Most folks look at investing in crypto in a one dimension fashion. Investing a portion of your financial net worth isn’t the only way to invest in new technology and reap great returns. Investing your time could pay off wonderfully well in the long run too.
And, I’d like to make the case that it is well worth your while to invest in understanding crypto in 2018.
We’re on the brink of something historic…
In his post reflecting on what happened in 2017, venture capitalist Fred Wilson shared the Perez Technological Surge Cycle. This is a framework by Carlota Perez — a Venezuan scholar on technology development.
If you look at the Carlota Perez technology surge cycle chart, which is a framework I like to use when thinking about new technologies, you will see that a frenzy develops when a new technology enters the material phase of the installation period. The frenzy funds the installation of the technology.
2017 is the year when crypto/blockchain entered the frenzy phase. Over $3.7bn was raised by various crypto teams/projects to build out the infrastructure of Internet 3.0 (the decentralized Internet). To put that number into context, that is about equal to the total seed/angel investment in the US in 2017. Clearly, not all of that money will be used well, maybe very little of it will be used well. But, like the late 90s frenzy in Internet 1.0 (the dialup Internet) provided the capital to build out the broadband infrastructure that was necessary for Internet 2.0 (the broadband/mobile Internet), the frenzy in the crypto/blockchain sector will provide the capital to build out the infrastructure for the decentralized Internet.
And we need that infrastructure badly. Transaction clearing times on public, open, scaled blockchains (BTC and ETH, for example) remind me of the 14.4 dialup period of the Internet. You can get a taste of what things will be like, but you can’t really use the technology yet. It just doesn’t work at scale. But it will and the money that is getting invested via the frenzy we are in is going to make that happen.
Fred has been bullish on crypto since he started investing in it in 2017. So, it makes sense that he’s calling it the next phase.
Or, are we?
Let’s consider the counter point — there was an interesting article on Hacker Noon recently that said the blockchain is most likely useless. Below are the headlines —
Everyone says the blockchain, the technology underpinning cryptocurrencies such as bitcoin, is going to change EVERYTHING. And yet, after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain — besides currency speculation and illegal transactions.
Each purported use case — from payments to legal documents, from escrow to voting systems — amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?
The blogger takes all the use cases discussed so far and takes apart the rationale for a blockchain based solution. It is a fun read. Similarly, “Mr. Money Mustache,” one of the top personal finance bloggers on the internet had a post on “Why Bitcoin is stupid.” In it, he says —
The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans are prone to mass delusions which lead to irrational behavior. This is a known bug in our operating system, and we have designed some parts of our society to protect us against it.
These days, stocks are regulated by the SEC, precisely because in the olden days, there were many, many stocks issued that were much like Bitcoin. Marketed to unsophisticated investors as a get-rich-quick scheme. The very definition of an unsophisticated investor is “Being more willing to buy something, the more its price goes up.”
Don’t be one of these fools.
Reconciling these points of view. Most of us come at problems with a selfish question — what’s in it for me? Or, put differently, is it worth investing in this?
Given this, here’s how I’d break it down. There are two investments we can make in new technology — money and time.
Let’s deal with money. There are tens of thousands of crypto tokens out in the wild. Many of them are nonsensical and some are ludicrous. All save a few will likely go down to zero in value in the next five years. Unless you are a crypto expert, it makes little sense to invest in “Initial Coin Offerings.” And, if you are an expert, you’re likely not reading this post anyway.
There are a few mainstream coins that are in the news — primarily Bitcoin and Ethereum. If you have tens of millions of dollars in net worth, buying a few Bitcoin — assuming it is in the low single digits of your net worth — may be an interesting experiment right about now. But, it’d still be an experiment. Investing in Bitcoin is what institutional investors and Billionaires are putting their money in right about now. So, for most of the rest of us, the time has passed.
In that sense, I agree with Mr Money Mustache’s premise — this isn’t the time to invest in crypto unless you’re open to speculating and experimenting with a sizeable portion of your wealth.
But, calling the blockchain worthless misses the point.
It takes multiple decades for a technology to get mainstream adoption. The foundations of the internet were set in the mid 1960s. Commercial use began in 1989. HTML and the idea of a webpage came by in 1994.
And, yet, it is only now that the consumer internet is mainstream. Businesses, on the other hand, are still moving to the cloud.
So, it might be 6 decades for the internet to become mainstream from when it was conceptualized and it will likely be 3 after promising infrastructure was built. These things take time.
If you want to understand why blockchains matter, think about databases.
We live in a data economy. The largest companies on the planet today own vast amounts of data in centralized databases. Their ability to use this data in more and more powerful ways (using tools like machine learning) is what makes them seemingly insurmountable today.
The core technology innovation underpinning the blockchain has made it possible to have decentralized databases. This was not possible before.
Thus, we can now build networks around these decentralized databases and create new incentive structures. In today’s world, the value of your data goes to a few large corporations. In theory, this would not be the case in a blockchain based world. That’s because anyone who contributes to a network would earn tokens based on a governance system created by the token creators.
Does this mean everything will be decentralized? Probably not. There is still value to centralization in many contexts. But, it doesn’t mean centralization is applicable everywhere either. We live in a world controlled by a few large corporations largely because we don’t have an alternative.
Blockchains promise a world where that might be different. They promise to take us down a path we’ve walked over the past century as we adopted newer pieces of information technology — more democratization and more permission-less innovation.
That’s why they matter.
And, that’s why it is worth investing your time in understanding them better in 2018.
PS: Of course, we’ll be spending plenty of time digging into crypto in future weeks.
Links for additional reading (with 5 of the notes mentioned above)