I like businesses that are simple for me to understand.
A company has a product or service that solves a customer’s problem.
The customer hates their problem.
The customer has money and is willing to spend it to solve said problem.
Customer buys product or service from company.
Customer is very happy and tells friends about company.
Whether the product is the iPhone, a delicious ice cream cone, or a million-dollar piece of enterprise software, this makes sense to me.
People pay money to make problems go away.
I’ve worked in and around technology businesses my entire career. So new, disruptive technologies are not unfamiliar to me.
For me, I think blockchain technology architecture is interesting. Prior to the blockchain, data and applications were centralized. For example, Facebook’s code resides on Facebook servers in a centralized cloud that either Facebook owns or controls.
Blockchain technology is the opposite. It is decentralized.
This technical difference allows different types of business problems to be solved that couldn’t be solved previously using the prior generation of technology.
I think the long-term potential of the blockchain has yet to be fully realized and is intriguing.
My thoughts on cryptocurrency, or “crypto,” are different.
I candidly don’t get it.
Crypto is not a product. You don’t buy it to solve a problem. Crypto doesn’t make your plumbing problems go away. It doesn’t help you reduce costs in your business. It doesn’t help you recruit new salespeople.
Okay, perhaps crypto isn’t a product, but perhaps it is a method of payment. So, instead of cash, check, credit card, Venmo, PayPal, or Apple Pay, one would use crypto.
However, as a payment method, the majority of cryptocurrencies have a lot of problems.
1) The exchange rate from regular currency to crypto is extremely volatile. This means that for goods and services priced in U.S. dollars and in crypto, the crypto price is going to change wildly, day to day.
An avocado at my grocery store costs around $3. Depending on the time of year, sometimes it’s $2.50. Other times, it’s $4.
If an avocado were price in crypto, it would have been $3 two years ago, $30 roughly a year ago, and $8 today. This makes it very difficult to create a budget for my guacamole. My guacamole usually costs $12 to make. I can’t imagine paying $120 to make a batch of guacamole for my kids. Too much volatility makes for a poor payment method.
2) Cryptocurrencies are not widely accepted. If I go to Europe, I’ll use U.S. dollars to buy euros because the entire continent transacts in euros. If I want to buy dinner, I need euros. If I want to pay for a taxi, I need euros. Okay, I want to buy euros because then I can buy things (in Europe) that I can’t buy with U.S. dollars. Euros are useful to me.
While NFTs (non-fungible tokens) and certain metaverse-type technologies and services require cryptocurrencies, 99.99% of everything else requires a traditional currency. So, its lack of widespread adoption is a constraint. (Though I can see that as the metaverse grows, the functional usefulness of cryptocurrencies as a means to buy “things” in the metaverse could become the equivalent of using euros to buy things in Europe.)
Outside of the metaverse, cryptocurrencies aren’t a practical payment method.
Okay, so perhaps cryptocurrencies are really an investment vehicle. You buy it at $X and you either sell it at $X + $Y… or you receive some kind of monthly return on your investment.
Cryptocurrencies don’t produce a monthly cash flow like, say, renting out a home or building full of apartments (or flats). It’s not like a patent or copyright where you can receive monthly licensing revenues.
So, it’s not inherently a cash-flow-producing type of asset.
Okay, then perhaps it’s a capital-gain type of asset where you buy low and sell high.
Let’s look at that scenario by comparing investing in a cryptocurrency to investing in a stock.
My first purchase on Amazon was in 1997. That happens to be the year Amazon went public. The stock price at the time (after adjustments for splits) is the equivalent of $0.09.
In 2022, the stock price is now $118.
Had I invested $1,000 in Amazon in 1997, it would be worth $1.3 million today. A 130,000% return.
This is a classic example of buying low and selling high.
However, let’s look at stocks more carefully. As an owner and shareholder in Amazon, you’re not buying some ticker symbol that goes up and down arbitrarily. You’re actually buying a right to the company’s future profits. These profits are a percentage of the company’s sales.
In 1997, Amazon’s revenue was $147.8 million. Today, those revenues are $470,000 million (or $470 billion) — an increase of roughly 320,000%.
Had I invested in Amazon in 1997, I would have been buying a part of a company that brought in $147 million per year. The stock price has gone up in large part because Amazon now generates half a trillion dollars in sales per year.
In short, Amazon’s ability to produce profits has skyrocketed, and shareholders are entitled to a portion of those profits (a.k.a. dividends) at some point.
Now, let’s look at a cryptocurrency like Bitcoin.
In 2017, a bitcoin traded at roughly $1,000. At the end of 2021, a bitcoin traded at about $50,000. This is roughly a 5,000% increase. At first glance, this is an incredible return on investment.
But why did the perceived value of a bitcoin go up by that magnitude?
Did bitcoin holders receive a lot more in monthly cash flow? No. Bitcoin doesn’t pay coin holders any monthly payments.
Did bitcoin holders receive rights in some underlying assets whose ability to produce profits has grown dramatically in that time? No. Bitcoin holders don’t participate in the profit-sharing of other underlying assets.
So, why has a bitcoin’s perceived value gone up by 50 times?
Yes, more people bought bitcoins than sold them. That much is true. But for the people who did buy bitcoins, what economic benefit have they received (separate from the price of the bitcoins themselves) while they’ve owned them? From what I can tell, nothing.
I am not making an argument that Bitcoin and other cryptocurrencies are bad.
The only claim I’m making is that it doesn’t yet make sense to me personally.
As a result, I have stayed away from Bitcoin and other cryptocurrencies in both my personal and professional endeavors to date.
I remain open-minded about learning more about crypto. I’m willing to say that I don’t understand crypto… yet. I’m willing to say that I don’t devote my personal and professional in crypto… yet.
I’m reminded of advice that Warren Buffet has given on multiple occasions: Don’t invest in things you don’t understand.
What are your thoughts on cryptocurrency? Comment below to let me know.
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43 thoughts on “Why I Haven’t Invested in Blockchain or Crypto”
You’re right. That’s why I wrote it’s “kind of” a dividend. But yes, it’s actually more like an income in exchange for a service – in this case, data storage, etc..
AR – Thanks for clarifying.
I will restrict my comments to Bitcoin, since other ‘cryptos’ in most cases are securities (Gary Gensler -Chairman of the SEC- dixit).
1. We should not compare financial assets (stocks) to real assets (Bitcoin). Bitcoin is a commodity so its value does not come from future cash-flows. You may want to own a part of a company to get a share of future profits. But if you demand a commodity, say oil or wheat, is to satisfy your needs (or to speculate with other’s needs) but not because they will produce any additional goods/services.
2. What needs does Bitcoin fulfil? It is a scarce digital asset you can own, send and receive with no counterparty risk. So it can be very useful for transactions under risky or restricted circumstances. Examples: i) You live in Argentina with double-digit inflation and no access to USD/EUR; ii) You are leaving the war in Ukraine and want to move your wealth to begin life in another place (very risky having cash/gold with you when fleeing and impossible to access your bank account or other financial assets); iii) You live under authoritarian regime and want to minimize risk of getting your assets confiscated, or want to make transactions without being banned and/or tracked; iv) You are one of the 50% in Africa without access to the banking system but with a mobile phone with internet access; v) For the same reasons you would want to own gold as a store of value but being digital, more liquid and censorship resistant (remember the Executive Order 6102).
3. Apart from real demand, there is speculative demand, like in any other commodity market. The same way an investor may buy wheat to sell it but not for consumption (thinking the market will demand more of it in the future and the price will rise), an investor may buy Bitcoin if he thinks the real demand will grow because of meeting people’s needs. If he is wrong and the demand decreases, he will lose money.
4. (Some) fiat currencies will still be much more convenient for daily transactions in the first world. That does not mean that Bitcoin (or gold) doesn’t add any value for many other purposes.
So much wrong with your reply. You admit that the main demand for Bitcoin is its speculative demand (ie. a Ponzi scheme), vs no valid use cases that are better than the current system – other than for scammers or illegal purposes.
1) You forget that in order to buy Bitcoin you need to go through exchanges (which can seize your money and crypto) – and you promote the myth of the superiority of Bitcoin, without mentioning how it is completely manipulated by a few players:
Facts: A small percentage of bitcoin addresses control 95-96% of the supply of Bitcoin. (This is why the prices go up randomly not based on news or value, but based on what a few whales do).
Facts: Greyscale’s ETF was rejected by the SEC for several reasons – specifically due to the massive scams, and the fact that due to the centralized control of Bitcoin of whales, and how Bitcoin can and is being used for massive market manipulation that if allowed to have an ETF would infect the financial system. (If you read why the SEC rejected a Bitcoin ETF, they released a close to 86. page document – go read it yourself). Go read what “wash trading” means.
Facts: Stablecoins are also a complete scam. Algorithmic stablecoins have failed (go read about Terra Luna) and investors (suckers) have lost billions
Facts: The companies behind Tether and other stablecoins which have are NEVER BEEN AUDITED, and only have a few weak “attestations” which anyone with a Finance or Accounting Degree know it is complete garbage. Yet they have pumped billions in liquidity into Bitcoin and other crypto which is mainly why prices have increased dramatically and then dropped. Simple pump and dump scheme.
Joe C, thanks for your reply. Here are my thoughts:
A. Ponzi scheme is very different from speculative demand. Bitcoin does not promise you anything in the future, so cannot be a Ponzi (other cryptos do). By far, the main demand for gold is speculative/store of value, not for industrial purposes. Would you call gold a Ponzi?
B. “No valid use cases that are better than the current system – other than for scammers or illegal purposes”: In my previous comment I said that the current system is more convenient for most cases, but there are also other use cases that cannot be achieved by it and Bitcoin fits the needs of those people.
C. There is no need to go through exchanges if you don’t want to. There are many alternatives. But, even if you go to an exchange to get Bitcoin and then send it to your personal wallet, they have no power on you. In my opinion, the banking system is not bad per se and it would even exist in a ‘Bitcoin economy’. The difference is that you can escape it if you need, and the incentives it creates to the banking system.
D. I am not sure where you get the % of addresses controlling the supply of Bitcoin but I think it is not accurate (pools?, whales?). That said, there is high speculation at this stage and some players or groups can move the price in the short term. Like in any other market.
E. I am not an expert on ETFs. But the rejection of Greyscale ETF was probably due to how it was defined, not because of Bitcoin nature itself. Because there are other Bitcoin ETF approved by the SEC.
F. I agree with you that many cryptos are scams and that euphoria/panic in the whole crypto market is contagious. But that does not affect the value proposal of Bitcoin, which do not depend on other cryptos at all.
Cheers
Dear Victor,
I am glad you wrote this as it makes me respect your ability to think rationally while the majority (from these comments) are completely delusional in thinking that crypto has any type of value. In short, you hint that crypto is pretty much a ponzi and a cult full of delusional people wanting to get rich quick.
As someone with advanced technical skills, I have investigated blockchain technologies and I have come to the following conclusions:
1) blockchain technology is inferior to most other database technologies and lacks scalability. Bitcoin can only process 7 transactions a second and Ethereum is also horribly scalable.
2) During last year’s hype of DEFI (decentralized finance), I went ahead to try many of the services out there, and they were completely user-unfriendly, where one wrong command would easily lead to loses. You had to do many complicated technical things to do the most basic of tasks. Trying to process transactions manually took several minutes due to network congestion – and the fees involved were completely high. Because Defi services were promising 60-70% yields of APR (to attract gullible investors), the reality is that unless you staked large amounts, the Ethereum “gas” fees to do anything useful made the whole thing net-negative. This goes back to Ethereum’s complete lack of scalability. Then soon afterwards, the yields dropped dramatically (due to the free market reducing arbitrage opportunities) to 1-2% returns. I realized it was safer to get yield in traditional investments and withdrew everything. In short, it was complete hype and the tech was painfully slow and insecure. I am sure the majority of people who promote crypto have never tried to use it for anything technical or have a programming background.
3) If you have been following the news, the alternative to Defi (decentralized exchanges) is CEFI (or Centralized Exchanges) which promised large 20% “risk free” APRs. Many of them, such as Voyager, Celcius, Vauld (the list goes on) have collapsed by freezing withdrawals and going bankrupt. Basically they promised high yields to lure suckers in – when in reality they lent money to other hedge funds (3AC) to speculate and make bad loans to other players – like Terra Luna. As a result, millions of people have lost their life savings and given money to complete scammers.
4) So let’s take your use case of crypto as a payment method. A pro-crypto friend said this was a great use case – because you can easily send money anywhere in the world, in a matter of seconds, vs. having to do it through banks. Without any regulations or anything to stop you.
Here is where he misses the point completely using logic:
1) If there is any mistake with crypto- all that money is lost because transactions are irreversible
2) to even buy crypto to spend, you need to buy crypto through a Centralized Exchange (Coinbase, Binance, Celcius, etc…) which have shown a tendency to freeze withdrawals – and according to their TOS (terms of service) none of this money belongs to you, and is not regulated and in case of bankruptcy you lose it all. Crypto bros say “Not your keys, not your crypto” and this is like saying that your house “not your keys, not your house”.
3) the other party also needs to buy or sell crypto on exchanges in order to exchange this crypto.
So in short, instead of a simple Bank to Bank = transfer -> you now need to send from Bank -> Crypto Exchange -> Crypto Exchange -> Bank and you added 2 middle-men with unproven business models (several of which are collapsing, and freezing withdrawals due to the high volatility of the market – including Coinbase which has severe customer service issues during times of volatility among massive layoffs).
The sad part is that so many young men have been brainwashed into thinking Crypto is the next big thing, that they cannot consider the possibility that it is a Ponzi Scheme and they use cult like words like HOLD, or Diamond Hands or Meme Coins, which have no basis in actual value. As long as people are making pretend 1000% gains, they keep cheering and dream of being millionaires and buying Lambos. In reality crypto destroys the environment, is fueled by people’s greed from FOMO (Fear of Missing Out), and unethical influencer Youtubers, and people only make money by forcing others to hold the bag. Similar to how Bill Gates call it the “Greater Fool Theory” – majority of crypto promoters have no ethics in scamming others so that they can get rich, and tell others “Have Fun Being Poor” (Do Kwon Quote of collapsed Terra Luna) – or Matt Damon saying you are not a man because “Fortune Favors the Bold” so you should invest all your money in a get rich scheme.
Existing database technologies are already 1 million times faster than crypto and used for financial processing everyday and if you want to invest, banks have strong regulations to protect users from scammers and scam companies that take people’s money. The reality – is if you look behind the surface, crypto technology is only hype (similar to the dotcom boom – where there are a few useful examples, but majority of dotcoms were trying to promote selling pet-food before people were used to buying online).
Now that the market has collapsed, you can easily see how many of these CEFI and DEFI exchanges are collapsing like a house of cards. All these crypto cultists will keep repeating blatant lies because they need more suckers to invest in their projects so they can become rich.
What I recommend you do is research crypto and teach others how to avoid these scams. A good example is in the Book “Laws of Human Nature” by Robert Greene, where he talks about Isaac Newton, one of the most brilliant men of his time. He learned about the South Sea Bubble where people were becoming millionaires overnight. Servants quit their jobs and had opera seats better than their former masters due to becoming super rich. So Isaac Newton invested a little money, and then quickly withdrew because he saw logically it was a ponzi scheme and would collapse soon. Instead the bubble continued, and kept going up and up, and he decided he was wrong because everyone else was promoting South Sea Bubble. Being greedy, he then invested his life savings (and lost it all and died in poverty). So one of the most brilliant, most rational scientists in history saw that everyone else “lost their minds” and even he fell for the hype. Newton remarked, “I can predict the movement of heavenly bodies, but not the madness of crowds.” It is now ridiculous to see so many so called “experts” fall for this crypto hype and not realize it is a big pyramid scheme / scam.
I feel it is your duty to research this topic and teach people to think rationally (even when Isaac Newton failed)
Joe C – Thanks for articulating and sharing your thoughts. I went through the dot com boom and I’m having the same feeling today as I did back then. A lot of what I’m seeing doesn’t make sense to me. It didn’t make sense until after the dot com crash. Same feeling again in 2008 with housing. Same feeling today.
This is not to say that blockchain at its maturity has potential; just where it is today seems to be getting way ahead of itself.
It seems like to solve the user friendly issue, there are firms like Coinbase. Unless I misunderstood something, Coinbase is a custodian that holds one’s crypto on your behalf. If so, there’s insufficient capitalization and counter party risk of the custodian. If one buys crypto direct, then there’s the physical security risk (I lose my keys, my offline physical device gets stolen or lost).
I’m reminded of what Bill Gates said decades ago. “Most people over-estimate the potential of new technology in the next 2 years and under-estimate its potential in 10 years.”
I’m trying to separate the inconvenience type issues with the rationale that in a few years those can be addressed. I still go back to the core capabilities and if there’s some break thru capability that’s not easy to do any other way. The smart contract thing especially in less developed economies seems interesting to follow.
At this stage I’m merely curious about crypto. I definitely have been noticed the psychological and sociological dynamics at play with crypto. As in 1999 and 2008, I really hope people don’t lose their life savings (as many people did). Most objects have a “utility value” and a “speculative” value. Utility value does not increase by 400%+ in 24 months… but psychological value can certainly do that. I do see blockchain as having some long term utility potential with short-term usability issues. I think the value of its long-term potential is buried underneath a layer of speculative value.
This was the same pattern in 1999 (speculative value), 2000 (crash), 2003+ (long term value) of Web 1.0 technologies. Same in 2007-2008 (speculative value of housing), late 2008 (crash in housing values / mortgage debt), 2010 (return of mortages and house values to the value of shelter – speculative value)
Thanks for sharing your scalability insights.
Yes, I am glad you recognize this pattern. By coincidence, if you read recent news headlines, a Coinbase manager (and other insiders) being charged for insider trading just today. If you look at forums, there are horror stories from customer service. Coinbase has lost $430 millions, the stock has dropped like a rock since listing, has had large layoffs and this is supposed to be the gold standard in the industry.
The dirty secret is that anyone with real technical skills know that all the tech hype is fake. For example NFTs is basically like a hash where you “buy” what is essentially a link (hosted somewhere) that is publicly displayed on block chain. These NFTs have sold for “millions” even though anyone can copy or duplicate them at will. If you go back further, there were previously the “ICO” – Initial Coin Offerings – hype where crypto was marketed as a way to raise capital and distribute earnings – but most were “rug-pulls” – ie. scams where the first people ran with all the money and it died out, which caused crypto to crash for a few years.
Bitcoin has been around since 2009, so saying the technology still needs to “mature” is pretty disingenuous. The truth is: most of the “real” use case of crypto is for illegal means, such as drugs, money laundering, child pornography, getting around sanctions, extortion, ransomware etc… But even that use case is being eroded due to “KYC” Know You Customer regulations which is used to track the true owners. So in the end – there is a big incentive for “crypto bros” and influencers to convince you this Crypto is the “next big thing” and worth a ton – when in reality, after over 20 years there has not been one valid use case for crypto other than as a Ponzi Scheme.
There are no Bitcoin ETFs approved by the SEC that directly own Bitcoin. The main reason is explicitly stated by the SEC on the gov website on a 86 page document. People promoting pyramid / ponzi schemes (where the only value is trying to have others buy it) is called the “Greater Fool Theory”. Same with Beanie babies. Victor understands that if he cannot understand the underlying value (and why it goes up and down randomly), then the simplest explanation is that it is what it is – a tech fad that roped in a lot of suckers, massively manipulated by speculators and that is now in the process of collapsing.
Joe C, I kind of like your radical tone on this. It’s always refreshing to read someone not mincing words too much. I am by no means an expert on crypto and nearly 100% of my basic knowledge comes from listening to / reading / watching people way smarter than myself. That being said, some *extremely* smart people would disagree with your assertion that it’s a Ponzi: Balaji Srinivasan and Naval Ravikant, just to name two. These people are to tech what Victor is to consulting. Any thoughts on this?
In regards to payment, on many networks (primarily ethereum) you can transact in stablecoins such as USDC which is backed by US dollar assets thus you don’t have to deal with the volatility of something like BTC or ETH. While a lot of what you say may be true for BTC, it’s not entirety of the blockchain technology. I think calling every blockchain technology a cryptocurrency (and conflating it with just BTC) does a disservice to what has been developed in the last decade and more.
I do see the distinction between blockchain (whose potential I think is exciting), crypto, and a specific instanced of crypto.
Having worked in and around tech nearly my whole career, I’m always intrigued by architectural differences with new technologies. Similar to the move from client-server to web browser-web server to web server-mobile app, new technical changes enable certain technical use cases to be possible… and that’s very exciting.
While I don’t think the “killer app” for blockchain has been fully realized (might be smart contracts), the crypto use case of block chain has some of the downsides I mentioned earlier. I was not aware of USDC until you pointed it out. That will be interesting to follow. I would assume there would be no speculation value because it’s tied 1:1 to the US Dollar…. but it provides value storage, digital convenience in parts of the world that lack a stable currency or reliable / trustworthy infrastructure. I will be curious to see how its adoption evolves over time and in comparison to the other crypto currencies. (Though a clear downside is it would still be subjected to the inflationary pressures placed on the US dollar; so probably not a great vehicle to be an inflation hedge).
Hi Victor,
I think what you’re not seeing is that the mission can be the product.
People are using crypto to be part of a movement. It was similar with the internet, it starts out usually far inferior compared to the status quo alternatives – but has outsized potential by being better in one thing.
Hobbyists and futurists aren’t attracted to it’s current, limited use, but are inspired by how it could work in the future. Their need is to work on something that they feel can change the world (to get reputation, legacy, recognition etc.)
The one thing the blockchain has (crypto is just one use case of blockchain technology) is a technical solution for trust – you don’t need to trust a central authority. The laws of a transaction can be encoded (if X, then Y) and directly enforced without a third-party but through a network.
The use cases right now aren’t great, but there are innovators attracted to the larger potential, e.g. you could have community-funding, more liquid, tradable real world assets (yes, securities are regulated), some say you can solve inflation – you definitely can’t do that right now, but it’s imaginable.
You should look at cryptocurrencies like a project, not a like a stock or another currency. You then ask: “Can this project work?”
You should then look at these crypto projects like you’d look at early-stage startups: “You want to solve inflation? Seems very unlikely, but I give it even a 5% chance it succeeds it’s worth investing because my returns would be 200x. You miss 100% of the moonshots you don’t take.”
I can definitely see the social aspects of crypto. I also find the automated contract enforcement use case of block chain intriguing. It’s hard to do that any other way and it is a problem. And to the extent you need crypto to use automated contract enforcement, I can see ETH as a means to an end (enforced contracts) without centralized intermediaries.
Hello Charles,
For a fair conclusion the environmental impact of Bitcoin/Crypto should be compared to that of the commodities/industries it is seeking to replace – namely gold (and its mining/refining industry) and banking.
Data from the article further below shows that:
“{…] we can say that Bitcoin consumes/emits less than half of what the gold mining industry does, and less than one-fifth of what bank branches and ATMs do”
https://www.nasdaq.com/articles/a-comparison-of-bitcoins-environmental-impact-with-that-of-gold-and-banking-2021-05-04
Best Regards
Giovanni
Good article. Agree with your basic logic. This said, some cryptos are starting to “kind of” pay out dividends aka staking rewards. If I own Ether, for example, I can make it available to the Ether blockchain network such that it can better validate third-party transactions. In exchange, I get a reward (dividend in the form of more Ether) for staking my Ether. Also, what your post didn’t cover is the benefit of crypto as store of value/means of payment for communities in some developing countries with extremely volatile national currencies and high financial uncertainty. While most cryptocurrencies are very volatile, too, they are sometimes a better alternative to the national currency and financial system in these sorts of contexts.
AR – You’re right I didn’t cover the use case in developing countries. That was something a few people pointed out and I can completely see how crypto is a better alternative that the local banking (assuming there are even trustworthy banks) and currency systems.
With Ether Staking, as I understand it, you’re not just providing ETH. Aren’t you also providing data storage, processing power, and the electricity to run both? If my understanding is correct, that’s not really earning a dividend on your asset. It would be more akin to renting cloud services (I pay a fee to a company that lets me use their CPU and hard drives to run this website).
Replace bitcoin with gold then re-read the article
I understand where you’re coming from, but gold has practical value as a raw material in everyday mass-market products — consumer jewelry, industry, electronics, etc..