One of my all-time favorite Clint Eastwood lines is from the movie Magnum Force: “A man has gotta know his limitations.”
I find that it applies to pretty much everything, but is particularly relevant to investing, where the human pitfalls of greed and overconfidence often get us into trouble. At breakfast this morning I heard one of the staff at my hotel talking about how he’s “really active in crypto” and “you’ve got to able to handle the volatility!” And how it will “break the hegemony” of someone or the other.
Slow down cowboy, I thought to myself. It’s a space rife with uncertainty, so be careful. If you got in 5 or 10 years ago, you made a great gamble and can afford to gamble some of your winnings, but if you’re wading in now, its a different game.
Investing is hard. Which is why I generally tend to favor algorithms which are simple and consistent, over humans who tend to be complex and inconsistent.
But there are notable exceptions, like Warren Buffett, Stanley Druckenmiller, Seth Klarman, and Aswath Damodaran.
What’s particularly notable about Aswath is that he keeps score. His predictions are all out there on the Internet, going back decades. And when you keep score, the market invariably humbles you, but you have a chance to get better.
Aswath Damodaran is brilliant at what he does. And because he keeps score, he remains humble and keeps getting better. Its always fun talking to him about investing. So, check out my episode of Brave New World with Aswath.
Cryptomania
I find the current media coverage on the crypto space somewhat vacuous. It feeds FOMO, to the point where I seriously considered buying virtual estate next to Snoop Dog before I slapped myself back to reality. I should know better.
The high degree of wealth concentration in crypto markets is disturbing. In the top two crypto platforms, namely, Bitcoin and Etherium, less than 1% of the people control at least a third, and possibly more than half, of the supply. The concentration of miners and exchanges, is equally lopsided. It smells of high systemic risk, and where a few have the most to benefit from raising prices. Unless Bitcoin becomes the world currency, the main reason for buying at the moment – with all the regulatory uncertainty – is the greater fool theory, but you don’t want to be one of the later fools.
It would be interesting to know the distribution of returns on Crypto in the last few years. Most young people I know who got in over the last couple of years are either losing money on crypto or making peanuts. “It will come back” is a familiar refrain “just got to hold on” and “tolerate the volatility.” Feels like gambling to me.
What’s the Killer App: Relationships?
What’s the “killer app” for crypto has been a common question for some time. After all, there’s usually a killer app with every new technology. Like the Web Browser, Search, and Whatsapp, that we saw with the current version of the Internet. What is it with crypto?
Its hard to take the “dark web” killer apps seriously, like hiring hitmen or making payments in North Korea. I’m not convinced about “payments” as the killer app either, with transactions fees ranging from tens to hundreds of dollars, compared to a few cents on an existing network that is optimized for payments. Virtual estate doesn’t convince me either. My valuation guru guest Aswath Damodaran isn’t ready to buy a virtual plot on Sandbox next to Snoop Dog either. I’m going to wait for his valuation of Sandbox.
I think NFTs are the building block for the killer app for Web3.0: digital relationships. The relationships can be expressed as code or “smart contracts,” and can cover pretty much anything among entities that could include governments, businesses, individuals, or their avatars. Taking about avatars, I predict that people will interact in the digital world increasingly through carefully-curated avatars that project our best digital self into the metaverse. I discussed this a few weeks ago as a guest on Matt Mulford’s TRIUM podcast.
An NFT is a “digital asset,” meaning that it is rendered digitally. But how does a digital asset acquire value?
I’m not moved by the hype around pixelated monkeys that are worth ten grand for the bragging rights of owning the “original!” The notion of an original in the digital world seems like an oxymoron: if two things are identical, who cares which came first or which one you own? If two Mona Lisas are EXACTLY the same and no one can tell them apart, does it really matter?
While an NFT is a digital asset, I believe its value will mostly be derived from connecting it to something real and unique in the real world. My house is real and unique. Snoop Dog’s Versace jacket is real and unique. If I stand outside the long line at the “Kith” store on Bleecker Street and buy a purple Nike sneaker for $1,000, that’s real and unique. Nike knows when I bought it, and might give me or the next owner a deal on the pink version.
What’s interesting is that the NFT can express and enable any kind of computable relationship between entities. The NFT can, for example, track how many times the physical asset changed hands, or implement “rules” or “smart contracts” associated with its acquisition and use -- like requiring that its holder be older than 18 years, taxing/rewarding its holder – pretty much anything. My colleague Arun Sundararajan has a great piece in HBR earlier this week on this kind of use of NFTs by brands that can allow us to “showcase our non-digital lives in our digital spaces more expansively and more authentically.”
It would be fitting for the killer app of the decentralized web be one where relationship building becomes decentralized as well.
Investing in the NFT Space
So, what’s the investment opportunity in the NFT space? I told Aswath that I felt like a chump for how long I waited to invest in companies like Google after their IPOs, and I don’t want to miss the boat this time! So, what’s the next Google-like platform in the Web 3.0 space?
Before you get too excited about identifying winners, here’s an inconvenient truth about the current state of the decentralized world of Web 3.0: it isn’t decentralized! in some ways, it is even more centralized than Web 2.0. Check out this post by a “crypto native” for a dose of the current reality of Web 3.0, but here’s a snippet that made me take note of the fact that no one wants to run their own servers:
Imagine if every time you interacted with a website in Chrome, your request first went to Google before being routed to the destination and back. That’s the situation with Ethereum today. All write traffic is obviously already public on the blockchain, but these companies (Infura and Alchemy) also have visibility into almost all read requests from almost all users in almost all dApps.
Infura and Alchemy? Are they a potentially new set of tech monopolies in the making?! Based on their recent valuations, which are quite large, it looks like the “smart money” has already made a ten to hundredfold return on their investments in the two. Will the crumbs be sufficiently large after they go public? Hopefully.
Until then, stay safe, and let’s hope that Putin’s invasion of Ukraine unites us and strengthens liberal democracy around the globe. COVID was a terrible crisis to waste, but I am hopeful we will do better this time.