Welcome back, friends!
Today I wanted to write a short post addressing one of the most common misconceptions I hear about crypto: it's just a bunch of random coins and tokens... only one of them can become the currency that everyone uses!
I think this misconception stems from a couple of things:
Bitcoin & the name 'cryptocurrency'
Memecoins/scamcoins built by people who are trying to get rich quick
Low penetration of Web3 decentralized apps
Crypto and Web3 (decentralized apps that run on the blockchain) are the most exciting technology that we have today. While currency is obviously a huge use case for crypto, by focusing on "which coin will become the next dollar?", you'll overlook all of the crazy innovation that's going on with DeFi and Web3.
Bitcoin & Cryptocurrency
Bitcoin is a fundamental leap in human technology. Many of you will already be familiar with the reasons why people are so excited about it. By being the first decentralized currency, Bitcoin took power out of the hands of middlemen (banks and governments) and gave it to the people. Anyone in the world can send money to anyone else in the world, so long as both parties have Bitcoin wallets.
On a more philosophical level, Bitcoin is the first technology that's given property rights to everyone in the world. No one (not even the government) can seize your assets unless they control your private keys.
When it was created, Bitcoin was billed as a peer to peer electronic cash system. While it is hugely valuable for enabling money to be sent to anyone in the world, Bitcoin just doesn't have the scalability to replace the dollar or other currencies. Bitcoin processes ~4.7 transactions per second while Visa alone does 1,700 transactions per second. Some groups are trying to fix this issue (e.g. Lightning Labs building on top of Bitcoin's blockchain), but the consensus among many crypto enthusiasts today is that Bitcoin's value comes as a "store of value". Because only 21 million bitcoins will ever be created, it has built in digital scarcity. It's limited in supply, just like gold, another "store of value" is.
Outside of certain crypto communities, most of the narrative around Bitcoin is still focused on debating whether it will ever become the world's currency. I think that contributes to people missing out on the bigger picture with crypto.
Quick note: Not everyone in crypto will agree with the points I made about Bitcoin above. Bitcoin maximalists, for example, continue to believe that Bitcoin will be the only cryptocurrency to survive. I think that's foolish; we should always be questioning whether better technology exists and not stick to something just because it was the first technology of its kind.
Memecoins & Scamcoins
Memecoins
Everyone's probably heard of Dogecoin by now, but if you haven't, here's a quick summary:
Dogecoin was literally created as a joke by two software engineers in 2013. Modeled after another cryptocurrency, Litecoin, it was launched as a satirical way of making fun of the insane speculative bubble on cryptocurrencies at the time. Its founders didn't intend to get rich, nor did they intend for it to replace Bitcoin. The store of value argument doesn't work, either, since the total supply of the coin is unlimited.
Somehow, DOGE became a meme that people thought was funny enough to spend real money on (it kind of is, to be honest). Elon Musk even got in on the fun:
All of this fueled a massive wave of speculation that saw DOGE jump from $0.0047 to over $0.70 at its peak.
I think it was fun to speculate on the same thing as everyone else. Some people made a lot of money off DOGE. The DOGE-mania fueled a number of DOGE clones, like SHIB and AKITA. SHIB is still worth over $3.5 billion, which is wild considering that it does nothing new or innovative. It's just funny.
Scamcoins
When I say I'm interested in crypto, skeptics are often quick to point out that there are lots of worthless scams out there trying to take advantage of people. I fully agree.
Inspired by all of these speculative bubbles, malicious, "get rich quick" schemers realized they could also just create their own currencies and then dump them on the market before people realized that they'd been duped.
These "scamcoins" have no purpose or value. They're Ponzi schemes, promoted by spammers who are trying to run pump-and-dump schemes. If you're on a crypto Discord server, you'll be very familiar with these kinds of messages:
Aside from being annoying, they actively undermine the reputation of people building real things in crypto and Web3.
The big takeaway here is that a hyper-focus on prices and speculation has driven the mainstream crypto narrative (along with fear-mongering about Bitcoin and its power usage and facilitation of illegal transactions - a story for another day). Rather than trying to understand crypto and its technology, people have spent 99% of their energy trying to figure out which random coin to buy before others. It's short-term-ism, pure and simple.
This behavior isn't new, though. Anytime a promising new technology pops up, people try to associate themselves with it to capture some of the upside.
There was the tronics bubble back in the '50s. From Burton Malkiel's A Random Walk Down Wall Street:
It was called the tronics boom, because the stock offerings often included some garbled version of the word "electronics" in their title, even if the companies had nothing to do with the electronics industry. Buyers of these issues didn't really care what the companies made so long as it sounded electronic, with a suggestion of the esoteric. For example, American Music Guild, whose business consisted entirely of the door-to-door sale of phonograph records and players, changed its name to Space-Tone before "going public." The shares were sold to the public at 2 and, within a few weeks, rose to 14.
The name was the game. There were a host of "trons" such as Astron, Dutron, Vulcatron, and Transitron, and a number of "onics" such as Circuitronics, Supronics, Videotronics, and several Electrosonics companies. Leaving nothing to chance, one group put together the winning combination Powertron Ultrasonics.
Jack Dreyfus, of Dreyfus and Company, commented on the mania as follows:
Take a nice little company that's been making shoelaces for 40 years and sells at a respectable six times earnings ratio. Change the name from Shoelaces, Inc. to Electronics and Silicon Furth-Burners. In today's market, the words "electronics" and "silicon" are worth 15 times earnings. However, the real play comes from the word "furth-burners," which no one understands. A word that no one understands entitles you to double your entire score. Therefore, we have six times earnings for the shoelace business and 15 times earnings for electronic and silicon, or a total of 21 times earnings. Multiply this by two for furth-burners and we now have a score of 42 times earnings for the new company.
In a later investigation of the new-issue phenomenon, the Securities and Exchange Commission uncovered considerable evidence of fraudulence and market manipulation. For example, some investment bankers, especially those who underwrote the smaller new issues, would often hold a substantial volume of securities off the market. This made the market so ''thin" at the start that the price would rise quickly in the after market. In one "hot issue" that almost doubled in price on the first day of trading, the SEC found that a considerable portion of the entire offering was sold to broker-dealers, many of whom held on to their allotments for a period until the shares could be sold at much higher prices. The SEC also found that many underwriters allocated large portions of hot issues to insiders of the firms such as partners, relatives, officers, and other securities dealers to whom a favor was owed. In one instance, 87 percent of a new issue was allocated to "insiders" rather than to the general public, as was proper.
And then there was the .com renaming bubble in the late '90s/early 2000s: random companies changed their name by adding ".com" and got a free boost in share price. A study found that companies that added ".com" to their name saw average returns of 74% within 10 days of the announcement.
There are always going to be short-term thinkers trying to make a quick buck.
Of course, the market would ultimately decide whether these companies were truly valuable businesses. The same will be true in crypto; the scamcoins and most people trying to get rich quick will be left with little to show for their efforts.
Low Penetration of Web3 Decentralized Apps
We're still so early.
Again, I can't help but see crypto as the Internet in '95. The technology was terribly impractical and highly technical. The use cases were extremely limited. Most people didn't know how to use it or what to do with it. And many people thought that it was a downright scam or fad:
By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.
-Paul Krugmann (winner of the Nobel Prize in Economics)
Paul Krugmann seems like a fool today for making such a comment, but perhaps it wasn't all that obvious back in 1998 that the Internet would become as big as it did. After all, the 1998 Internet was pretty impractical for most things - just like crypto is today.
Using decentralized apps right now is not straightforward at all. It's not obvious why or how to set up a Metamask wallet and the fees associated with using crypto are often impractical. These barriers make people focus on what they can understand: price speculation.
What Crypto & Web3 are Actually About
When you hear people talk about coins or tokens, it's natural to make the connection to currency.
In reality, most tokens today are more like stocks than the US Dollar. Tokens can represent voting power or can be used to claim a portion of the revenue generated by a decentralized app.
With Bitcoin, it's very difficult to predict the ultimate fair value of the coin (it's worth whatever people are willing to pay for it). But there are also tokens built on existing blockchains that act more like equities than currencies. For example, SUSHI is token built on top of Ethereum's blockchain. By staking SUSHI tokens, you can receive a portion of the protocol's trading revenue.
In that case, the value of the token, basically comes down to cash flows and future growth potential. How will the protocol grow in the future and how much revenue will it generate? It's just the same as evaluating any business. Businesses are worth different amounts of money depending on their future potential, revenue, and earnings.
But let's leave speculation aside for a second.
Crypto and Web3 are about enabling a permissionless, decentralized Internet that can't be censored or deleted. Think about crypto less in terms of currency and more in terms of “the new Internet.” Ethereum is less of a currency and more of a decentralized app platform. Here’s a great primer on how Ethereum could become the new Internet.
This new Internet, Web3, enables lots of fascinating new things. Here's a practical example from the Ethereum foundation:
Crypto is also all about enabling coordination. When you think about it, many of the problems we face today are just coordination problems. It takes time to get a loan from the bank because we have to wait for a bunch of trusted employees to assess our credit worthiness. Web2 has already improved coordination a ton; Web3 will improve it even more. Smart contracts allow us to safely control money together, trade assets with one another, and take out loans (without relying on a third party).
In the future, I think lots of things are going to move onto the blockchain to take advantage of these coordination benefits.
Someone will create an uncensorable, decentralized version of Twitter. We'll create robust financial systems that work for everyone, not just the middlemen and elites. Even more exciting are the potential use cases that humans can't yet fathom. As a unique technology, crypto is going to enable us to coordinate in ways we previously hadn't thought possible. Just like we'd never have been able to imagine using the Internet to coordinate overnight stays in strangers' homes (Airbnb), we lack the ability to forecast the most exciting possibilities enabled by Web3.
It's going to take time and it's not always going to be easy, but I think this new Internet is too powerful to be stopped. And instead of being about currencies competing against one another, crypto is about enabling us to coordinate and solve problems more easily.
If you're a beginner who would like to read more about crypto, I recommend these resources.
If you'd like to understand how crypto is going to overhaul our financial system, check out this article.
As always, do your own research!
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.