Crypto and Alt Assets

I remember reading about Bitcoin in its early days back in 2011 while I was still in Pittsburgh and was drawn to its mystery.  I enjoyed trying to understand something that most everyone else was also trying to understand and explain in simple English.  And being a finance professional I was of course intrigued by its speculative potential.  While I didn’t purchase bitcoin from the start, I understood it’s value. “How can you buy things with it, it’s not a physical asset and has no value, so how can it be worth anything?” Well, our greenback has no inherent value.  Only through people accepting it for a transfer of value does the dollar obtain its worth as a medium of exchange.  Same with Bitcoin.  Bitcoin is accepted as an exchange of value.  In addition to functioning as an exchange for goods and services, it lives on a secure, decentralized blockchain, transactions can happen much faster and much cheaper than using our current banking system, it has scarcity value with only 21 million capable of being mined (some think of this as an inflation hedge) and as more people, institutions, countries/governments accept the utility and potential of Bitcoin it has great speculative investment opportunity as we’ve seen in its meteoric rise.

While I understood the utility of Bitcoin and refuted none of its value as a virtual currency, I had been more focused on how I can get a piece of the underlying technology on which Bitcoin was built.  Bitcoin is not blockchain, blockchain is not Bitcoin.  I saw that the blockchain had countless, scalable applications for all industries and Bitcoin and other cryptocurrencies were just one of many applications for the blockchain. 

For me, Ethereum was the crypto investment in order to play the underlying technology and the main reason why it was my first crypto investment.  Ethereum is the blockchain technology on which DApps (decentralized applications) are built.  Said another way, if I was a developer, I could build a crypto currency on the Ethereum blockchain and exchange with other willing parties, I could build a smart contract on the Ethereum blockchain and execute it with a counterparty, my medical records could someday securely be housed on the blockchain so I will always have record of my entire history, I could hold my NFT on the Ethereum blockchain, etc. etc. etc. I’ve always been a more conceptual learner/thinker and I wanted to bet on the platform rather than one of the many applications for the platform. 

After understanding Bitcoin and Ethereum enough to put money behind both assets, I dove into the rest of crypto space and realized how much of a legitimate side car it is to the stock market with coins dedicated to very specific functions. In addition to Bitcoin and Ether, we find coins in the cryptosphere with a vision to compete with or replace the current cloud infrastructure we know from the likes of AWS or Azure.  Filecoin (FIL), for example, powers a decentralized peer to peer file storage network which allows users to store files on excess hard drive space from others in the network.  Like Ethereum, Polkadot (DOT) and Cosmos (ATOM) are building an ecosystem of blockchains where developers can build their own chain which will have interoperability amongst other blockchains in the system. Instead of instead having all the cars, activity, and congestion on one highway (Ethereum) we can now have multiple highways which reduce congestion and cost and increase transaction speed. Ripple (XRP) is building a global payment network to facilitate faster and more cost efficient cross-border payments.  Polygon (MATIC) is a token that powers a scaling solution for Ethereum.  Because the Ethereum network is overwhelmed with traffic resulting in higher transaction prices and slower processing time, the Polygon network offers a way to invest in the “Layer 2” sidechains which run along side the main Ethereum chain.  Dogecoin…well…does nothing so we’ll move on.  I realize I was late to the alt coin game, but the point is, the more I dig into the crypto space the more varied innovations I see outside of those few that hit the headlines which could possibly paint our digitized future and I want to be a part of that. 

My initial hesitancy to investing in crypto was because I didn’t fully get it (and truthfully still don’t). At a high level I understood Ethereum’s vision and watched countless YouTube speeches from creator Vitalik Buterin (which were far over my head) and tutorials on the infrastructure and underlying blockchain technology, but I couldn’t understand what exactly I OWN when I buy ether.  What am I entitled to?  If I buy Apple, I get it – I own a share of the company and am entitled to future cash flows of the company including and dividends distributed.  It’s less clear with ether other than you own GAS that fuels the system.  It’s equally hard to understand valuation, specifically when to buy/sell on price movements. If I like a stock and buy it, there is a fundamental reason why I think it’s a great buy for the long term.  If the stock dips from a one-time slip on earnings, or the overall market is down, or from disruptions in the supply chain, etc. I’ll likely buy again.  Tougher with crypto – it could go down 50% without reason.  And does that mean it’s going to zero or really going to bounce back in a big way?  Hard to tell with it’s short history and it’s unproven long-term use cases.  But as I look more toward alternative assets being a larger portion of my investing portfolio, I realize that I’m really not going to fully “get” everything or be able to pick apart and understand the financials, forecasts, product, addressable market, etc. that I can with public equities.  And as long as alt assets don’t become the majority of my portfolio, I guess that’s ok.  I’ll do my research and reading, follow price movements on the assets, and understand the landscape to a point where I have a strong gut feeling and make a call.  Crypto and other alternative assets are “alternative” for a reason and don’t come without risks.

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