Crypto – Picks and shovels

The genie is finally out of the bottle?

  • While cryptocurrencies and digital tokens are grabbing all of the headlines, I think that the real action is going to be in the mechanisms that allowed the frenzy to be created i.e. the blockchain.
  • I know very little about how this whole thing works but there is one important distinction to make which is between the digital assets and the mechanism that allows them to work.
  • The digital assets are Bitcoin, Dogecoin, and the other 6,900 or so cryptocurrencies and digital tokens often referred to as NFTs.
  • These are non-fungible tokens which means that each one that is created is unique and cannot be substituted by anything else.
  • By contrast, a Bitcoin is a fungible token as it can be exchanged for another bitcoin that is exactly the same.
  • For example, an NFT can be attached to a digital artwork which denotes that the owner of that NFT owns the original version of that work.
  • The possibilities of this are almost endless and artists and musicians are already queuing up to make a quick buck by selling previously unsellable assets that they own before the fad wears off.
  • Frenzy aside, I think that a real use case for NFT will be to make the buying and selling of intellectual property rights and copyright claims much easier and much more liquid.
  • NFTs also enable fractional ownership so fans of the Beetles could all own a small fraction of the copyright and receive a share of the royalty stream from their favourite song.
  • This will have the effect of making a whole range of investments much more widely accessible and in that regard, I think that they have a bright future.
  • Where I have concerns is with regard to the valuations currently being attributed to cryptocurrencies because other than the confidence of their holders, they have no intrinsic value.
  • It is the fact precious metals are scarce and have uses beyond being a store of value that gives them the value which they have held for thousands of years.
  • Cryptocurrencies have one redeeming feature which is that they cannot be debased by money printing which puts them one notch above fiat currencies.
  • However, there is no limit to the number of them that can be created as the 9,600 created to date clearly demonstrates which I think is money printing of a sort.
  • Sitting underneath all of these creations is the blockchain mechanism, the biggest of which is called Ethereum (not the coin with the same name) which is the system that allows all the currencies and tokens to function.
  • It is these systems that are the picks and shovels of the crypto rush and the only exposure to the mad world of crypto that I would want to contemplate.
  • I think that one of the biggest use cases for the blockchain is to decentralise the banking sector.
  • For decades, the banking sector has enjoyed regulatory protection that has stifled innovation and allowed the banks to overcharge for services that are not fit for purpose in this modern digital age.
  • If ever there was a sector that is ripe for disruption, it is financial services but progress on this front has been very slow because of the regulatory protections that have been afforded to it.
  • However, with blockchain now becoming more widespread and even the European Investment Bank issuing a €100m bond using blockchain, the genie may have finally escaped the bottle.
  • This would mean that the disruption of financial services would now become a when rather than an if.
  • There is still enormous regulatory risk as the example of Libra (see here) clearly shows that the vested interests will fight hard to protect their entrenched positions.
  • This is the segment of crypto I would be looking at and I already have a small position in a fund (Dispersion Holdings PLC) that has been set up to do just this.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

Blog Comments

“…they have no intrinsic value” – that’s because nothing has “intrinsic value” – all value judgments are subjective. The theoretical problems involving value and utility that bedeviled classical economics were solved independently by Menger, Jevons and Walras in 1873.
The coins or tokens underlying various blockchains have a wide range of functions and value propositions. The market will have no problem in sorting them out and assign prices that properly reflect them. At the moment bubble conditions prevail, but that is due to central banks printing money like crazy. Eventually a shakeout will come and the most useful coins will survive.

RICHARD WINDSOR

sounds like we are in violent agreement…I think some coins will survive but 99%+ go to the wall. The coins may have value in the future but I am far from convinced there is any today…