Where is the value in crypto?
14th December 2020 |
Before I get into your latest Crypto Network update, I just wanted to let you know that I’m taking a couple of weeks off over Christmas.
That means when you’re due for your next Sam Volkering’s Crypto Network update (28 December) I’ll be sunning it up on a beach somewhere drinking Coronas working on my tan…
Actually, no, that’s not what I’ll be doing at all.
Seeing as I can’t go anywhere because ‘the Rona’ and all that, I’ll be at home, probably watching a lot of Christmas movies drinking homemade Glühwein in my favourite Christmas jumper which you can see below…which I think is pretty appropriate for Christmas 2020.
Source: Editor’s own photo
Anyway, hopefully you’ll be doing the same, and will barely notice that there won’t be a fortnightly update on the 28th. But what that means is that rather than waiting another two weeks from there, your next Sam Volkering’s Crypto Network update will be on Monday 4 January.
What a way to start the New Year!
I’ve always made sure to take a bit of time over Christmas just to ‘go dark’ from everything, a chance to reset and refresh the brain and then hit our strides strongly as we kick off the new year.
That’s what I’ll be doing again. Needless to say, even though I’ll be taking time off, and theoretically going dark, I never really am. I’m always around, keeping an eye on things, and as per all my subscription services, if there is any great need to get information to you over the next few weeks, be it crypto related, stocks for Frontier Tech Investor, whatever is needed, we’ll be sure to let you know
Valuable questions on value
I had an email come through last week that I thought was worth addressing this week. The questions are ones that I get a lot and are great questions. The answers I think are important and relevant to everyone that’s trying to figure out if this is something they should or shouldn’t be considering as part of their overall wealth strategy.
Here’s what the subscriber asked:
- I think your view of cryptos is influenced by whether you are a holder or not i.e. there is a lot of talking up your own book if you are a holder and if you are not then you are disparaging of it.
- As I say I am not a holder but am interested in the whole concept and the potential investment opportunity.
- I invest in a lot of different stocks and I keep coming back to a very simple question on Cryptos/Bitcoin – what is the value proposition?
- Cryptos and Bitcoin should not be any different in terms of analysing the investment opportunity
- So in your article below the question that arises is why would somebody pay you 12% interest rate in a near zero interest rate environment – the answer must be because your capital is at risk to a much greater extent than having it in a traditional bank. The real exam question on this is how do you measure that risk to your capital and can a non-insider/expert be in a position to make this judgement on this risk? Prima facie today a 12% interest rate implies a high level of risk to your capital
- So to me it is either a giant Ponzi scheme and if you are buying you are doing so on the basis that you can sell at a higher price – the greater fool theory
- There is a simple one sentences long explanation as to why Crypto/Bitcoin is a good investment? My challenge to you is can you write that one sentence?
Here are my responses:
- If you’re not a holder of cryptocurrencies, I have no problem with that. However my view is that all investors should be looking at this space as a way to grow wealth long term. Between investing in stocks, cryptocurrencies and other investments suited to your personal situation, it beats having money sit in a bank account rotting away with next to zero interest as the central banks inflate away your savings. You’ve got to make money work for you, you’ve also got to understand risk – but if you’re an investor, I don’t see why you wouldn’t even consider an opportunity that could help build wealth in the long term. Why I think people should read my book (whether you have crypto or not) is the underlying basis and context it gives as to why crypto exists, and some of the reasons for why it should be a factor in someone’s wealth strategy.
- This kind of reaffirms my point above. Some people will still outright dismiss crypto without taking the time to understand where it came from why it’s here and where could it go. Interest to the opportunity is the first step – learning about it, learning how it works, the value propositions and then how to transact and operate with different crypto is the next step.
- The most important value proposition for a lot of crypto is what’s considered as the ‘network effect.’ This is the capacity for their network to scale and distribute amongst the wider populations. A great analogy is with the telephone. Telecom companies are worth an incredible amount of money. But alone one telephone, one telephone connection is worthless. But if you have two telephones and a connection between them, you have a network, albeit small, for transacting in information. If your telephone network grows to one million people or one billion people, you’ve achieved a significant network effect, that is a valuable way for people to transact in data and information. It’s not the only reason, but it’s definitely one of the more important ones in crypto. A large, distributed, decentralised, network that allows the democratisation of data and information and other things like digital money, digital assets, is immensely valuable. The bigger crypto like bitcoin and Ethereum have tremendous network effect as a starting point to understand their value proposition.
- Crypto have some similarities when assessing value relative to traditional assets like stocks. But they also have different ones, that are more akin to understanding the value of utilities and infrastructure. How do you value the internet? How do you truly value every piece of personal data you create and should own? There’s no perfect science to it, and it’s also making us rethink how we value assets too. They are new, they are different to everything we’ve seen before, and that also requires new ways of approaching more traditional financial concepts around value as well.
- Understanding risk/reward is something that’s really important with all assets. But like I say in point 4, it’s also making us reassess traditional financial concepts we’ve known before and how they’re applied to what’s effectively new kinds of networks, be it money, data or asset networks.
- The greater fool theory and Ponzi arguments with crypto I think is a cop out to understanding how markets work, investor psychology and value of things that are intangible in nature. Does a stock buy and sell market operate on the greater fool theory too? What if that company is carrying a large amount of goodwill or intangible assets on their balance sheet? Not everything of value needs a physical asset behind it. Saying it’s a Ponzi for a start implies there’s some overarching overlord behind it all, which is incredibly removed from the fact with something like bitcoin. Again, it’s a fundamental lack of understanding of how the network operates, functions, how it continues to function – which is why something like my book helps to explain what the blockchain is and how it works.
- It’s an opportunity to invest in what I consider to be the foundations of future global finance.
You might have had similar questions, you will almost certainly have people ask you these questions about it if you get onto the crypto conversation bandwagon during the Christmas and New Year period.
Use my answers to help you understand it all better, and to also present fair and reasonably answers to people you speak with about it.
Of course you can also always buy a hardback copy my book as a gift for people this Christmas! It’s a great stocking filler. The link is here – but I’m not sure if you’ll get it by Christmas or not, considering some of the delays with the post at the moment!
Finally, I’m not adding a new “Crypto to Know” this week. I think the two key crypto that focus is needed on right now continues to be Bitcoin and Ethereum that we’ve mentioned to you in the last couple of updates.
I’ll be looking to add to our growing list of crypto to know in the New Year.
What I would suggest however is using these key resources to ‘skill yourself up’ more on each as a bit of holiday reading.
What is Ethereum? Click here – a solid foundation of resources to learn more about how Ethereum works, developments that have been taking place and what it’s designed to achieve.
Click here for the original emails threads in the discussion and creation of Bitcoin P2P e-cash. This gives an incredible look at the very earliest origins, discussions and creation of bitcoin. Helps give more context as to its origins and why it exists.
Our current watchlist of “Crypto to Know”
- Bitcoin
- Ethereum
And just finally, as I said at the top. Merry Christmas, have a fun time in what’s unusual circumstances.
Thanks for taking an increased interest in crypto this year and what is happening in this space. Hopefully I can continue to build on your knowledge foundation and help you to understand how to exist and thrive in a thrilling and fascinating world.
Regards,
Sam Volkering
Editor, Sam Volkering’s Crypto Network
