I’ve honestly lost track of what year Bitcoin first came into the mainstream enough for people to start asking me about it, but since then every time there’s a market boom I start getting questions, and this time around is no exception.
Rather than continue to field each email, text, and call individually I thought I’d just spend some time articulating my beliefs about crypto and how to make money with it.
Before we get into anything else, I need to make clear that while I believe some of the currencies discussed below are useful tools and do have value, I also think the mainstream crypto market is completely irrational and driven by hype, scammers, and fads.
I am completely useless in terms of being able to predict which coin will get pumped and dumped next. Anyone else without inside knowledge of which players are moving and when their hype campaigns and selloffs will happen is equally useless, so I don’t feel bad about that.
Put another way: If you want to make massive short term gains and you’re not in on the scam, you’re a mark. Best case you’re in a casino with the odds stacked against you, and worst case you’re being actively courted to set your money on fire so someone else can get rich.
I do have opinions on specific coins I think are part of useful projects. I don’t claim to be a crypto expert nor do I have the kind of encyclopedic knowledge of the crypto space that I do in other far less lucrative topics. (If only I could monetize Star Trek trivia or Rock and Roll factoids!)
There are two kinds of coins that make sense to me: Value Store and Utility.
A Value Store seeks to emulate the concept of scarcity driving value that we see in the real world.
See if you can guess what item I’m talking about below:
A rare and unduplicatable item is created via hard work that can’t be faked or acquired via a shortcut. People decide that the scarcity and immutability make it useful for commerce, so it’s ascribed a market value via supply and demand and traded for goods, commodities, and fiat currencies on a variety of markets around the world.
All of the above can apply equally to gold or to Bitcoin. Both are a value store.
Bitcoin is both more and less convenient than gold. I can walk around and have access to my entire Bitcoin stockpile via my phone, not so with gold.
I don’t need a massive vault to hold my Bitcoin that can only be breached by Danny Ocean and his crew, and if I want to do a transaction with Bitcoin it’s much easier to transfer it somewhere else.
There are downsides. If someone gets into my phone or hardware wallets they can conceivably rob me while I’m in the room without me knowing. It’s also true is that while Bitcoin is being mined it takes an immense amount of electricity, though that will stop in a few years once the entire supply has been distributed.
Either way, there’s now so much institutional capital and ultra wealthy individuals invested in Bitcoin that I think it’s passed the “too big to fail” goal line. If my Bitcoin becomes worthless, so does Elon Musk’s, the Winklevii’s, Charles Schwab’s, etc. I don’t see them letting that happen.
Bitcoin as a long term value store is a good investment in my opinion. Once the mining stops and all Bitcoins are in circulation, the value will likely go up even further.
That isn’t to say it’s a 100% sure bet. China controls a massive amount of Bitcoin infrastructure and holds massive numbers of coins, and they may use it as a lever in the future. There is also a ton of uncertainty behind who created Bitcoin, why they did it, and who controls some of the early wallets that contain billions of dollars of value now.
Whatever happens, Bitcoin occupies a unique first mover position and has become the de-facto flagship crypto product. Even so, it doesn’t actually do anything but enable private transactions between wallet holders so it isn’t a Utility Token.
A Utility Token is a “coin” that’s part of a larger ecosphere or application and has some function beyond simple transactions.
The most interesting of these to me is Ethereum, which is far more than just a digital coin and public ledger. Instead, Ethereum is a platform for creating decentralized applications and “smart contracts.” The “coin” used in these applications and contracts is called “Ether,”
The idea is that monetary transactions would be enabled by these smart contracts to allow people to conduct transactions without the need for a third party such as a bank.
In real estate, for example, a smart contract enabled transaction could require the buyer to stake their Ether in a virtual escrow account. Once that’s done, an inspector would be engaged who would then file a cryptographically signed report which would trigger the next step and so on until the buyer and seller agree that the transaction is complete. When that happens, the contract transfers the deed between parties and notes it on a public blockchain.
A car dealership could sell or lease cars on a smart contract. The buyer would be responsible for depositing Ether into the dealer’s account on a certain day of the month, and if that doesn’t happen the contract could disable the ignition. No need for a credit check, a bank loan, etc.
Anyone who’s asked me where I think the long term value in Crypto is going over the past few years has gotten Ethereum as an answer. It hasn’t come close to realizing it’s full value in my opinion even with the recent gains.
A few other interesting utility coin projects I think are worth looking at:
FileCoin (A decentralized file system. It’s like Dropbox, but without a company at the center)
Basic Attention Token (A system to manage online privacy)
Ripple (used by financial institutions for payments)
Stellar Lumens (Fiat to Digital Currency Converstions)
Monero (Truly anonymous transactions — risky since it could conceivably be made illegal in the future)
That’s pretty much it in terms of useful coins I’ve spent any time paying attention to. That isn’t to say there aren’t more, but I haven’t looked too closely at the space recently because there’s just so much noise.
Now I’ll move into areas I think are sketchy where I just don’t see the point.
First there’s NFT’s. Now, I’m not a person who has ever seen value in collectables, be them baseball cards, in-box action figures, or uh, coin collecting. As such, I might not be the best person to explain this offshoot of the crypto market in terms that make it sound like a good idea.
NFT’s are non-fungible tokens, basically a digital version of the certificate of authenticity you get when you buy a collectible from the Franklin Mint.
You’ll need to find someone else to explain why anyone would pay money for JUST the certificate and not even the item in question. I don’t understand it at all.
The idea of an NFT makes sense at it’s core. Hell, a blockchain powered coin is basically an NFT to begin with. I stay with it for public ledger, non-duplicatable token, etc, but I get lost at why I’d want one for a random JPG on the internet that anyone could download.
The NFT’s that I see getting bought and sold right now just seem silly to me, but then again so does paying $1000 for a pair of Nike’s so maybe I just wasn’t born with whatever gene makes doing either of those things sound fun.
It may well be that I’m getting old and have finally lost touch with the way the world works, but it could also just be that most of the NFT space is a crock of BS.
Speaking of BS, let’s talk Dogecoin.
I just don’t see the point of it. It doesn’t do anything Bitcoin and others don’t do and it doesn’t have a supply limit. If Bitcoin is Coke and Ethereum is Pepsi, Dogecoin is Big-K Cola, the store brand from Kroger. The same concept, just in cheaper packaging and made with ingredients that don’t taste as good.
What Dogecoin does have is a billionaire pumping it for reasons that are 100% his own and designed 100% with his interests in mind. That means it’ll rise and fall at his whim, and unless you’re good at getting in his head and figuring out what he’s doing, you’re just gambling.
I know people who have bought homes and cars with Dogecoin returns and I can’t fault them for it, but if you want to buy in there just know it’s walking up to a roulette table and putting all your money on black. Sure, it might come up. You might even have as good as a 50/50 chance on a huge return, but personally that’s not how I make financial decisions.
So… how to tell if a coin is a good investment? I do it by asking the following questions:
- Who is using the coin? If it’s the super rich, banks, and large corporations, the coin is probably going to be around for the long haul since those a) Run the world, b) Don’t like to lose money, and c) Tend to use their immense unchecked power to make sure that they don’t lose money. If you’re invested where they’re invested, they’re effectively in your corner. Bitcoin and Ethereum both have this box checked.
- Does the coin have any actual utility? Just like any other product, a first mover advantage or unique selling point can drive value. Value store counts as a utility, so that’s a yes for Bitcoin and a yes for Ethereum as a decentralized app platform.
- Who created the coin and what’s their agenda? This is often hard to figure out and if you can’t, it’s often a sign of a scam. Granted, no one knows the answers to those questions for Bitcoin, which is one of several reasons I prefer Ethereum.
- Look at market cap and trading volume, like a stock. To get market cap, multiply price per coin by the total supply in circulation. Let’s look at how that shakes out today:
- Bitcoin = $58,925 x 18 million coins give or take. I have never seen such a big number in Excel and believe the 12 zeros = over $1 Trillion Dollars. For comparison’s sake, that’s roughly 1/3 the US National Defense Budget and puts it between Facebook and Amazon’s Market Caps.
The Supply of Bitcoin will top out at 21 billion coins and when that happens the value will likely double or triple where it is today. I could see Bitcoin being bigger than Apple given that it’s international, Apple and other companies are bought in, and everyone will depend on it. The scenario where Bitcoin is valued that way sounds reasonable to me.
- Ethereum = roughly $4k = 115 million coins in circulation. They’ve recently made a change to burn coins every time there’s an ETH transaction which will limit the supply. Current market cap is $460 billion, putting it somewhere between Visa and Mastercard. If that coin price doubles or triples, it still likely won’t be as big as Bitcoin and given the utility I described above, I could see a reasonable scenario where it’s valued that way.
-Dogecoin = Roughly 130 billion coins with the ability to mine 14 million coins per day with 5 billion added to circulation every year. At the $0.62 it’s trading at right now, that’s an $80 Billion market cap, right around FedEx and SnapChat, and just $5 Billion below GM.
Does that sound reasonable to you? A coin with no utility, no controls against inflation, and that no one who doesn’t spend most of their day on Reddit had ever heard of eight weeks ago is somehow worth that much? If it goes to $1 for more than a nanosecond, it’ll be worth more than Sony, IBM, Raytheon, Amex, and Goldman-Sachs. Ask yourself if that is realistic before you put money in there. If the faddists and Elon cash out, there’s no actual value there and it could crash hard and fast with no warning.
That’s where I am with Crypto as of today. There’s much more hype and BS than there is actual value, but there’s plenty of actual value if you ask the right questions.
