Everyone talks about falling down the crypto rabbit hole. I fell late 2017.
I empathize with Alice.
Crypto twitter, with the cacophony of opinionated, razor sharp voices makes this fall all the more dizzying. At some point, you have to look up, take stock and learn to enjoy it like the Cheshire cat. Here are some of my personal learnings:
1. Public blockchains and the applications being built on them are early stage experimental technologies
This is obvious to the OGs, but it wasn’t for me.
Then I think about blockchain developers.
And I see that even the tools themselves are being built. Ohhh-kay, we’re that early.
2. Invest so you can sleep (well) at night
Late 2017, I reconnected with a college buddy and we started talking Bitcoin. I came away from that conversation with the thought of, ‘I should buy some to keep myself interested in the comings and goings of this new *thing*’. Of course I’d be lying if I didn’t admit to some sense of FOMO, so I’m glad I was exposed to Fred Wilson’s approach to asset allocation in this space early on. He recommends a range from 3% (average investor with some risk appetite) to 10% (young aggressive risk taker) of your portfolio in crypto (0% for retirees seeking to preserve their portfolio). What these percentages tell me is: don’t take out a second mortgage on highly experimental technologies.
Another lesson: averaging down is not a bad idea. This resonated in 2018 as we all watched the price of crypto tumble and twirl, like Alice, downwards.
3. Blockchain is (too) many things, you can’t know everything — find mental models
There’s a lot to learn; you could say public blockchains are at the intersection of cryptography, distributed system, economics (game theory, mechanism design) and politics.
My go to resource for the fundamentals was (and continues to be) the a16z’s crypto canon.
This nice visual to the left provides a sense for why the rabbit hole goes deep and is seemingly never-ending. Although crude, this represents a mental model, something to help create order out of the chaos. If there’s something I would advise future Alices about to slip down the rabbit hole, it’s to find mental models. They’re usually visual and they help make sense of the space. Here are some of my favorites:
Hu Liang’s 2x2 quadrant that organizes the crypto universe.
Jill Carlson’s products, platforms and protocols.
Trent McConaghy’s infrastructure frameworks.
4. Enterprise blockchain: It’s not just the technology.
The big consulting firms are scrambling to offer their enterprise clients blockchain-related services (PwC, Deloitte, BCG, McKinsey, KPMG, EY, to name a few and IBM and Microsoft offering their own technical solution). Like the NBA, it’s a copycat league.
On one hand, I see a lot of activity in enterprise blockchain. Consortiums are forming. Blockchain-as-a-service companies are setting up shop. Yet, I struggle to see what benefits “private” blockchains have over traditional database and I wonder if 95% of the time, a traditional database will get the job done.
Where I am convinced that blockchain applications will take off in the enterprise space are instances where the technology is accompanied by an entirely new business model. Here we see the potential for a large independent energy provider in Thailand collaborate with PowerLedger to implement peer-to-peer electricity trading.
And yet, I keep having to remind myself that this is all very experimental technology; that in the enterprise space, marketing has likely outpaced deployment and actual implementation.
5. Just because public networks cannot be valued like cashflow generating companies, doesn’t mean they can’t be valued at all
I have friends in finance who concern troll the lack of fundamental valuation in cryptoassets. Just as these experimental technologies take time on the technical infrastructure side, they also take time for researchers to develop fundamental valuation frameworks. But there are a lot of smart people working on it (see Chris Burniske’s work, also here; Panek’s work using Metcalfe’s law for cryptonetwork valuations). I also ran the numbers, they check out.
The basic premise is that public blockchains are networks. Like any network, the more participants, the more valuable the network becomes (see Metcalfe’s law and telecommunications network). We’re still early in the game, but the beginning of a fundamental analysis framework for cryptoassets is emerging. In due time, I’m confident the Intelligent Investor version for crypto will emerge.
Thanks for reading. Happy new years!