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”
Hello Victor, thank you for this very interesting article,
Personally, I think the number one problem of cryptocurrencies is its dramatic impact on environment due to its energy consumption during the mining process: the Bitcoin network reportedly consumes more electricity every year than a country such as Argentina or Sweden. Also, the source of electricity used in the mining process mostly comes from fuel-based electricity (especially coal).
This 2021 article from the NY Times explains it very well : https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html
You may have heard that Elon Musk said in 2021 that Tesla will no longer accept Bitcoin over climate concerns, as reported by the BBC here : https://www.bbc.com/news/business-57096305
A more environment friendly alternative to mining was created in 2012 : the Proof of stake (PoS) instead of the Proof of work (PoW) used by Bitcoin and most cryptocurrencies.
PoS is based on a “validation sharing” across a cryptocurrency network, instead of a “validation competition” like PoW. Therefore, it aims at less energy consumption than PoW.
However, PoS may have problems regarding security breaches, and it hasn’t been proven at scale. Besides, as written in the NY Times article: “Bitcoin stakeholders have a powerful financial incentive not to change, since they’ve already invested so much in mining.”
In conclusion : environment concerns are a very legitimate reason to stay out of cryptocurrencies.
Thanks,
Charles
Thanks for highlight the environmental aspect of crypto. I’m curious, if that concern gets addressed, effectively and at scale, does that change your thinking?
Hi Victor – this is a surprisingly naive-sounding post, especially when compared to your typical insightful content. I do not mean that as a criticism; I do appreciate your candid disclosure, willingness to put aside pride and being open to learn.
In your past life, you have dealt with numerous fields that you are unfamiliar with, but where you have to grasp how the client derives value from the product or business. Isn’t there a similar approach that you would apply to understanding how crypto and blockchain deliver value and to whom?
I’m a novice myself. I think Paul has summarized it nicely:
1) Blockchains are the foundation protocols for Web 3.0 (think HTTP for Web 1.0)
2) Crypto are one application of blockchain that faciliate store and exchange of value
3) Bitcoin is one crypto that is the leading store of value. Similar to gold, there is arguably little inherent utility. The value of Bitcoin increases as more people and institutions agree on it as a store of value.
I get #1.
For #2, an ideal store of value mechanism wouldn’t have downside risk. There’s too much volatility to be an “ideal” store of value… but perhaps ideal is in the eye of the beholder.
For #3, gold in addition to being used as store of value also has utility as a raw material used in industrial manufacturing (jewelry and electronics manufacturing come to mind). So the extent there will be more electronic components in the world in 10 years than today, gold’s value is at minimum tied to the supply chain demand for gold. This would be similar to the value of corn is tied to the consumption of corn by consumers, agriculture and bio-energy company. At times the prices of gold dramatically exceeds the underlying industrial demand for gold. This is typically in times of uncertainty, inflation, or uncertainty. It seems crypto currencies price changes over last 2 years has not been driven by increased in industrial consumption. Electronic manufacturing has not grown by several hundred % in 2 years. It seems to me that when there is that much price volatility, it shifts from being a maintainer of value to one of speculation.
Hi Victor
I agree with #3, that indeed Bitcoin’s current price = its value as store of value (this is similar to gold) + tool for opportunistic speculation, and the latter component had far outpaced the former in the past few years. Also indeed in theory, gold’s value is lower bounded by its industrial demand, and bitcoin’s value could plunge indefinitely.
I however do think when we talk about Crypto, we need to recognize there are different types of them, each with built in fundamentals for their value. e.g. BTC and ETH are very different, and in the extreme case even if BTC goes to zero ETH might still thrive, and vice versa.
However all crypto share some amount of speculative factor, and in the past few years the speculation had been so massive that it had overshadowed everything else. That’s why we see the price of coins with very different fundamentals move along the same direction…
Apart from ‘rebelling’ against central bankers and the LIBOR cartel, I think your basic question remains unanswered – so far – in the comments. And that is, if I read correctly, what is the practical use for crypto? I can think of atleast one. If you are a US resident, with your family and friends mostly in the US, then you would have no need for and therefore no knowledge of how difficult it is to remit money abroad. Hence the first use case was monetary transfers. Banks take 3 days to a week to complete simple transfers (yes, in this day and age!) and even that involves painful amounts of information to be submitted – SWIFT codes, etc, not to mention commissions and fees plus exchange rates. However, there are a lot of places in the world that are not served well by the formal banking system. Or in other cases are served by banks, but the end user is at the mercy of a corrupt bank manager who may be more literate. In such cases, direct money transfers become especially useful – not to mention in warzones where families have to survive (ukraine, etc) and their local currencies may not be worth much. That is the power of crypto. Within seconds if not minutes, a money transfer can take place directly from the sender to the end recipient (often times older, rural family members) without paying exorbitant fees that Western Union, etc charge. All this with both sender and recipient having just 2 things – a mobile phone and a crypto wallet that can be set up from a mobile phone. Africa (esp western Africa) is a fantastic case study on mobile payments – in regions where formal bank branches and cash withdrawal is a real issue. And this is just one example. I’m sure most readers can find many many more, if they didn’t dismiss it as a product, but rather tried to view it as an alternate medium for currency. The reason central bankers are scared, is because the ‘formal’ system would then be endangered and they would not be able to manipulate rates, because it would be a more fundamental market-driven demand-supply mechanism and the Bretton-Woods system would break down which allows for sustaining a lot of powerful people and the ability to dictate terms to others.
Vazir – I’m starting to see in an under-banked or no bank region of the world, crypto does indeed solve a problem. Most emerging technologies breakthru in “niche” market segments long before they do so in mainstream markets. Thanks for contributing to the discussion.
Dear Victor, thanks for your insight and clarity, always a huge inspiration. I see your points and coming from that totally I understand your personal decision not to invest in crypto. I do with a small proportion of my investments betting on the value increase (taking some daily/monthly yield along the way) with a very long-term perspective. Why did I decide that? I can already see more reasonable „real-life“ use cases of crypto and especially the blockchain technology. I would like to share two examples of use cases as money/value storage from the perspective of poorer people on this planet.
1. Case from the present: When the traditional money system breaks down, as it just happened in Lebanon, without crypto there is right now no way to protect your cash assets. And most of the world population don’t have the means and/or the financial literacy to think beyond cash. In Lebanon a failed state and respectively banking system lead to a hyperinflation and all account were frozen. Everything even middle-class Lebanese had in cash, is gone. Im most cases that was ALL they had. One Lebanese friend of mine went into the rabbit hole of crypto already some years before that and had invested in Bitcoin, maybe a sum of 5k Dollar, which is much more to him than to us „westerners“. He didn’t even have easy access to stocks as there were no low-fees brokers he could open a stock and fund investing account with. Only very rich/international living Lebanese have access to such vehicles. His 5k (considering all volatility and recent down of crypto) is still worth a couple of Million Dollar. He feeds his family now. So what is a highly risky investment for a wealthy citizen with high earning potential from the free world can be the only rescue for a citizen of a failed state. Similar examples I have seen from refugees coming from Ukraine I am working with: when a war breaks out, crypto with its de-fi properties make it much easier to move and take with you than banked money. You just need a phone, internet and your hard wallet in your purse.
2. Potential future case: The world has about 2 Billion unbanked people, half of that women. For example only 14% had a bank account in the Middle East in 2017. Those people still need money storage and payments. They are however online. Mostly via mobile phones. Here de-fi and hot wallets have a huge future potential and I would invest small high-risk allocations of my portfolio in coins of such start-ups offering solutions to those highly burning problems.
I have a few more non-financial potential uses cases for blockchain tech in mind like taxing or voting systems that have the potential to solve problems in a much more satisfying way than what we do now, but this would exceed this post. So yes, I do invest in crypto with a very simple bet in mind: will Blockchain technology disappear for good? My answer: no! Will many coins fail: yes! I allocate accordingly with the main focus on Bitcoin (the crypto gold), Ether (mother of all smart contracts), and a much smaller proportion to BAT (the coin of the Brave browser that pays me for my attention as an already existing web3 application outside the Metaverse) and Algorand (for its potential if digitizing public administration and governance). And I’ll hold if necessary forever. Kind regards , Zina
Zina – Those are very interesting uses cases you point out. Clearly, I’m heavily biased by my perspective living in the U.S. with a very stable (I know some will argue with me on that) banking system that’s extremely reliable. That is my starting premise. The individuals you describe have a completely different baseline and I can see where in the absence of a stable and reliable banking structure, there’s a problem in need of a solution.
Hi Victor
Thank you very much for writing this and I really appreciate your humbleness on this matter. Not that I understand much about crypto, but here are my two cents:
As you have highlighted implicitly already, there are different kinds of Cryptos. I would broadly categorize into three.
A. Those intended to be a general type of payment method (like Bitcoin)
B. Those that are useful on a particular platform (like those tied to metaverse)
C. Those that act as a translation layer spanning multiple platforms. (like ETH, Cosmos)
Type B and Type C actually do have a business case – their fate is quite closely linked to the meaningfulness and development of that platform(s). The problem I see is that few of these platform have actual value (there are so-called platforms whose only existence is to rent out more cryptos to others..), and among the rare ones that do have a meaningful value, fewer can justify the use of their own peripheral currencies and not others. Out of the so many cryptos, I think maybe a dozen ones are worth investing. I must say I should stay humble on this and I too, don’t really get it, yet..
For Type A, I think none of those cryptos, including Bitcoin, is in anyway an ideal currency. Apart from all the problems you mentioned, Bitcoin also suffers from the “whale” problem, meaning a few large holders can literally sway the direction of the entire market. For me, Bitcoin has one purpose, that is to hedge against the seemingly unthinkable risk that the central bank completely blows up and we plunge into a world where something as bad as Bitcoin becomes the least worse option for transaction. I like what Chamath Palihapitiya said – invest 1% of your portfolio in Bitcoin, just to hedge against the very small possibility that “what if the 99% of people are wrong”. Already (and IMO quite unfortunately), we see countries with gross mismanagement of their own currencies and economy, preferring to use Bitcoin over their own currencies.
I think in this way, Type A cryptos are definitely not an investment vehicle, but also not really currencies, at least for now. it is much more similar to a digital gold. And in that aspect, I think it is actually a much better version of gold.
Yifan – thanks for sharing your point of view.
Thanks Victor for a very insightful article. I am 100% aligned with your thoughts that crypto alone doesn’t seem like much as it’s volatility, lack of backing by the banking institutions, and complexities associated with it/storing it from average person thinking of it like money, etc. render it fairly useless. Being in the tech/cloud sector myself, it’s been very challenging it for me to figure this out. I’d, however, point out that Crypto is sometimes used as proxy for the Web3 revolution taking place, which as you point out is probably where it would have some usefulness, but more likely comes with Web3. I recall a Ted Talk by Jeff Bezos in 2003 where he talked about the analogy of Web1.0 internet to when electricity was first rolled out to the masses. Essentially, “light” is what came to the house (not electricity as only “light” was the use case they solved for – literally a bulb “socket” on the ceiling was the hookup, and early adopters of “appliances” (Washing machine) would “screw” a one end of the cord into it (with no off button!), and the washer (or toaster) would be sitting outside on the porch with cord running all the way from outside to the inside to your ceiling. All that sounds very dangerous/and I am sure people lost lives operating appliances that way. Appliances was a later revolution, even before 3-pin sockets were invented. It feels like Crypto is probably that – what we understand the most today, but as someone pointed out, the value of it would be in when critical mass understands the use of smart contracts, NFTs, digital identity, security, portability of your data, owning your domains, and reliability of data/transactions due to no middle parties involved. Ultimately, Crypto might still be around (remember MP3 songs, and company MP3?) in some form as Gold or Diamond which have fluctuating values and may even be regulated somehow, but 10 yrs down the road, I think we’ll be having a different discussion.
Sanjaya – I think you raise a great point. If crypto may indeed be the means by which on does “stuff” in Web 3.0. Similar to the way the Euro is the means by which to accomplish daily life tasks in Europe (take a bus, eat breakfast, etc…).
Crypto is simply a digital currency. I suppose you can call a currency a payment method, but the examples you shared, such as Venmo, PayPal, and Apple Pay, are more similar to a crypto wallet in my opinion.
I also wanted to highlight the fact that many blockchain/crypto advocates view the technology (the decentralized aspects anyway) as the means of a revolution against a centralized banking system and governments that tend to manipulate centralized currencies and cause net inflation. Decentralized finance (DeFi) on the Blockchain (using smart contracts) provides for greater transparency and democratization. “The Price of Tomorrow” by Jeff Booth is an interesting book that highlights the potential for a dramatically different economic system influenced by advanced technology like this.
Thanks for sharing your thoughts. I get the argument around a de-centralized banking system. I’m not sure how much that matters for most people. The usefulness of currency is stability, so if crypto values didn’t change much, I could see its functional value of transacting in a non-nation specific currency. At the moment, it’s very volatile. Smart contracts I can see. What kind of situation would greater transparency be a major benefit? I’m thinking perhaps government contracts (so constituents could see what was agreed to), but they also seem the least likely to de-centralize contracts. In typical private party contracts, both parties know what they agreed to. I’d imagine that in a multi-party contract, that could be interesting… but I can’t think of any examples off the top of my head. Thanks for the book recommendation. I will check it out.
I think they are kinda accessories as golds or diamonds to me. Think about millon dollars valued diamonds on a woman hand. Why did she buy it? How valuation come on that point? How you put a price on a rare metal? Crypto is a rare metal to me
I can understand that point of view. You buy it for personal utility reasons. I can see the gold argument. You can buy gold and then re-sell it at a market price. Diamonds drop in value significantly the day after you buy it. I don’t know why that happens (but would love to know).
Who knows what will happen with crypto. But it seems to me that holding ETH (after the imminent merge) entitles you to a share of the already considerable revenues of the protocol, generated by demand for its blockspace. Ethereum (or its various layers) is a seemingly highly secure, transparent and decentralised smart contract platform that has arguably already implemented every traditional financial product that exists, as predicted a few years ago (spend a bit of time in defi, it’s mind-blowing).
Regarding bitcoin, it seems to have potential as a store of value with very similar, arguably superior, properties to gold. Also, it is straightforward to receive a monthly revenue from bitcoin in the defi world – for example, use it as collateral in one of the various flavours of money market (which performed spectacularly in the recent crash) and borrow fully dollar backed stablecoins to provide liquidity to earn fees on those aforementioned decentralised financial products. This is one strategy amongst many.
That all being said… who knows. As an investor it seems like a space with asymmetric oversized returns, high returns high risk, you don’t get that for free and it totally could go to zero. Anyone who thinks otherwise is, of course, completely deluded.
Paul – I have a few questions I was hoping you might be able to answer for me.
1) Ethereum seems to have the most well established, technically mature (relatively speaking), and adopted smart contract platform. In practice, it would seem that if you want to use smart contracts you more or less need to have ETH to both publish the contract and transact with it. Is that right?
2) Could you point me to some bitcoin affiliate money market accounts / services?
3) Could you elaborate on “borrow dollar backed stablecoins to provide liquidity”? That seemed significant, but I didn’t understand how that works.
Strong believer in crypto having a major impact in the future. I suggest you check out a16z’s report https://a16zcrypto.com/state-of-crypto-report-a16z-2022/ for impact areas and the podcasts of Balaji Srinivasan with Tim Ferris as two high quality sources.
Thanks for the link. I didn’t realize a16z had written something on crypto. I will check it out.
I’m with you … I don’t get it… yet. Also concerned about the extensive energy required for mining and managing the blockchain databases behind the various currencies.
Good point. I forgot about the energy aspect of it. There are entire power facilities being built just to mine crypto. Is that really the best use of our natural resources?
Hello Victor,
I hope you are well. Thank you for the stimulating article and debate. Your newsletter is always a pleasure to read.
I believe for a fair conclusion the energy/environmental impact of Bitcoin should be compared to the commodities/industries its adoption is intending to replace – namely gold (with its mining and refining, logistics and storing industry) and banking (ATMs spring to mind).
Data from the article linked below shows 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.”
On a separate topic: I fully agree with you that in order to function as a currency Bitcoin should really be more stable in value, and I believe this will eventually happen when it will stop being a target for speculation as more and more people start using it for what it is – a self-collateralized currency (and not an investment asset).
All the best
Giovanni
PS: I would like to recommend a book that was enlightening to me:
The Bitcoin Standard by Saifedean Ammous
PPS:
https://www.nasdaq.com/articles/a-comparison-of-bitcoins-environmental-impact-with-that-of-gold-and-banking-2021-05-04