My Crypto Thesis
Crypto accelerates commerce.
That’s it. That’s my thesis. Hours of research and thinking condensed into three words. The future of my career comes down to 25 letters.
Simple is elegant.
Simple is understandable.
In this article I expand on my crypto thesis, outline how technological disruptions unfold and explain why crypto is a fertile investment ground. My thinking is informed by Technological Revolutions and Financial Capital by Carlota Perez among other researchers.
Crypto Accelerates Commerce
There have been four technological disruptive innovations in the past 250 years. They all share one thing in common. They accelerated commerce. In doing so, they reshaped the fabric of society and the economy.
The water powered mill was invented in Britain in 1771. The invention mechanized the cotton industry. It proliferated the use of water as a source of power. It led to the development of canals and waterways. People and goods flowed more freely facilitating commerce.
In 1829, the first steam engine powered a train from Manchester to Liverpool. Steam power was repurposed for other industries increasing productivity. Railway lines connected regional hubs increased the trafficking of people and goods between them.
In 1875, the Carnegie Bessemer steel plant opened in Pennsylvania. It produced cheap steel that revolutionized all industries. Sea going steel ships voyaged across the oceans carrying people and cargo. Cheap steel was used to lay railway tracks across America. Bridges and tunnels were built. Canned food was invented. Electricity proliferated. Domestics and international commerce boomed.
In 1908, the first Model T car was manufactured in Detroit. It gave rise to mass oil production. It popularized assembly line manufacturing. Combustion engines pioneered advances in aviation, mass transportation and home appliances. Networks of roads and interstate highways were built. Cities were redesigned. Mass transportation accelerated economic activity.
In 1971, the semiconductor was invented in California. Computers followed thereafter. Then the Internet was developed. Mobile computing and later smartphones enabled digital communication. Disparate economies around the world became connected. Globalization flourished driving economic growth.
Technology revolutionized commerce in each example. The volume of goods traded increased. At first using waterways, then railways, then steam powered steel ocean vessels, eventually road networks and ultimately coordinated exchanges orchestrated by digital communication. The frequency of goods exchanged also increased. At each stage of innovation productivity increased and the friction of transacting was reduced. The size of the market was enlarged. The easier it is to transact and the larger the market, the more transactions occur. The more transactions occur, the more commerce accelerates.
Acceleration of commerce is a good thing. It leads to economic expansion, full employment, rising wages, wealth creation and rising living standards.
I use crypto as a catch all term including blockchain technology, crypto currencies and non-fungible tokens.
Crypto will accelerate commerce. It provides the infrastructure for permissionless, trustless, auditable, low cost and instantaneous settlement of transactions. That’s a breakthrough.
It’s permissionless, meaning anyone in the world can use it. No one can be denied access. It’s trustless, two parties can transact without trusting one another or a central intermediary. It’s auditable, so anyone can review the integrity of transactions. It (eventually) will cost thousandths of a cent to transact. Transactions will (eventually) be settled as soon as they are inputted.
Those characteristics pave the way for the next evolution in the free flow of commerce. It’s a technological disruption in the making.
Technological Disruption
Technological disruptions have three attributes:
They modernize all aspects of the economy and reconfigure society.
They experience boom and bust cycles.
They are eventually assimilated into society and become part of everyday life.
Crypto has one and a half of the three attributes.
Modernize
Technological disruption pioneers an entire new paradigm. The car disrupted prior forms of horse-enabled transportation. It facilitated inter-state commerce, spawned the expansion of the oil industry and redesigned cities. Mass transportation affected every industry, not just transportation.
The magnitude of disruption is unimaginable at the outset. Railways were developed to transport coal from mines. In a world of canals and waterways, it was hard to imagine trains would carry people. Oil was originally extracted to light lamps. No one thought it would be used to power automobiles. Semiconductors were invented to extend radio frequency. It was impossible to foresee their use in the device you’re using to read this. The innovators can’t even imagine what could be possible. Edison thought his phonograph would be used to record people’s dying will.
IBM’s boss in the 1950s thought a few computers would satisfy the world’s total demand.Crypto checks part of the “modernize” attribute box. Crypto technology facilitates seamless borrow, lend and trade peer-to-peer and network building. It enshrines digital ownership. So far the benefits are limited to the crypto ecosystem. Like prior technological disruptions in their infancy, crypto’s potential and interest is booming, but the use cases remain limited. If crypto can bridge to the rest of the world economy, then crypto could potentially modernize it. That remains to be seen. Hindsight will provide the evidence.
Boom & Bust
Crypto checks this box. Crypto is plagued by the disbelief of both its supporters and detractors. There are few crypto realists. The identity of fervent supporters is rooted in their belief in crypto. Denying them crypto’s potential is equivalent to stripping them of their identity. Staunch detractors fear innovation compromising their livelihood.
Contrary to popular belief, both are needed. Innovation requires entrepreneurs to suspend their disbelief to attempt the impossible. Their identity is so closely tied to their success, they’ll risk anything to achieve it. Detractors unintentionally promulgate the technology. They serve to bring lofty ideas back to reality. They spearhead framework and regulation to make the innovation accessible to the masses.
These two competing forces combined with capital fuel the boom and bust cycle. During the frenzy of the boom cycle opportunities are endless. Talent flocks smitten by the promises of riches. Capital is carelessly deployed. Profits are abundant. Everyone doubles down, and then again, and again. The hype surpasses the potential. Speculation and fraud is rife. Asset prices balloon. Then pop.
During the bust detractors are the loudest voice. Asset prices return to reality. Speculators are wiped out. Regulation is introduced. Calmer heads prevail.
The boom and bust cycles each serve a purpose. The boom period attracts capital and people and overbuilds infrastructure. Without the mania of the boom time, capital, people and infrastructure would not have accumulated in such size. For example, in the 1990s, a trillion dollars was invested rolling out fiber in the US and Europe. Only 1% of it was lit by 2001. Subsequent to the dotcom bust, court-appointed liquidators of bankrupt telcos recovered less than 10% of the original cost of building the networks when they sold the assets.
The excess infrastructure served a purpose. It lowered the cost of accessing the technology in subsequent development periods. Lower costs increase adoption.The bust period heralds regulation and the entrance of incumbents. Regulation gains traction in the wake of the bust’s calamity. Incumbents witnessed the potential of the new technology but previously feared wading in. Investing in inflated assets in unregulated industries doesn't glide through the incumbent's bureaucracy. Comforted by regulation and lower entry prices, incumbents deploy their capital into the new technology subsequent to the bust. Incumbents like Goldman Sachs are now seeing “more sensible valuations” to “invest in the technology that underpins crypto.” Unlike the speculative capital that funded the mania, incumbent’s capital is patient.
Boom and bust cycles are common in technological innovations. The panic of 1798 was preceded by “canal mania.” Canals were chaotically trenched across Britain in different depths and widths. Connecting them proved difficult rendering many of them useless. Railway mania ensued in the 19th century. Far too many railroads were built to places that didn’t need them. A crash ensued in 1847. Stock market mania led to the crash of 1929.
Crypto has experienced boom and bust cycles. This latest one is the most significant. The $2 trillion magnitude to the correction is far larger than past crypto busts. Unlike prior bust periods, the crypto industry now has real infrastructure, products, users and revenues. Using prior technological innovations as a guide, the degree of regulation and willingness of incumbents to invest will dictate crypto’s trajectory.
Assimilation
Crypto is not assimilated into society. It’s a fringe technology. It’s not intertwined in our daily life. There are a few hundred million users globally. It’s a separate small ecosystem that does not affect the wider market. For example, crypto’s November market rout was contained to crypto. There was no contagion to other markets and the broader economy.
Full assimilation occurs when:
Society accepts the technology as common sense
Frameworks for use and regulation are implemented
Institutions deploy the technology for their own benefit
People don’t understand why they would use crypto. It’s a long way from being accepted as “common sense.” Regulation is emerging. It could provide the guardrails necessary for wider use. It could restrict the industry’s growth. The verdict is outstanding. Institutions are increasingly embracing crypto. Financial titans like Fidelity enable their customers to buy crypto assets. Goldman Sachs issued a bond on-chain. Their CEO penned a Wall Street Journal column supporting the merits of the technology. Fashion houses, brands, record labels, sports franchises and gaming companies are embracing the technology.
Assimilation takes a long time. The Internet was invented in 1983. It took nearly two decades for people to become aware of it and another several years thereafter to be widely used in the developed world. The Model T was invented in 1908, but it wasn’t until the 1960s that roughly half of Americans had cars. Societies fear change. They are slow and reluctant to evolve. Change threatens the comfort and security of the status quo. The existing system bore riches for society, so why should it change? So much was already invested in the established system. Change requires tedious relearning.
Assimilation of new technology is driven by its use. Two types of use cases propel usage:
Step function change use cases: The new technology enables something that was done before to be done in a dramatically better way. Better usually means cheaper, faster and easier. For example, the evolution of horse drawn carriage to automobile is a step function change.
Entirely new use cases: The new technology enables something to be done that was previously unimaginable. Entirely new use cases are usually what propel new technology. Emerging industries are more willing to experiment with new technology than established ones. For example, high speed internet enabled video streaming. Video streaming wasn’t fathomed in the early 2000s when the internet was simply going to replace the mail.
Both types of use cases are supported by investment in the emerging technology. The more compelling the investment landscape, the more likely the technology can succeed. Crypto is a fertile investment ground.
Crypto = Fertile Investment Ground
Great investments have two attributes:
The business, protocol, project creates value
It’s misunderstood
Crypto shares both of these attributes. Crypto’s value is that it accelerates commerce. It allows (will allow) billions of people globally to transact instantaneously at low cost without a trusted intermediary in an auditable way. There are existing and unimagined use cases for this. Crypto is also misunderstood. It’s technology, cryptography, currency, commodity, Web3, Ape JPEGs and a landmine of scams all wrapped together. If everyone understood it, it would be fairly priced. Therefore it would not be a good investment. Crypto will become better understood as its value becomes more tangible and experienced in daily life.
Technology aside, there are four dynamics that make crypto a fertile investment ground.
1. Inefficient and liquid market
Crypto markets are inefficient. Information is not easily accessible and widely disseminated. Common business and valuation heuristics are not established. Inefficient markets are the source of alpha. ‘Alpha’ in investment parlance is the incremental return astute investors generate above the market’s return.
Crypto markets are liquid. The market capitalization of all crypto tokens, excluding stablecoins, is $900 billion. The average daily volume traded is $10 billion.
Crypto is the only asset class in the world that is both inefficient and liquid.
Typically markets are either liquid or inefficient, not both. Real estate is an inefficient market. Information asymmetry exists. Investors with an understanding of the local market can better source and underwrite investments. The tradeoff for this inefficiency is liquidity. It is not easy to buy and sell real estate. The stock market is more efficient than the real estate market. Information is standardized and publicly reported. There are fewer deals to be had. But the stock market is far more liquid. It's much easier to buy stock in a company than real estate. Typically, the more illiquid the market, the more inefficient. The more liquid, the more efficient.
Yet crypto is both inefficient and liquid. The combination of the two make it a fertile investment ground. Assets are regularly mispriced. Information is not evenly distributed. The conclusions drawn from the investment community vary greatly. Investors can also easily buy and sell positions.
2. Research edge
Crypto investors can develop more of an edge than tradfi investors. ‘Edge’ is investing parlance for your competitive advantage. There is no central source of information in crypto. No standardized reporting. Crypto investors develop an edge in surfacing and collecting information as well as analyzing it. There is a ton of on-chain real time information available in crypto. It’s just hard to access. Investors need to develop their own frameworks and heuristics. In traditional investing, nearly all of the available information is provided to the investors. Public companies file statements with the regulator. Investment banks collate relevant information for prospective investors in private markets. Frameworks and heuristics are established. An investor’s edge mostly stems from analyzing the data presented.
Crypto investors have more avenues to develop an edge. As a result, they have a higher chance of differentiating themselves from the investment heard. Differentiation enables investors to outperform the market. It’s a source of alpha.
3. Competition
Crypto is less competitive than traditional investing markets. Albeit, it’s a much smaller market. Good luck competing with Citadel in public market investing, Blackstone in private equity or a16z in venture. Citadel has an enormous budget to analyze all imaginable data sets and efficiently execute trades. Blackstone is a behemoth with tentacles in every industry to sniff out deals before they surface. A16z has developed a pedigreed name brand that startups knock on its door.
Investment juggernauts don’t exist in crypto to the same extent. Crypto is a fraction of the size of financial markets. It’s far less sophisticated. It’s mostly retail investors. Sophisticated investors have the potential to stand out a lot more in crypto than in traditional financial markets.
a16z Crypto is the largest investment firm in the space with nearly $9 billion of capital. Their brand continues to attract top caliber entrepreneurs. However, unlike traditional venture, in crypto liquidity events occur much earlier. Sometimes as early as the project launch. Investing in crypto projects is not limited to venture funds. Anyone can invest. In some cases, the market route has enabled investors to buy in at a lower price than the prior venture backers.
4. Institutional knowledge
Developing knowledge at an industry’s infancy will be enormously valuable. The research edge will wane. Competition will intensify. The market will become sophisticated. By the time that happens today’s crypto investors will be the most experienced, knowledgeable and established players. They will be best positioned to continue to compete.
In summary…
Crypto will accelerate commerce. It will follow a similar arc as prior disruptive technological innovations. All of the potential use cases at the outset are unimaginable. Boom and bust cycles are critical to the technology’s development. They serve a purpose. Assimilation into society occurs over time. If the disruption is successful, it will modernize all aspects of the economy and society. Crypto is a fertile investment ground. Crypto markets are inefficient and liquid, unlike any other in the world. Investors have more opportunity to develop a research edge and stand out from the crowd.
Stay curious.
Follow me on Twitter @samuelmandrew for my latest.
Technological Revolutions and Financial Capital. Carlota Perez 2002. (p. 29)
Technological Revolutions and Financial Capital. Carlota Perez 2002. (p. 29)
Carlota Perez 2002. / The Financial Times. Dan Roberts 2001. (p. 12)
Technological Revolutions and Financial Capital. Carlota Perez 2002. (p. 106)
Another great one Sam!