Got $1,500? Here's What You Need to Know Before Buying Cardano.

An investment of $1,500 could grow into a respectable amount of money in the right place, but it's not so large that it precludes taking a bit of a risk. On that note, for some investors, Cardano (CRYPTO: ADA) might seem like an appealing option, as it's riskier than a pick like Bitcoin but nowhere near as risky as some lesser known altcoins.

But there are a few things you need to know about Cardano before moving forward, so let's go over them in detail.

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Understand the objective and the significance of the results

Many investors look to Cardano as a coin that surpasses the capabilities of Ethereum because doing so is one of the reasons the coin was developed in the first place. In short, Cardano's ambition is to offer cheaper and faster service for decentralized finance (DeFi) projects, governance tokens for distributed autonomous organizations (DAOs), stablecoin transfers, and other projects, including non-fungible token (NFT) platforms. It succeeds in accomplishing those goals from a technical perspective because it's less expensive to use and faster than Ethereum.

But what investors need to know is that there are larger issues that make meeting its internally defined targets difficult. In particular, the chain is simply not home to many projects in high-growth segments that would bring in enough outside capital to drive demand for the chain's coin.

Its smart contract platforms, stablecoins, DeFi projects, digital infrastructure projects, artificial intelligence (AI) projects, and even its meme coins are all dramatically smaller, less liquid, less well known, and fewer in number than other chains of its size. That means those segments won't be generating pressing needs for investors to buy Cardano and then invest in its ecosystem. More importantly, it raises the awkward question of why the chain's orientation isn't leading to a booming set of projects compared to Ethereum, which is slower and more expensive.

In a nutshell, when Cardano launched in late 2017, those differences mattered more because the crypto sector as a whole was much smaller and less differentiated. It gained some initial traction by showing that it had solved some of Ethereum's core problems. But now, an even cheaper and faster chain, Solana, exists, launching in early 2020 and growing much larger than Cardano.

It's unclear how Cardano could ever one-up Solana at this point; Solana is well positioned to capture the next set of growth segments that crop up as well because there aren't other large chains that are as inexpensive and as quick.

Think about what needs to happen for this investment to work

There is no rule that says Cardano is forever doomed to be a suboptimal investment.

The blockchain is in active development, and that means its trajectory could change, salvaging its position in the cryptocurrency competitive landscape. Making the chain more amenable to hosting AI projects would be a major step in the right direction, whatever measures the technical implementation of doing that might require. Its governance system, while slow-moving due to being highly democratic and fairly academic, is probably capable of making the necessary changes to ensure that the chain flourishes, though it won't be a fast process.

Still, investors need to understand exactly what the investment thesis is and how it needs to look in the future if the coin is going to actually be worth buying. It doesn't matter whether you're looking to park just $1,500 of your capital or five times that amount; there's simply not much point in investing in an asset if you can't define why it is going to gain more value rather than buying a safer alternative, which in this case would be something like Bitcoin. And right now, there simply isn't a strong thesis for buying Cardano over this alternative.

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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Cardano. The Motley Fool has a disclosure policy.