I was highly cynical of the cryptocurrency market (initially Bitcoin) for many years. I mostly thought that it would just be a novelty or only used for illicit transactions. I committed the common investing mistake of not keeping an open enough mind. I finally jumped in in early 2020 and like most folks wish I had gotten in earlier. The ecosystem is super confusing to understand / follow and I figured I would share how I think about it.
What is Crypto?
Crypto is a set of technologies that started in 2009 with the release of Bitcoin. Bitcoin invented a way for a group of untrusted computers to agree on a set of transactions. Traditionally computer applications work by your computer (the client) connecting to the application in a data center owned by a company (the server). All your data is stored in a database (like a big spreadsheet) on the server. For large web applications that have lots of users the data is split across multiple servers, but they all reside in data centers (big buildings with lots of computers) owned by the company. The company says this is David Brick’s data and they know that because they own all the servers, they trust them and they put that data there.
Bitcoins key innovation allowed a set of different servers owned by different people / companies to all agree on a shared set of data. Before Bitcoin this wasn’t possible because any server could lie to the other servers about what data they had and there was no way to tell if they were telling the truth or lying. Bitcoin created a lie detector.
This innovation allowed for a currency to be created between these computers. Before Bitcoin this wasn’t possible as any individual computer could just assign themselves unlimited money. This currency was called Bitcoin.
What is a blockchain?
Blockchain is just the technical jargon used to describe the shared set of data between computers. It’s basically a shared spreadsheet that all the computers agree upon the contents of.
So what are all these different coins?
Bitcoin was the key innovation of distributed trust that started everything. However, it has technical limitations that have led to more advanced innovations. Bitcoin only supports around 7 tps (transactions per second, i.e. the number of updates to the shared spreadsheet). As a comparison Facebook was doing 13 million tps in 2010. This makes transactions to the Bitcoin blockchain typically slow and expensive.
Bitcoin also doesn’t support arbitrary programs running on it’s network to update the blockchain. In the traditional client server model the server can run an application like google.com to execute code and return results to the client. Bitcoin doesn’t really support this, but other blockchains do. One of the popular ones for this being ethereum.
Here’s some of the top projects split into rough categories.
A Blockchain (ie platforms / technology to run applications on)
Applications that run on one or multiple Blockchains
A combination of both a blockchain / application
What are the possible implications of Crypto?
There are several as blockchains continue to scale. Some of the big ones that come to my mind are:
The internet could shift from http (client / server) to one of these blockchains or some combination of them creating a new decentralized internet.
Digital ownership. Now that different computers can agree on data they can agree on someone owning a digital asset (Non Fungible Token - NFT) or currency.
Government created digital currencies (programmable money) could lead to much more targeted economic policy. Raising and lowering interest rates or mailing cheques is very blunt vs programming money that can only be spent on certain things.
Non-government created digital currencies could lead to loss of governmental control of the currency system.
Instead of content creators paying a digital tax to FB / Google, they may be able to monetize their content directl,. i.e. general disruption of the big tech monopolies.
More automation of the financial / insurance sector, i.e. banks may be less necessary as a central arbiter.
How I would think about crypto investing
I would think about crypto in similar terms to the internet in the 1990s. At the time it seemed like it was super exciting and the future. Everything was getting funded if it was a .com regardless of the business model. When the Nasdaq peaked at 4500 in 2000 it didn’t again reach that high until 2014 or 14 years later.
Therefore, I would invest in crypto with the following in mind.
Be prepared to be invested in the space for the next 15 years
Be prepared for it to go down 90% and to lose all your money
Have a small percentage of your portfolio allocated, maybe something like 10% or less, and buy more if it crashes 90%
If it becomes too concentrated in your portfolio sell and take profits
Don’t get stuck on one project, own a diversified mix.
Don’t try and 10x your money with some weird altcoin based on news headlines. Start with bitcoin and build a diversified mix, similar to index investing
Crypto I own currently:
Bitcoin (57%)
Slow and no applications, but most mature and potentially seems to be disrupting Gold. Works fine as a store of value.
Etherium (31%)
Currently blockchain with most applications / largest developer platform. Has the most stuff built on it, but transactions are becoming expensive / might not be scaling fast enough
Solana (7%)
Currently blockchain with highest transaction speed, but is early / Beta. May disrupt Etherium in the future
Filecoin (2%)
Interesting blockchain / token to have distributed file storage. Like AWS S3 of the blockchain
Basic Attention Token (4%)
Interesting project to try and disrupt the adtech market
Crypto I’m considering buying
Polkadot
Trying to make an alternative to http by connecting all the blockchains into one ‘internet’
Disclaimer: This does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor.