| Bitcoin goes up; it goes down. And many other cryptocurrencies follow closely.
For those who speculate on cryptocurrency, the volatility can be maddening. The rises and falls provide support both for Bitcoin maximalists (who are certain it will go to $1 million or more) and those who claim Bitcoin is dead (or is a Ponzi scheme).
For those who invest rather than speculate, however, all the price drama is just noise. The real reason to invest in crypto assets is structural.
The most important contribution to the world of investing from crypto assets is not a new asset class or a bunch of tokens that might go “to the moon.” The benefits from crypto assets are trustless transactions and the elimination — or at least reduction in importance and risk — of counterparties. Cryptocurrency has the potential to be the internet of transactions.
Other transactions you engage in require counterparties. If you use a credit card, you have a credit card company. If you send an ACH or Zelle, you use a bank. Most currencies themselves are created by federal reserves or fractional banking that issue the currencies according to their own goals and objectives — whether the issuance is to your benefit or not.
And these counterparties have become increasingly political. Companies have been de-banked because of their political stances. Even individuals have had bank accounts frozen for contributing to causes that later become unpopular with the government.
Crypto assets, property structured, have no counterparty to create the transaction. Peers transact with peers from anywhere to anywhere at any time with no one in the middle to approve or facilitate the trade. Everything is done with open-source software and validated by leagues of independent validators. The only point where crypto assets require counterparties is when they are forced to interface with traditional banking assets, for example when paying for crypto with fiat currency (like dollars or euros) or when using a point of sale (POS) system that translates among many currencies including fiat.
There are many crypto assets that have been created. Many don’t share the properties necessary to eliminate counterparty risk. The keys (besides being on a blockchain) are:
- Highly decentralized. A centralized asset (few nodes maintained independently) is subject to pressure from governments on the node operators. At this point very few blockchains are truly decentralized. To invest in a crypto asset, you should assess the likelihood that the one you are interested in either is or will soon become decentralized.
- Clear and transparent software and a block validation approach that properly incentivizes miners as well as a known (also decentralized) method for any software updates.
While crypto transactions are trustless, the crypto assets, themselves, may have counterparties that are not part of the financial system. For example, crypto assets that are backed by real assets (e.g., gold, real estate, carbon credits, art or company ownership) inherit the benefits of their underlying assets while having the crypto asset benefits of better liquidity and ease of use.
The values of these crypto tokens ought to reflect the value of the underlying assets (possibly with a liquidity premium). And an investor should perform the same due diligence on the crypto asset that they would perform on the underlying asset, in addition to a basic due diligence on the crypto asset issuer to make sure there is no additional risk introduced by their involvement.
Similarly, some crypto assets are utility tokens. They can be consumed to pay for services within a company (as with frequent flyer miles or credit card points). These should be evaluated based on the usefulness of the service either in general or specifically to you. In this case, the credibility of the issuing company is also key for deciding on an investment.
There are also unique crypto tokens (smart contracts/non-fungible tokens — NFTs) that can be immutable and represent single transactions. While some of the most popular NFTs don’t really make sense, the potential for NFTs to transform contracts, real estate title and provenance is huge. Before they can really be useful, however, there must be a way to ensure the uniqueness of NFTs across platforms and blockchains (right now you could create an NFT for the same thing in several places).
Crypto assets could be to transactions what the internet was to communications. And crypto seems to be following a similar pattern to the dot.com boom.
During the dot.com boom and the creation of the internet as we know it, there was a huge flurry of innovation. Many companies created new business models that took advantage of the ability to reach customers online. Lots of really bad ideas were tried. Some very good ideas were created. Over time, the bad ideas went out of business, and the good ideas were consolidated into the best implementations of them. Now, the largest companies in the world are those that benefited from this consolidation.
Crypto assets that best leverage this new capability of trustless transactions and independence from counterparties will ultimately do the same, but we are currently still in the idea-generation phase of this development and not yet at the point where bad ideas go out of business.
But during the dot.com boom, e-commerce still used the same approaches for payment. You still input your credit card info or bank info and transactions occur through those counterparties. Crypto assets have the potential to move those transactions into new frameworks that operate on software and independent of the credit cards, the payment services and the banks. For now,
these counterparties are still relevant at the edges of crypto assets. They assist with moving fiat currency into or out of the new financial paradigm. And they are subject to existing regulations and restrictions. When crypto assets have enough market penetration that there is no longer a need to go outside them, that is when the counterparties’ influence will be reduced and/or eliminated.
Many people ask me which cryptocurrency to invest in. That would be like asking me during the dot.com boom “what is the best website.” Different websites have different uses and purposes. There is no “best” site. And crypto assets support different types of transactions. There is no best asset.
Instead, a knowledgeable investor should look at the purpose and implementation of crypto assets. Is this a kind of transaction that will provide advantages to people above what is already available? If so, that may be an investable asset. If the crypto is an intentional joke, has little utility, or does not provide some sort of transformational capability, it may have limited long-term upside. It still might go to the moon — and then crash just as fast.
Of course, gold is the quintessential asset that has no counterparty. Owning gold makes you independent of the financial system. And crypto assets that are highly decentralized and transparent also make you independent of the financial system.
Crypto assets have the advantage that they can quickly and easily be traded across the globe. They have the disadvantage that they are not physical and could be vulnerable to extreme events where the internet is gone.
Both assets have their place in an investment portfolio. But when investing in crypto assets, focus on structure and transforming transactions — not market cap, momentum or popularity.
Steve Streetman is the author of “Cryptocurrency and Real Estate,” available at https://www.CryptoREBook.com or Amazon. He consults on real estate exchange and investing and with cryptocurrency startups (like https://HoneyBricks.com — a real estate tokenization platform) and is a professional data scientist and risk analyst with https://www.DataArchitectureSolutions.com.
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