We save and invest in productive assets to build wealth and live the life that we want.
The objective is financial freedom.
Money is just a tool that allows us to achieve that goal.
Equities and property have traditionally been the asset classes that provided the “engine” of a portfolio: they delivered the highest returns for long term investors that could ride the volatility and bear risk. Bonds and cash traditionally acted as shock-absorbers for those that wanted a smoother ride.
Equities and property still work but now we have more choices for our “engine”. Today we also have venture capital (earlier stage equity without a quoted price) and crypto (early stage venture capital with real time pricing).
What’s happening right now is the convergence of different classes of risk asset:
- venture capital
You can own a stake in a tech business via traditional equities (publicly traded stocks). You can own a stake in a tech business via venture capital (unquoted equity). And now you can own a stake in a tech business via a token (crypto).
Or consider the ownership of property. You can own property direct. Or you can own stock in a publicly traded Real Estate Investment Trust (REIT). It seems inevitable that property will get “tokenized” allowing you to buy an ownership share in it via crypto.
Last week I received angry messages from people annoyed that I’d been writing about crypto…when we all know that crypto is not a productive asset.
Or do we?
I give you exhibit A: these are the top revenue-producing crypto assets (source: Token Terminal). The Y axis is revenue generated (in dollars) in the past month:
These are digital assets that produce cash flows; where value accrues to the benefit of the owners. Crypto contains a growing number of such productive assets.
So why do people still say that crypto is not a productive asset class?
Perhaps they are focusing on Bitcoin, which gets 99% of media attention? Bitcoin can be thought of as digital gold…and gold is an inert lump of metal and not a productive asset. Be warned that most of what you’re reading in the mainstream media about crypto is incomplete at best and nonsense at worst.
Perhaps they don’t understand the full range of digital assets out there? You can’t fully understand crypto if you don’t understand Ethereum, Decentralised Finance, gaming, digital art and NFTs. These things are more interconnected than people realise and will become increasingly so as new use cases emerge.
Would you agree that Amazon is a productive asset? Amazon is a business that generates billions of dollars of free cash flow which is available either for reinvestment, share buybacks or dividends. Just because it doesn’t pay dividends now, doesn’t mean it won’t in the future and doesn’t mean it’s not productive.
Now consider a crypto-native business such as Axie Infinity. Value accrues to token holders via usage rights, voting rights, token cancellations (these are like share buybacks), rewards, air drops and staking revenues (these are like share dividends).
The fundamental investment case for crypto continues to get stronger as more stuff gets built out. I think of Ethereum as a fintech venture capital play. It’s risky but you get a chance to own a piece of the new financial internet.
The Ethereum network recently successfully implemented the EIP-1559 upgrade. This means that transaction base fees now get burnt (units of ETH get cancelled and, all other things being equal, the supply of ETH shrinks).
This is a bit like a company share-buyback. Share buybacks are an alternative to dividends; they’re another way that companies return value to shareholders. Shareholders that don’t sell get to own a larger % of the assets.
In 2022 Ethereum is due to move from proof of work (where miners use lots of electricity and computer equipment to mint new coins) to proof of stake (where validators put up ETH as collateral and get new coins for checking transactions). This means a more eco-friendly network, a big reduction in electricity consumption and in miner selling pressure. What happens when reduced supply meets increased demand?
The “secret” to being a good investor (it’s not much of a secret) is to do your homework, understand what you are investing in and have enough conviction and patience to see the investment through to a profitable conclusion.
Most of the alpha got squeezed out of the stock market long ago. But there is still a lot of alpha in crypto. Research matters in crypto in a way that it no longer does in the traditional equity market. There is an enormous difference between the scams, rug pullz and jokecoins and the projects with real world use cases.
Sure, you can ignore crypto and just buy a global equities tracker fund. You’ll probably do just fine over the long term.
But you should be prepared for big changes over the next couple of years. Very few people understand fully what’s happening and the landscape will change rapidly and change again.
We are still early. Cognitive flexibility is a competitive advantage. Those who are able to hold competing ideas in their heads will have an advantage. Those who think in terms of probabilities (rather than certainties) and are able to change their mind when they get new evidence will have an advantage.
Stay flexible people!
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