Crypto : From Evil Criminal Network to Sensible Investment in just 18 months

It’s amazing how quickly the media narrative shifts.

Crypto has gone from being portrayed as the payments network for SPECTRE Criminal Enterprises Inc. to sensible investment in just 18 months.

If the speed of this change seems crazy to you, you’re not alone.

Everything is speeding up

One of the reasons that everything seems crazy these days is that the pace of technological change keeps speeding up.

When it comes to the future, it’s easy to end up sounding like a grumpy old man.  The flying cars are still not here and we still don’t live in space…even though the Bond film Moonraker was released in 1979.

But things are definitely speeding up.

Many technological changes are accelerating i) because Moore’s Law is exponential and ii) because new technologies are built on top of old like Lego bricks.

The changes have gotten faster over time as one innovation facilitates the next. Packy McCormick made this point using the tyres on the Tesla:

“The wheel was invented in 4000 BC in Mesopotamia. Ancient South and Central Americans used rubber to make balls for games as far back as 1600 BC.

In 1844, Charles Goodyear vulcanized rubber, in 1847 Robert W. Thompson patented the air-filled rubber tire, and in 1888, an Irishman named John Boyd Dunlop commercialized the first successful pneumatic tire.

120 years later, in 2008, the Tesla team used an evolved version of that tire as one of many, many inputs, each with its own long and winding evolution, into its first Roadster. The Tesla team didn’t need to reinvent the wheel.”

Compounding Crazy, Packy McCormick

Crypto adoption is exploding

Crypto is the fastest ever adoption of a new technology. 

The current uptake of crypto is roughly equivalent to where internet adoption was in 1997 but crypto adoption is growing even faster than the internet was at that point:

With adoption this fast, the question is not what you or I would like to see happen…the reality is that it’s coming whether we like it or not.

Just because most people associate crypto with speculation (e.g. dog money) doesn’t mean there aren’t real world applications. Crypto now has multiple real world uses from shipping and supply chain management to gaming to music streaming to insurance to decentralised finance.

If that all seems a bit esoteric for sensible savers, how about being able to earn interest rates of 5 – 12% on your money? Staking crypto allows you to do this right now in a world of zero interest rates on your GBP / USD / EUR tokens.

Bitcoin was the first application of blockchain technology but it certainly wasn’t the last nor the most interesting to me. I don’t like the energy consumption of Bitcoin but other blockchains use a proof of stake model that uses 99% less electricity. Bitcoin now accounts for a minority (~42%) of crypto market capitalisation.

I recently downloaded MetaMask, the non-custodial digital wallet that has become a gateway to the world of Decentralised FInance (DeFi). MetaMask monthly active users hit 10 million in July 2021 (up from 545 thousand one year ago), representing 1800% annual growth.

With growth rates like that, the rise of crypto has been really hard to keep up with. The speed of the changes makes fools of us all.  I had to pivot earlier this year as those pesky facts kept on coming.

I may be an idiot but it’s not just me. To illustrate how far the mainstream media narrative around crypto has changed in 18m, consider first a story from The New York Times in January 2020 (when BTC was trading at about $9,000):

Did I mention that much legacy media content is now just clickbait, political theatre and general nonsense? Yes I think I did.

Fast forward to September 2021 and Bitcoin is being embraced into the mainstream by The Economist:

Note the use of the The Nobel Prize “brand” to pour holy water on something that was until recently beyond the pale for sensible index fund investors.

It’s already regulated

One of the big myths about crypto is that it’s unregulated. This is not true. For example, Coinbase is regulated and licensed as a money transmitter by the New York State Department of Financial Services. It is regulated as a publicly traded company by the SEC. It is regulated as a crypto exchange in the UK by the Financial Conduct Authority (FCA).

Since January 2020, any crypto exchange operating in the UK must register with the FCA under anti-money laundering rules. This means an exchange must check who its investors are and verify their identities to ensure it is not supporting criminal activity or terrorism.

Over time, digital assets will be further integrated into the legacy financial system and the regulatory regime. The old financial system and the new will converge. Goldman Sachs, JP Morgan, Paypal and VISA etc now have crypto teams and offerings. If you are convinced that crypto is just a fad, it’s worth asking yourself: why are Goldman Sachs are wrong?

Why are Mummy and Daddy fighting?

When I first sent out this article by email, I got some replies from readers struggling with the fact that different writers were saying different things about crypto.

The question I got asked more than once was “Why are you talking about crypto when other financial bloggers / Warren Buffett / The Media / [insert your favourite financial authority figure here] warn people to stay away from it?”

A gentle reminder: if your argument is that “Warren Buffett doesn’t do crypto”, you don’t have an argument. You have a mental short cut (copy Warren). In the past, that’s not been a bad rule of thumb but it ignores the fact that Buffett changes his mind (see his huge bet on Apple). Plus he’s in his late eighties and does not need to navigate crypto. This does not work for young(er) people who are not yet billionaires.

Staying open-minded

There are some good examples of staying open-minded. For example, in 2020 there was this piece by Monevator which talked about owning a Bitcoin (now worth ~$55,000). JL Collins published a guest post on crypto written by someone who clearly understands the space. Then Banker on FIRE got ETH-pilled.

If you’re a believer in diversification, passive investing and market cap weightings, it seems odd to rule out an asset class that now accounts for ~0.5% of global financial assets and rising. To match market cap weightings, someone with a £100,000 portfolio would own roughly £500 of crypto.

Invest in yourself

It takes work to learn a complex new subject such as crypto but I see that time and effort as a sensible investment.

To be an expert on crypto you’d need some familiarity with a lot of different subjects: investing, macro-economics, tech, software, cryptography, game theory. That’s quite a big ask. The rabbit hole runs deep and the learning required is quite extensive.

Sometimes it’s hard to change your mind. Ego gets in the way. No one wants to admit they were wrong. Perhaps this is why there is that old saying that progress in academia occurs one funeral at a time.

Investing is all about dealing with uncertainty. I try to think in probabilities rather than certainties. We never have perfect information so it’s important to stay open minded. Change is the only constant. This is why continuing to learn is important.

It’s not for everyone

Crypto is risky and volatile. It’s not for everyone. You should never allow yourself to be pressured into making an investment.

If you can’t handle volatility, it’s probably sensible not to invest in an asset class that’s 4x more volatile than equities. If you haven’t got time to do a deep dive, it’s understandable to be wary of investing more than say £100 in crypto.

But there are risks with a “ignore it and hope it goes away” strategy. Traditionally, the great thing about global equity index funds is that they picked up new economic trends and new companies as they grew and got included into the index.

Watch this space

What if in future more companies funded themselves by issuing tokens rather than equity? What if businesses added tokens as a whole new layer to the capital structure?

Token sales would allow businesses to collect cash upfront for future sales discounts and to reward customers via airdrops. What if every big company had a token equivalent to airline airmiles that customers could sell for cash or use for discounts? For example, imagine a Disney token that fans could trade or spend in cinemas, theme parks or to pay for Disney’s streaming service.

Customers benefit from a rising token price and are incentivised to tell their friends and act as evangelists for the business. This alignment of interests might mean that companies with tokens out-compete companies that don’t have such tokens. Tokens also allow for voting rights and other governance features that help to co-ordinate communities.

If crypto is as disruptive a force as it seems, more and more value might accrue to token holders versus public stockmarket shareholders. That would mean that just buying a global index tracker won’t get you full exposure to the value creation. Index funds would get disrupted (or at least bypassed) to some extent.

This is why I will continue to keep learning and keep one eye on crypto.


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11 comments

  1. yacomine · · Reply

    Care to share what coins you are investing in and what the split is? I think most people will have this question. Thanks

  2. medithi · · Reply

    The problem with crypto has never been the technology. It is politics. It is possible to produce a lightbulb that functions for more than a hundred years, but light bulb companies invented programmed obsolescence to avoid that. Equally, the very abrupt price changes in crypto are due to the fact that the elites haven’t figured out if they are good or bad for them overall. They have probably seen some advantages, and some disadvantages. If this experiment suddenly makes them realise crypto goes against some very important interest of them, it will die right there. Elites have great control over governments, and their policies. So, we are all really waiting for their final opinion on this.Meanwhile, have fun.

    1. Ray Dalio, Tudor, Druckenmiller own Bitcoin. Cohen is heavily invested in the space. We have senators, congressmen/women, world leaders who are strong proponents of crypto. Miami has their own coin. Visa and Mastercard are all over this. Traditional and investments bank are experimenting in De-Fi (Societe Generale for example). They have exclusive research departments to track the developement in crypto (Fidelity just released their report). Banks are now offering crypto custodian services as well. The space will be regulated, it is coming but the genie is already out of the bottle. In my view, socio-political pressure will challenge the strength of the space and the strongest will win. Many will be left behind.

  3. Failure to understand what is happening in the crypto space is NEGLIGENCE at this point. While others are still stuck to the idea that Bitcoin is rat poison because Warren says so, it has moved so fast in the last 18months, we now have a thriving Decentralised Finance, NFTs, Play2Earn, DAOs and massive development in the Metaverse and Web3. Web2 companies are intergrating and are moving quickly as well – Reddit, Tiktok, FB, Twitter. Brands experimenting with NFTs and the Metaverse – Marvel, D&G, Gucci, Coca Cola.

  4. Yes, interesting that you should mention how some elite players are going in with crypto. However, they are still experimenting. There could be some unintended consequences still in progress. What comes to my mind first: the fact that crypto is becoming an indispensable tool for ransomeware atacks. If these attacks start to really damage elite palyers’ interests, you could start seeing government policies to see it die. And that is only one example. In my opinion, the future implications of crypto use for the wealthy are yet to be seen in all its glory. It could go either way at this point. That is why I say “have fun”, because for me, crypto is still gambling.

  5. There *might* be something that has practical and commercial use in blockchain / crypto in the future but so far there’s zero instances where a centralised database wouldn’t be more efficient. Any tech guy worth his salt knows this.

    As the underlying tokens, coins and exchanges are completely unregulated, the entire market has been cornered by exchange operators, stablecoins and other insiders to their benefit, and to the detriment of retail users. The price manipulation of markets is crazy and the entire ecosystem is propped up by stablecoins with very dubious origins that refuse to perform audits of their reserves.

    Buying crypto now is lining the pockets of the insiders and offering liquidity to early adopters – it’s simply a gamble that you can get out with a return before the music stops, rather than an investment.

    1. ASH, superinteresting comment. I hadn’t thought about the insiders. So… it could turn out to be similar to an international ponzi scheme. Thanks for the comment.

      1. That’s exactly what it is – you’re playing in a rigged casino where the house can see your cards.

        Like the old saying goes, if you’re playing poker and you don’t know who the patsy is… you’re the patsy

        1. Ha ha, great saying! I also follow Mr. Money Mustache’s blog and he wrote this article on bitcoin three years ago and hasn’t updated on it, but I bet he still isn’t investing in Crypto. https://www.mrmoneymustache.com/2018/01/02/why-bitcoin-is-stupid/

  6. lady aurora · · Reply

    I am in the process of opening my mind to all this.

  7. Thank you very much. I Like your blog……also Read my Documents!

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