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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