Sharing my perspective on the crypto market and a bird’s eye view of Cryptoland — a structural guide when investing in this space. (For the long term investors)
As you know, the birth of Cryptoland started out with bitcoin, about a decade ago, as the only digital asset that had some sort of value. Honestly, I was not an early believer or investor of bitcoin. I was quite a skeptic. A few years ago, I recalled my friend probing about Bitcoin, “Huh, what’s that?!” I detested. I read that it was a scam and I was put off immediately.
By now, Crypto has been the buzzword of 2021. And Bitcoin isn’t taking the Main Stage anymore. In hopes of making up for lost time, I went down the rabbit hole for days and weeks, rummaging through heaps of information, trying to get a better grasp of what I have missed.
Everything in the digital asset space is developing so fast that almost no one can keep on top of it. Even the experts in the field are struggling with the sheer amount of innovation that is going on. It is almost impossible to get to the bottom of it all and most investors do not know where this is headed. So if you’re feeling a sense of alienation from this digital asset space, you are not alone.
P.S. Grab a cup of coffee to stay awake! You snooze you lose.
Being an investor who wants to know-it-all before I invest, I found it difficult to put my money down. It was too abstract for me, I couldn’t connect the dots. It is so different from the world we live in, a world where we become the owners of protocols, where we do not let a corporation or a government control all our money. Even just by saying this, I find it hard to imagine.
Besides that, Cryptoland is known for its volatility. It is risky out there. You do not know which projects will work or fail. The value of these projects can easily fall 70% to 80%, wiping you out; and you are screwed.
I do think it is overhyped, especially when the FOMO kicks in, as we see millionaires being made in this space. One reason why I think we are in some sort of a bubble is because in terms of these digital assets or technologies contributing real value to our physical world, we are not quite there yet. I may not be 100% convinced, and I am deeply concerned about investors who are plunging in recklessly, taking on huge risks, more than they can afford to.
“A genius is the man who can do the average thing when everyone else around him is losing his mind”
Napoleon
That being said, I do not want to underestimate how fast we are progressing in this digital world. I do think Blockchains have the potential to disrupt industries and businesses drastically in years to come. And I am super excited to see how all of this will pan out. I just want to make sure that I know my downsides and I can sleep at night without worrying about losing all my money.
4 Categories of Digital Assets
Cryptocurrencies is one of four types of digital assets. As the name suggest, it works purely like a currency or what you call money. Bitcoin is the biggest cryptocurrency. It is meant to be a store of value, and potentially one day, it can be a medium of exchange. It has graduated to being a macro asset that is being adopted by every part of the world – from banks to investment firms, to individuals and emerging economies, to corporate treasuries. There is no other asset in the world other than the US treasuries that are being utilised by this many people. Bitcoin is now a completely different asset than anything else. Bitcoin’s correlation to gold, to the dollar has gone up while its correlation to other assets in the digital asset space has gone down.
The second type is protocols and platforms. Currently, Ethereum is the market leader – almost everything built in this space to date has been built on the Ethereum blockchain. Though there are hundreds of other protocols and platforms trying to do exactly or improve on what Ethereum has. For example, Cardano (ADA) and Neo which is named as the China’s Ethereum. Think: iOS app store. There are thousands of different apps that are built on top of iOS app store. The same thing is happening, the difference is that there are hundreds of different app stores. All of these different blockchains are in a race to become the most viable platform for projects to be built on.
The third type is called the Asset-backed tokens. These are exactly what they sound like. These tokens are backed by something real, in the physical world. They can be backed by equity, by debt, or by an income stream. One example of this which most people are probably familiar with, or at least heard about is Spencer Dinwiddie, the NBA player who tokenized his NBA salary. That is an asset-backed token. It is explicitly and legally backed by the income that he is earning from his contract with NBA.
Note: This has nothing to do with Ethereum, nothing to do with Bitcoin. They are totally different.
Last but not least, the fourth type, which may be the most evolutionary or revolutionary, is what they call pass-through tokens or hybrid tokens. These tokens are accruing real economic value, and they are passing through this value directly to token holders. I know this may sound abstract. The best way to explain is through the Binance token, $BNB.
Binance is a real company, with a real CEO, and probably a real Board of directors. They introduced the $BNB token where if you own it, you get utility and rewards. By using the $BNB tokens, you get discounts when trading on their platform, and access to deals available on the platform. In that regard, it works like a loyalty reward card. On the other hand, Binance uses a percentage of their profits every quarter to buyback and burn existing tokens. This is equivalent to share buybacks. When there is a reduction in the token supply, token holders will enjoy a corresponding increase in the token price.
So as a token holder, you get equitable increase in the value of your tokens, and at the same time you enjoy rewards and discounts from being a member or customer of Binance. This is basically the merging between user and equity owner. With this, customers will be economically motivated to continue using your platform. It’s a win-win situation.
This is just one example. And I can foresee companies will start to adopt these tokenised incentive system as it progresses and develops to suit each company’s complex structure.
By categorising, I was able to diversify within the digital asset class. It helped me to analyse the different use cases effectively.
The crux about investing in this space is that it is growing so fast you have to be nimble and evolve as this asset class evolves. You need to constantly read and keep up to date with the progress of things. The competition in this space will continue to grow exponentially. This is a nascent space that has tremendous upside potential, but comes with risks as well.
I am trying my best to blockout all the noise and focus on the projects in this space that are working to improve lives, that can eventually provide real value to people in the physical world.
“If you can’t ignore the hype while things are trending up, then you can’t ignore the despair when things are trending down.”
Brian Armstrong, CEO of Coinbase