This Hidden Gem Crypto Could Have Explosive Upside Potential | The Motley Fool

Even in the middle of a crypto winter, a few altcoins succeeded in defying the odds. For instance, Toncoin (CRYPTO:TON) is up around 25% over the past month. Based on this recent surge, Toncoin is now one of the top 30 cryptos in the world, with a total market capitalization of around $2.1 billion.

Toncoin is now trading below $2, and some traders predict it has even more upside potential. There are two reasons why you should consider this potentially explosive altcoin for your crypto portfolio – but also a reason why Toncoin might be too hot for many investors to handle.

Telegram relationship

Toncoin is a decentralized layer 1 blockchain designed by Telegram, a popular messaging app with over 700 million users worldwide. Like other popular layer 1 blockchains, Toncoin offers super-fast transaction processing speeds and near-zero fees. It also provides the ability for developers to build decentralized applications on top of the network. In this regard, Telegram works much like Ethereum (ETH -0.22%).

However, Toncoin is a blockchain specially designed for Telegram users. The only time you interact with this blockchain is if you were already using Telegram. For example, in addition to messaging other users on Telegram, you may one day be able to send them crypto payments through a blockchain wallet. This is why the deep relationship with Telegram is so important – it essentially ensures Toncoin has an integrated user base of hundreds of millions of users.

Explosive growth

So why did Toncoin suddenly take off? In partnership with Telegram, Toncoin launched a new auction initiative in late October that gives Telegram users the right to buy and sell Telegram usernames. The only catch, of course, is that they have to use Toncoin to pay for those usernames. This has increased the demand for Toncoin, since the most searched Telegram usernames have a minimum bid value of 10,000 Toncoin, or about $17,500 in current US dollars.

This initiative is remarkable because it creates a continuous and recurring demand for Toncoin. You must have Toncoin to pay for these usernames, so if you don’t have Toncoin now, you must go out and buy it. These usernames could become very important if Telegram eventually uses Toncoin for crypto payments.

Regulatory risk

There is, however, significant downside risk to investing in Toncoin, due to this same relationship with Telegram. The Securities and Exchange Commission cracked down on Telegram in 2018. That’s when Telegram originally built the Telegram Open Network (“TON”) and launched an initial coin offering (ICO) of 1.2 billion dollars for this blockchain project. This led to a very nasty legal wrangle with the SEC, a hefty fine, and a promise from Telegram not to attempt to issue a crypto token until 2023. The Telegram Open Network eventually folded and disappeared under everything this regulatory review in 2020.

But then, in 2021, Telegram Open Network suddenly reappeared as Toncoin, which rebranded itself as The Open Network (“TON”). Telegram claims that The Open Network was founded by top coders unrelated to the original Telegram team. These coders simply took some of the open source code that was online and built a new blockchain based on that. Telegram CEO Pavel Durov said he supports The Open Network, but he’s always quick to point out that he’s not part of Telegram.

It is therefore interesting to see how the SEC will react and how the US regulatory environment will affect both Telegram and Toncoin. For example, you can buy Toncoin on some crypto exchanges, but not on US-based platforms. Coinbase (PIECE OF MONEY -2.83%). And if you’re a US-based Telegram user, you can still send and receive messages, but you can’t participate in the Telegram username auction.

What to look for in 2023

Next year is going to be very interesting for Toncoin. Most of this has to do with the fortunes of Telegram, which could anticipate an initial public offering in 2023. With any further injection of cash, Telegram could choose to reallocate some of that capital to blockchain and crypto projects, including including Toncoin.

And, of course, there is the question of how the SEC will react to the re-emergence of Telegram in the crypto markets via Toncoin. When you add Telegram’s presence in Russia, where it has been widely used to evade censorship, you can see how Telegram’s regulatory issues could become controversial in the United States and around the world.

For purely upside potential, it’s hard to ignore the allure of a blockchain designed for social media with 700 million users. It could become a fantastic peer-to-peer way to trade cryptos. But once you start digging into the details of Toncoin, it’s also hard for cautious investors to ignore potential red flags. For this reason, I keep Toncoin on my radar for 2023, but cannot recommend it as a purchase. It’s just too risky for the average investor.