Blockchain: A Solution Looking for a Problem
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Opulent spending and excessive waste characterize overhyped technologies as they crest the peak of inflated expectations. You’ll be hard pressed to find a technology that was more hyped than blockchain. From initial coin offerings to non-fungible tokens, the promise of Web 3.0 powered by blockchain technology has been embarrassingly underwhelming. The biggest issue with the technology has been the blockchain trilemma. The perfect blockchain boasts three elements: security, decentralization, and scalability. Pick two, but you’ll never have all three.
For many venture capitalists, crypto is that embarrassing drunk friend who you don’t want to be around, but that you feel obligated to support because that’s what friends do. Everyone plods ahead with the mixers in New Yawk City where people suck down overpriced cocktails and tell each other how brave they are. Sure, there’s plenty of promise in blockchain applications ranging from realty to energy, but your average unaccredited retail investor is limited to what’s available on stock exchanges and crypto exchanges. Let’s discuss the latter which has seen better days.
Crypto Exchanges
“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.”
SEC Chair Gary Gensler
Several months ago, the SEC filed charges against the world’s largest cryptocurrency platform, Binance. A few weeks later, an agreement was reached that would “avoid a full asset freeze of the platform in the US” while the ongoing lawsuit moved through a process that could take years to resolve. Never mind the platforms, it’s the large number of downright scams available on them that are the real problem. Now the attorneys have gotten involved. A bad attorney might draw this out for months while a good attorney will make it last for years.
Coinbase (COIN) lists 9,872 “assets” for crypto investors to participate in. At the top, you’ll find Bitcoin and Ethereum, two of the most popular cryptocurrencies that institutional risk-takers like ARK might dabble in. Bitcoin promises a new form of digital gold, and holding a low single-digit percentage of our total assets in this OG of crypto makes sense for diversification purposes.
Further down the list you’ll find Tether, probably one of the shadiest things we’ve ever seen, and Binance’s own coin offering which appears to be frozen. As for the other 9,868 coins out there, we’re not convinced it’s worth wasting your time wading through a haystack of scams and volatility in search of something you might not lose money on. Advocates may point to any number of “projects” that prove crypto is more than just a quick way to lose money, and to them we say this.
Let’s consider the stock market for a second. The number of ways to piss away your money on this age-old institution is remarkable – stories, meme stocks, penny stocks, binary options, regular options, and the list goes on. It’s so easy to lose money in the stock market that we’ve built an entire business around teaching people how to avoid these traps. Being a risk-averse investor who diversifies across asset classes will ensure that you preserve wealth in addition to growing it. If it’s easy to squander wealth on the highly regulated equities market, just think about how easy you can blow up your account on a market that’s rife with scams and completely lacking any form of regulatory scrutiny. An aptly titled piece by The Atlantic, Is Crypto Dead?, spells it out:
It is definitely down, written off by thousands of individual and institutional investors. The most obvious issue: scams. In the world of crypto, big firms are scams. Little firms are scams. Stable coins are scams; exchanges are scams; NFT schemes are scams; initial coin offerings are scams; tokens are scams. Firms run by self-proclaimed altruists are scams.
The title of this article should have been “Blockchain: A Problem Looking for a Solution.” You know who really doesn’t want the promise of blockchain technology to be dead? Everyone who is benefiting from these scams.
Cryptocurrencies Aren’t Securities
Crypto advocates shoot themselves in the feet when they proclaim emphatically, “crypto is not a security.” That’s precisely why we don’t want anything to do with it. Unless these 9,000 tokens give the holder rights to something with intrinsic value, what’s the point exactly? Some of the world’s best companies offer the best of both income and capital appreciation. Why should I “stake” a crappy coin someone contrived out of thin air when I can put my money into shares of Procter & Gamble (PG), a multinational consumer staples giant that’s increased their “staking reward” for over 60 consecutive years? Warren Buffett, the man who notably called crypto “rat poison squared” now receives his entire investment in Coca-Cola back every single year because he “staked” that firm many decades ago.
Warren Buffett also said to be greedy when others are fearful, but that’s in reference to quality assets. Where that statement rings a bell is when we think about Gartner’s Hype Cycle. Blockchain must be floating somewhere around the trough of disillusionment at this point.
Were blockchain to be climbing up the slope of enlightenment, that’s precisely when we want to be paying attention to it. Sure, it’s fun to bring up how correct we were in steering away our subscribers from the Web 3.0 shite show, but that’s spilled milk. Could blockchain now be emerging as something worth investing in? Maybe, but if cryptocurrencies don’t allow ownership in the underlying businesses, how else might we go about investing in this space?
Investing in Blockchain Technology
Other ways we might take advantage of blockchain technology include:
- Bitcoin/crypto miners who transform electricity into tokens that are only worth what others are willing to pay for
- Publicly-traded platforms like Coinbase that provide pure-play exposure to the growth of cryptocurrencies
- Incidental exposure through investing in firms that leverage blockchain technology to add value
We’ve covered bitcoin miners extensively and still maintain that you’re better off just owning bitcoin instead of taking on the added company-specific risk of owning a “miner.” As for the third bullet point, that recalls an old saying about AI that seems relevant in this situation as well. Once it works, nobody calls it blockchain anymore. The ability to track something using a ledger, or break up an asset into fractional ownership pieces, doesn’t necessarily require blockchain. If it does, fine, throw together a blockchain-powered solution and get on with your life. That leaves us with the second option above – invest in the platforms that make Web 3.0 possible, Coinbase being the largest and most legitimate.
Our last video on Coinbase stock looked at how they’ve gone on the offensive by leveling their own lawsuit against U.S. regulators. The company says they’ve been trying to get regulatory clarity from the government since last summer, meeting more than 30 times with regulators over a span of nine months. At the beginning of this year, the SEC decided to pursue an enforcement approach, and Coinbase was served a Wells notice in March. Until this turmoil is resolved, the regulatory risk is just too high. Even then, Coinbase needs to remove their heavy dependence on retail transactions before we’d take a serious look at investing in the second-largest cryptocurrency platform behind Binance.
Blockchain Looking Forward
Once regulators start regulating cryptocurrencies, they lose one aspect of their appeal – decentralization – but they’ll experience increased adoption because the scammers will be put in their place. In the same way cannabis investors wait for legalization at a Federal level, crypto investors await a decision by regulators as to how they plan to handle this complex web of blockchains, tokens, and low-resolution pictures of monkeys that have lost 95% of their value. That’s where Coinbase sits. The outcome isn’t overly concerning, it’s the closure they’re looking for. Regulators need to make some decisions with conviction, so everyone knows where they stand. When that happens, then the biggest manifestation of blockchain – cryptocurrencies – can then start to be taken seriously. Maybe.
Advocates of Web 3.0 will point to DAOs, daaps, and other manifestations of blockchain technology as proof that we’re still making progress. Forget about that pyramid scheme that fleeced those poor Filipinos who were told they could make an honest living playing games, or the debacle where a bunch of people tried to buy the U.S. constitution and ended up with another crappy coin. That’s all water under the bridge now because we’re finally figuring things out. That’s great to hear, but we’re going to wait for the regulators to finish battling with the world’s largest crypto platforms. When that regulatory risk is removed, we’ll come around for another look.
Conclusion
If you’ve achieved financial independence and you’re sitting around bored half the time, cryptocurrencies might present a more intellectually challenging way to blow your spare cash than a casino. We warned investors not to get involved with any of this Web 3.0 mess and continue to take that position. Tokens might start to get interesting if they represent intrinsic value, particularly surrounding fractional ownership. However, where they differ from a traditional path to liquidity – the IPO – is the institutional vetting process. The disaster that was SPACs showed us that providing a shortcut for companies to go public does retail investors no favors. Once the risks surrounding regulatory uncertainty are resolved, blockchain technology may finally start to realize its potential.
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