10 Insights from Cryptocurrency 2.0

DISCLAIMER: This is not financial advice; the article is for educational purposes only. These observations, Insights, and predictions are based on my direct experiences with Blockchain and Cryptocurrencies for 10 years and have seen it evolve, crash, morph and grow. I am not a qualified financial advisor, please consult a professional for investment advice. I am also not advocating investing in specific blockchain projects or associated tokens in this article.

Introduction

Crypto is not for the faint-hearted. I will not go into all the popular stuff you are reading and observing e.g., this is institutional investor play, the cycle is different, regulators are getting more comfortable, etc. Instead, let me provide observations from my own vantage point and insights gained from the network.

As Blockchain and the Crypto economy continue to gain momentum and scale, multiple companies are emerging and there is a lot of buzz around blockchain, decentralization, value chain definitions, communities, and interesting projects. While crypto and blockchain are here to stay, killer apps and use cases are just starting to emerge now. Here are some notable insights:

Insight #1: Cryptocurrency is not the Hegemony of Wall Street or Silicon Valley

This is really a global movement focused on a decentralized world. It spans industries, countries, sectors, cultures, and ideas. For the first time, we have seen more non-financial services use cases coming mainstream in 2021 (NFT, supply chains, media royalties, DeS, etc.) and the movement will continue to proliferate, exciting times for the rest of this decade.

Insight #2: The Fiat Decoupling

The one problem I have commonly observed is people spreading their portfolios thin, across many altcoins and assets; this is generally based on the internet hype, crypto PR, or influencer coverage. As cryptocurrencies have matured, it no longer makes sense to index them on fiat like USD or Euro. Most crypto markets are tied to BTC (not USD). When BTC does well, crypto markets do well. For example, if your Altcoin is worth $10 but went negative 25% to Bitcoin, you lost money in a bad position. USD will still matter to cash out, if you are in the “HODL” game then look at BTC rates first. Given the amount of greenback printed over the last few months in the US, inevitably, we will see downward pressure on the USD and value decline but given BTC is a deflationary asset by design, it is bound to rise to create the fiat decoupling effect.

Insight #3: Digital Transformation of Balance Sheets

Given the events in the macroeconomic landscape, many corporations are realizing that the cash on their balance sheet is a depreciating asset that can be converted into an appreciating asset through Bitcoin conversion. The obvious opportunity is to convert the USD (being inflated at 15% a year) into a scarcer asset like BTC which is deflationary by design. The actions were undertaken by Tesla, MicroStrategy, Mass Mutual, etc. are the beginning of a trend toward digital transformation and balance sheets. People move money from analog traditional Treasury assets like cash and bonds into Bitcoin. The ESG "FUD" created by the media has slowed this trend, but as better research and visibility to a better BTC carbon footprint emerge, it is likely to get back on track.

Today, we picture Bitcoin as digital gold and not a “like to like” replacement of the US dollar or Euro. This digital gold is sitting on the world's first digital monitoring network which functions many at an efficiency many orders of magnitude better than traditional gold assets. We can move it at the speed of light, program it at a sub-second level, and is an appreciating asset compared to the UD dollar (>200% a year for a decade). These characteristics have defined an institutional “safe haven” asset.

According to an example given by Michael Saylor (CEO of MicroStrategy), if you are a corporation generating $1b in cash flow and you buy back your stock then you are a billion dollars closer to insolvency. If you borrow $1b to buy your stock back, then you are $2b closer to insolvency. To create real shareholder value, you cannot capitalize the company with a depreciating USD (a liability of sorts) given money supply is expanding at 15% forcing downward pressure on purchasing power. A 15% degrading asset for 8 years creates a loss of ~75% shareholder value. In this scenario, it makes serious sense to evaluate the conversion of a balance sheet from liability to asset and analog to digital. The digital transformation of the balance sheet is a phenomenon expected to accelerate.

Insight #4: The NFT (Non-Fungible Tokens) Game

While this sounds like a new fad, non-fungible (non-replaceable) assets have been around for several years. For example, unique items such as website domains, copyrights, Twitter handles, etc. have caught the eyes of collectors and alternate investment gurus for years. Many of these could be taken away from people, but NFT can never be taken away unless you lose your key- they are unique and not mutually interchangeable. While NFT’s have exploded, many marketplaces are undifferentiated, and prices are running on hypes. The trend is revolutionary and here to stay, but only a few will survive the race and maturity curve to an ultimate value.

Insight #5: Gas Wars

The DeFi revolution has skyrocketed the adoption of Ethereum and the adoption of exchanges like Uniswap (UNI) etc. clogging of the Ethereum network. The demand has created a crisis with the gas fees and until EIP 1559 goes live or other types of scaling mechanisms/protocols, there are limited options on Ethereum. Until then, there are a few ways to hedge against the future gas crisis. Let us examine the options.

• The Chi (CHI) gas token is one such interesting way where you can literally buy into the gas prices you are betting on. The Chi gas token creates smart contracts when burned rewards through the inbuilt Ethereum feature. It is like reserving gas space at a certain pre-agreed-upon price, if it goes up you can essentially use the gas token you have created just like a call option.
• Oiler (OILER) token is yet another hedge using call options, it had built up a lot of hype on social media for introducing a new type of financial product which is a native parameter blockchain derivative on Ethereum. For example, a big exchange like Binance, etc. has a lot of withdrawals paying gas fees on Ethereum and if they gain the ability to predict gas fees over a long through derivates, they can control gas fees. This is a new DeFi paradigm in the infrastructure space.
• Competing protocols such as Cardano, Casper Labs, and Polkadot, etc. have changed their implementations have lower gas fees. Each independently is much superior technology and then in theory and but still building on their community and network effect as the scale decentralized applications in their own ecosystems. However, they do provide solutions that can offset the high gas fees and Ethereum network performance now, a matter of time.

Gas wars create more interesting insights with conflicting forces at play. Technology upgrades to platforms like Ethereum, Cardano, Casper Labs, Polkadot, etc. are pushing transactions to become cheaper by reducing gas fees in the medium to longer term. The rise in the price of Bitcoin continues to drive transaction prices higher on that Blockchain which adds to the stock price of publicly traded exchanges like Coinbase. At the same time, BTC moving off exchanges and ETH being staked and locked puts pressure on Coinbase revenue.

Changes in the cost of transactions will affect operating costs driving interest levels in cryptocurrencies players specifically in the e-commerce industry. Acquiring more crypto assets will attract online stores given it is cheaper to deal with than traditional fiat currencies. Whether it is possible to maintain this advantage in the long term, adoption and scale will largely determine the transaction speed and crypto’s spread as a means of payment.

The decentralized application space is competitive, the gas wars are only a catalyst as many projects fight for creating ecosystems and communities driving scale for the future. 

Insight #6: The DeFi Revolution

DeFi has become a noteworthy buzzword lately. However, there are many questions on its immediate and end state. Key questions to unravel include:

• Where are the different scaling solutions going and which ones will dominate?
• What about DeFi on other chains?
• How will the regulatory landscape look like?

Let us look at the path to the end game and try to piece the puzzle together. Decentralized finance shot into popularity in 2020 and at its peak in 2021, there was an astounding $75b of value locked in it, the volume on DEX (decentralized exchanges) also traded at ~$50b each month. Many tokens also saw significant value increases, with new projects launching all over. Corporations like Visa announced transaction settlement in USDC on Ethereum signaling exciting times for the DeFi space.

DeFi is at the crossroads, on one hand, different protocols are competing as alternatives to Ethereum, different scaling solutions are also emerging to alleviate high gas fees. Many DeFi solutions have challenges with maintaining centralization and security which they have compromised to attain scaling. Fortunately, most of these challenges are solvable we'll probably see a lot of bridges between different scaling solutions which should help with reducing friction on top of this the other approach is to create a whole ecosystem interoperable by default e.g., Polygon. The future of DeFi looks brighter than ever, although its final form cannot be predicted with 100% accuracy yet.

Insight #7: Altcoin Era Transition

With DeFi in 2020, a lot of new Altcoins have emerged on the scene and arguably some have even done well e.g., AAVE, Compound, Uniswap, etc. The new Altcoins have also made significant technical progress and improvements over first-generation Altcoins thus creating different winners and losers. Many hyped coins from the last bull run have stayed on the sidelines with limited ability to pick up steam from this rally. The trilemma between security, level of centralization, and scalability has made improvements and some unable to keep up have been left behind. There are different reasons for Altcoins 1.0 to not spike relative to BTC, some have done okay regarding USD – but the ratio with BTC is generally off balance.

A few Altcoins which have failed to deliver the pickup from the last season are Tron, ZCash, Monero, Ethereum Classic, Bitcoin Forks, Ripple (for regulatory reasons), Golem, Lisk, and many more projects which have slowed down or faded away. Many have also died, the entire list of these can be found on the Deadcoins website. There are many coins from the earlier cycle that has delivered promise and fortune reversal like Cardano, Stellar Lumens, and IoTA, etc. It is a wait-and-watch game with a few significant milestones yet to play out for these. Some of the dinosaur coins with a cult following are unlikely to go back up the hype curve as people chase the bright and shiny new projects.

Insight #8: Ethereum Supply Shock

Ethereum has morphed into a crypto commodity powering real use cases like DeFi, NFT, and inspiring new ecosystems. It has its shortcomings and ultimately will slow in growth or lose market share to more efficient players with advanced technologies, but its massive network effect is hard to replicate for the newer projects. A lot of Ethereum has also moved off exchanges given the issues with supply which has dented exchange fees attained through transactions, we are also seeing exchange offering Ethereum staking propositions. Ethereum is also burning many tokens as fees to upgrade, unleashing a deflationary effect which could propel prices in the short to medium term, but a longer-term market fracturing is inevitable.

Insight #8: Availability of Data and Metrics

Unlike the past cycles, we now have a ton of infrastructure, tools, and data to have better insight and predictability to the markets. For example, Glassnode can give on-chain activity, whale maps/whale alerts throw large transaction activities, AI-based tools like Messari, and Token Metrics provide visibility like never and we are seeing opinion and emotion-driven investors lose out to the data-driven investors in a race to accumulated Bitcoins.

Insight #10: Regulation

There are interesting patterns here. Many countries have imposed mild to draconian steps on cryptocurrencies on hand taking a clear stand many are launching their own versions of centralized digital fiat via smart contracts conflicting with their own views. It is also harder for regulators to take on individual retail investors willing to wage bets on their money directly or indirectly.

There have been advances in regulatory clarity over the past few years with IRS and the SEC designating Bitcoin as property which has been great for the asset class. As Bitcoin attains regulatory parity with other assets like stocks, commodities, and bonds, regulation will mature and many perceived barriers causing people to take a pause will vanish. With thousands of corporations adopting Bitcoin over the past 12 months and many more getting on board, people are acknowledging it as a high-quality asset just like traditional assets.

The fact is that legacy finance and banks are both outdated and slow to adapt to the innovative ways of emerging players. The new, innovative companies on the block have nibbled at the markets of the legacy institutions – this will either scale and disrupt the way finance works or legacy players will rewire their own companies. Decentralized finance is still a relatively immature and evolving space, it is a matter of time regulation evolves and will permit DeFi in a controlled manner. Time will tell.

Concluding Thoughts

Despite all the FUD and newbie panic, the fundamentals in this space stay strong. Blockchain is now a movement and for approximately a decade it has survived negative media reports, criminal exploitation, hacks, ICO scams, and direct assaults from people threatened by it. Crypto has thrived and will continue to evolve and grow. Transformational value through DeFi, NFTs, etc. will set the pace for this decade.