I spent over six months studying cryptocurrencies to understand whether or not they have any future.
The short answer is that I think there is an incredibly bright future for a few cryptocurrencies which could 10x or even 100x in value, but 99.9% of them will be poor investments.
I have two main reasons why crypto will succeed. The first reason is that cryptocurrency is not just a currency. It's software.
To be fair, I stole that quote from Shark Tank’s Kevin O' Leary.
The second major reason why cryptocurrency will succeed is a simple one. It's because people want it. There is a big demand for cryptocurrencies - the total market cap of all cryptocurrencies is over a trillion dollars.
And why did all this money flow into crypto? Because it can solve a host of real business use cases and needs that at present nothing else can.
So what are the use cases for cryptocurrencies? The biggest use case is, of course, making decentralized payments. And besides from being a currency, cryptocurrencies can be used to power decentralized finance (such as lending), decentralized gaming, decentralized contract management, and even as platforms with which to run decentralized applications (like a decentralized version of Amazon Web Services).
"But Dave, why should I care if something is centralized or decentralized?"
This is why:
And this too:
I could go on. Do you think these people should have as much power over our lives as they do?
Yeah, me neither. Bezos, Zuckerberg, Nadella, etc are the winners of the power grab that was web 2.0, when companies centralized around their various specialities and usurped enormous amounts of power over the every day internet user.
The decentralization provided by cryptocurrencies (and the decentralized apps they enable to be built on top of them) is what can deliver us from web 2.0 to web 3.0. The existence of decentralized alternatives will work to erode the power of web 2.0 apps like Facebook, Twitter, Spotify, Amazon, and so on.
But at present, crytpo is still nascent and frankly not good at solving a lot of the problems it's trying to solve. So if it's not very good yet, why bother investing in it now?
Because it's a long term investment, and because the best technologies will iterate and improve like they always have. In investing, do I want to wait until everyone understands how big crypto can be, or do I want to buy in before most everyone else? Of course, I want to buy in before most everyone else.
Earlier, I mentioned that crypto is software. What do I mean by that? A lot of people still think that the best use case for crypto is as a store of value. Although some cryptocurrencies may prove to be a safe haven against the over-printed U.S. dollar, I think the considerably more interesting use case crypto provides is that of decentralized applications (software) built on top of a decentralized network.
Decentralized applications built on top of a decentralized network already exists. The network is called ethereum, and the coin that powers it is called ether. Ethereum has a host of nearly 3,000 decentralized apps (called dapps) built on top of it. Calling ethereum "software" is probably a bit too general. In reality, it's an entire ecosystem of software.
But if this ecosystem of software already exists, aren't we too late?
No, we're not too late. Because in a lot of ways, ethereum sucks. Transaction fees sometimes cross $100 a transaction, and it can only handle a dozen or so transactions per second. So ethereum might be winning the battle for now, but if it intends to win the war, it's going to have to upgrade. (and actually, ethereum is trying to upgrade over the next couple of years, but it may not solve all the problems it needs to solve. I digress - this will be a story for another time.)
Since ethereum has big problems, this opens up the door for investing in one of the many ethereum alternatives that provide lower gas fees, higher transactions per second, decentralization, and security.
To be fully transparent, even though I have sharp critique of ethereum, it is probably still the front runner L1 cryptocurrency right now, which is why it's among my largest crypto holdings.
However, the point of this post is not to debate about ethereum, but rather the point is that cryptocurrency is software (and in the case of ethereum, it's an entire ecosystem of software) in the early stages of development with a bright future and many evolving use cases. As a long time software investor, this makes crypto a no-brainer for me.
A few other points worth making: 98% of people don't really understand crypto that well, possibly more. Despite this, there is over a trillion dollars already allocated into cryptocurrencies. This will play right into the hands of those who are willing to educate themselves and become intelligent crypto pickers.
And not only are a lot of cryptos expensive to trade and transact with, many provide terrible UX and UI's. And yet, people are still racing to use them! This speaks to the sheer attraction people have to the crypto and web 3 movement.
Maybe people aren’t racing as fast into crypto as they were in late 2021, but money is still being pumped into the cryptocurrency space from both smart money and retail investors. This is a trend that will continue in the long term, so long as crypto continues to find new and improved use cases.
Wrapping Up
Cryptocurrencies are still in their first or second inning. They have a long ways to go to reach their potential. I can't tell you what all the use cases will ultimately be, but right now there are real, value creating use cases in payments, GameFi, DeFi, and as platforms for hosting decentralized applications.
Decentralization is a key outcome of using cryptocurrencies, and it can lead to a future where less things are controlled by a powerful few. Quick reminder though, I am a software engineer by trade, and lots of software effectively can’t be decentralized (or at least, not for a long time). People who tell you that crypto is going to decentralize everything in a few years don’t know what they’re talking about. However, crypto can decentralize *some* things within a few years if the cards fall into the right place.
Earlier this year on Twitter, I created a poll to see if you guys would want to come along with me on my journey to learn crypto. 64% of you said yes, and I’m happy to bring you along with me on my journey!
Thanks for reading! And let me know in the comments what questions you have and what topics within the crypto space you want me to cover.
Thanks for the write up. I agree ETH is still king in many ways. I have looked also as a small gamble at PLS / PLSX. Seems interesting to copy the whole system state over and even though initially there is no inherent value to the ERC20 copies there might be a process of price finding between the copy and original depending on how much acceptance PLS will gather based on superior metrics such as proof of stake, lower fees and more. Who knows. Cant get worse than my growth stocks ;)
Thanks Dave for the thoughts shared! Do you plan to release your crypto portfolio or just publish review articles on high conviction coins similar to AVAX?