Checking In On The State of Crypto
The past 12 months of cryptocurrency growth has minted an astonishing number of new millionaires and billionaires faster than any point in modern history. We wrote back in November last year that social proof and adoption rates are the primary drivers of crypto returns. That’s still true today. Recent reports suggest that 46 million Americans own some allocation to Bitcoin. Even Tom Brady recently indicated on Twitter that he has joined the club. There is a lot to unpack in this rapidly evolving sector. Here are some considerations:
Bitcoin has an increasingly dramatic environmental problem
Private equity firm Atlas Holdings recently purchased a natural gas power plant in upstate New York for the sole purpose of powering bitcoin mining centers. You can read more about it here. This is very profitable for Atlas, which can mine for Bitcoin at the cost of $2,869/Bitcoin (which will rise over time). With Bitcoin prices hovering around $50,000, this will certainly attract copycat investors.
Tesla announced last night they will no longer accept Bitcoin as a payment option due to the associated environmental issues. An important investment rule of thumb is to avoid investing into political headwinds. The Biden administration has made it clear that they have many pro-environment priorities (as they should!). If Bitcoin does not address blatant wasteful energy consumption, the cryptocurrency may not be able to continue to function.
Etherium does not have this issue as a proof-of-stake cryptocurrency. Bitcoin is a proof-of-work crypto, which means that energy consumption is built into the core functionality. It will not be easy to convert Bitcoin to proof-of-stake.
Bitcoin is a religion
You may have heard the term Bitcoin Maximalist, or “Bitcoin Maxi”. A Bitcoin Maxi asserts that there is just one currency worth caring about, and that currency is Bitcoin. This makes Bitcoin a religion (or more like a cult). There is very little sound logic, rationality or thoughtfulness behind the Bitcoin Maxi belief system. It’s simply a full commitment. Bitcoin Maxi’s proselytize for hours on end on youtube seeking to gain converts. It’s great to invest where the user base is passionate but the logical arguments are not worth listening to.
Why not start your own crypto?
It’s not difficult to start your own cryptocurrency. Many coins today are copied and pasted versions of existing projects with the names changed. Because cryptocurrencies are entirely code-based, the crypto ecosystem can iterate and evolve into new versions incredibly fast.
Andreessen Horowitz recently announced a $1B fund to invest in cryptocurrency projects. Their latest project named Internet Computer achieved a $35B valuation this week. At $35B, they are ranked among the top 10 market caps. Over time, the underlying technology of each coin will be critical to its success. Of the thousands of cryptocurrency projects, many are simply copies or pump and dump schemes promoted by influencers chasing quick profits.
The creators of SHIB coin, which is an imitation of DOGE coin, transferred half of their dog-themed cryptocurrency to Ethereum founder Vitalik Buterin when it was worth just a few million dollars. Just yesterday, Vitalik donated $1B of SHIB to India’s Covid Relief fund. Whether or not the charity will be able to effectively convert the $1B value of SHIB to a more useful form of currency is another question.
Too Large To Ignore
Over the past year, cryptocurrencies have gained the kind of institutional adoption that is critical for continued growth and survival. The total market cap of all crypto is now $2.5 trillion. The US equity market is $50 trillion. Yesterday the US equity market traded $680 billion while the global crypto market traded $290 billion. On a dollar basis, crypto is no longer a niche asset class.
Bitcoin eventually became too large to ignore and now JP Morgan, Fidelity, Morgan Stanley and every other major financial institution have found a way to jump on board. This adoption will continue as crypto rapidly innovates and evolves over the coming years.
Crypto as a strategy
Skepticism about technology has not been a winning strategy for the past decade. The rise of the FANGs coincided with the rise of the internet and mobile computing. Blockchain and internet-based currencies are a natural part of the next phase of our technological evolution. Given how little you need to invest to participate in these projects, it makes sense to allocate even a tiny amount. For emergent technologies, the earlier you can invest the better. Waiting for a dip at this point will likely result in buying at an even higher level.
Remember that skepticism and investing are natural partners. When the next crypto bubble pops, it will not end crypto entirely. A lot of money will be lost on speculative trading and from buyers who are unlucky late entrants, but the blockchain and its main use cases will survive.
You can read our last cryptocurrency article here:
- An Update On The Role Of Bitcoin – Nov 11, 2020
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