptocurrency has all the qualities and offers wonderful utility features, but it cannot travel outside of its native blockchain, it will not grow. Therefore, the power of a cryptocurrency to be highly connected and interchangeable is very important.
At present, almost all cryptocurrency wallets and peer-to-peer trading platforms allow Blue Chip digital assets like ETH and BTC. For this reason, cryptocurrency investors can easily send or receive these currencies through any network of blockchains, DEXs, CEXs, and digital wallets. In turn, the connectivity of these cryptocurrencies also makes them more liquid.
In comparison to stocks, most cryptocurrencies are traded around the world that further increasing their ease of exchange. At the same time, investors should be able to trade one currency for the other.
Volatility
Volatility indicates the rate of change in the price evaluation of a cryptocurrency. Traditionally, Blue Chip stocks are less volatile and offer more stability for their holders. However, cryptocurrencies are relatively more volatile than most equities.
However, when it comes to cryptocurrencies, analysts tend to measure the volatility in terms of long-term reserves, which is also known as HODLing.
Looking at the statistics, the movements of cryptocurrencies such as Ethereum and Bitcoin are slower in comparison to the trading volume of other digital assets, which grants them a more stable status and give investors relative calm during bear or bull markets.
Decentralization Status
Cryptocurrencies are all about decentralization. However, many cryptocurrencies are only partially decentralized at best. Only a select few cryptocurrencies, such as Bitcoin, are truly decentralized in a way that it is fully open-sourced and is not under the control of any private organization.
All the decisions on the Bitcoin network are made by the participants who are holding the token, and thus it follows a democratic blockchain network.
What Makes Bitcoin and Ethereum Blue Chips?
Bitcoin is the first-ever blockchain network that does not need the presence of any physical government or private enterprise to operate. The currency has been around since 2008, and it has managed to remain at the top despite the addition of thousands of new cryptocurrencies.
Bitcoin has also weathered some bearish market cycles during its course, and it is deemed a Blue Chip on account of its institutional interest and global popularity. There is only 21 million Bitcoin, and it has features like halving to maintain its circulatory supply. Almost all other blockchains follow the blueprint of the Bitcoin blockchain.
Ethereum network is the second largest cryptocurrency by market cap, and it is known for its diversified DeFi ecosystem. Ethereum network has given rise to hundreds of new DeFi products and tokens. It is also home to some of the most important altcoin projects.
Ethereum has climbed to the top by attracting the attention of the top financial companies from the beginning, and it is also one of the most useful and utility-based blockchain networks.
Therefore, Ethereum demand has remained high among investors, and it is also deemed as a proven Blue Chip despite some issues like scalability, security, and gas fee inflation.
Conclusion
Blue Chip cryptocurrencies are the best of the bunch in the sector. Investors who are only getting started can benefit from adding Blue Chip cryptocurrencies to their trading portfolio.
Most investors prefer to invest in Blue Chip cryptocurrencies for the long term to take advantage of the compounding interest effect over the years. Blue Chip cryptocurrencies can give investors an idea about what to look for in a cryptocurrency product before adding them to their portfolio.