How To Succeed In Blockchain Investing Beyond The Cryptocurrency Roller Coaster
In 1849, a young Bavarian immigrant headed to California’s gold fields to make his fortune. But Levi Strauss wasn’t interested in the back-breaking work of panning for gold in a mountain stream. Instead, he set up shop in San Francisco, selling ‘49ers the pans, picks, and pants they needed to succeed.
Now we’re in a far bigger, far more complicated gold rush, this time around cryptocurrencies and other blockchain-based technologies.
Once again, you can do the “mining” yourself, as some do, playing the averages with banks of expensive computers and access to cheap power. Or you can buy already mined Bitcoin and Ethereum, then do the HODL, a misspelled motto of partisans committed to holding on through crypto’s many gut-wrenching ups and downs.
Rather than just HODL, though, smart long-term investors should instead consider the Strauss method: Investing thoughtfully in the companies whose technologies will bring blockchain to the masses, while giving the miners, investors, analysts, and even regulators the tools they need.
For investors with more capital, ambition, and comfort with risk, you have more blockchain options than ever. Government regulation remains relatively late and light, and companies are innovating like mad, finding new ways to use blockchain technologies in potentially game-changing ways. Before I list a few promising categories, let’s put down a few caveats.
First, you’re not a fan choosing a sports team. You’re making a financial transaction, investing in early-stage companies in a fluid and dynamic sector. So much can go wrong with any one company that it’s self-defeating to bet on just one horse this early in the race. So consider investing in more than one company in a given category (just don’t join boards to avoid any conflict).
Find sectors where technology or applications are defensible, or hard to legally and easily replicate. Then do your research, understand the pain points, and which competitors are addressing them well.
As an example of what not to do, there are dozens, if not hundreds of crypto exchanges. Traditional finance people love crypto exchanges because they look familiar. But very little differentiates most blockchain exchanges beyond scale and some perceived level of security. That’s not enough, by itself, to make most exchanges worth your high-risk, early-stage investment.
Instead, consider “plumbing” and infrastructure. Lots of companies are trying to replace credit cards, a $150 billion business in 2019, according to the Federal Reserve Bank of St. Louis. Traditional credit cards securely and quickly process millions of transactions a day through multiple, tightly integrated layers of middlemen.
Blockchain and cryptocurrency promise to flatten and simplify that process, while generating billions of dollars for the contenders that do it better than the incumbents. Needless to say, no one has solved this challenge, yet.
More generally, crypto credit cards are part of Decentralized Finance, or DeFi, which keeps calving off new ventures and categories like icebergs off a glacier. Rather than embrace all of DeFi, it’s best to dive deep in a few specific corners that promise to solve real-world problems, and do it better, bigger, faster and more securely than legacy systems. I’m interested in the way the blockchain can be used to disintermediate all of traditional banking — credit cards, checking, savings, everything.
Another such area involves the digital tools that let people stake, or loan, their cryptocurrency to others, in return for interest on repayments. Staking puts crypto holdings to work, while turning the owner of those holdings into something like a bank themselves. But the tools enabling that process have lots of room for improvement.
In similar fashion, peer-to-peer payment systems need a blockchain overhaul, reducing middlemen and fees, between all kinds of small-scale transactions.
And disintermediation as a rule is an opportunity across the blockchain world. It extends even to areas such as cloud computing and social media. Find the companies transforming those sectors of the digital universe, and you’ll find a lot of opportunity.
There’s also opportunity in brand new sectors. Non-fungible tokens, or NFTs, have exploded in the public consciousness in recent months. They’re increasingly embraced by artists, musicians and other creatives, as well as legacy publishers with libraries of material they can repurpose and resell.
But aside from all that attention and some eye-popping auction prices, NFTs remain a complicated, expensive, and clunky sector.
How to best showcase your NFT collections, for instance? How to connect virtual assets with In Real Life ones (called VIRL by some)? How to move assets from one market to another? Creatives love NFTs because their work can find new markets. But for millions of fans, NFTs still need a lot of improvements throughout the chain of ownership, collecting, exhibiting, and sharing.
Yet another promising area is decidedly much less fun than NFTs, but really important: creating easy tools to track and report cryptocurrency gains to the IRS (You are reporting your gains, right?). Again, it’s a huge opportunity for the company that gets it right, and will become only more important as blockchain gets more widely embraced, and closely regulated.
As you can see, blockchain provides lots of nooks and crannies for innovation and investment. So how do you find the companies worth your investment dollars? For all that’s new here, the fundamentals of traditional smart investing still hold (or HODL). Do your research, focus on specific sectors, bet on more than one horse, and keep evolving your strategy as the industry grows and changes.
