Crypto. Nice technologies, Bad Investment Models

Discussing Cryptocurrencies is almost unavoidable. The subject is trendy, exciting, and even fascinating. While the technology that backs it – blockchain – is undisputedly solid and here to stay, the case for cryptocurrencies is more complex to analyse.

Trading or investing in Cryptocurrencies is no longer a field for niche fintech start-ups in Silicon Valley. Banks worldwide have started providing such services too. Nowadays, the trading/investment business of cryptocurrencies is going mainstream. 

Cryptocurrency is promoted as a token,  digital money that provides a modern and innovative service with unique features (decentralised control through blockchain). The concept is sold as a currency, but it is bought as an investment. 

Most of the market’s hype is derived from its investment potential (Crypto as an investment asset class). Its value has grown dramatically during the last decade. Initial holders are millionaires or billionaires. These facts don’t go unnoticed in the investment world. There are incredibly speculative and investment opportunities.

Indeed, several central bankers don’t believe cryptocurrency entails key features for being a currency. Its most popular aspects are those of a speculative asset class, caused mainly by its limited supply and growing demand. At the moment, the practical service value of cryptocurrency is still limited, while its speculative value is extremely high.

Bill Ackman, a hedge fund manager, known not to be old-back from high-speculative initiatives, recently shared his opinion on cryptocurrencies on the WSJ:

“I think crypto is a fascinating phenomenon. I think it’s a brilliant technology. I kick myself for not understanding it. It’s one of the best speculations ever…But it’s not a place where I would feel comfortable personally putting any meaningful amount of assets. And therefore, I wouldn’t invest…our firm’s assets…because there’s no intrinsic value.”

In this Youtube Interview, Warren Buffett and Charlee Munger are not shy about their judgment about Crypto, stating its business model as an investment asset is solely based on the Greater Fool Theory. 

Nicholas Nassim Taleb calls Bitcoin a Ponzi Scheme. The Deal of Valuation Aswath Damodaran states that Bitcoins cannot be considered Millenial Gold because it does not hold its value during crises.  

Looking at Crypto, I cannot but think about the 2000 Memo of Haward Marks on the Tech Bubble. While praising the quality of the new technology ecosystem that would change the world, he highlighted how most highly valued companies did not have a business model: they had no profit, and some did not even have revenues.  The value of their stock was calculated on “eyeballs”.

He wrote: “Of course, the entire furor over technology, e-commerce and telecom stocks stems from the companies’ potential to change the world. I have absolutely no doubt that these movements are revolutionizing life as we know it, or that they will leave the world almost unrecognizable from what it was only a few years ago. The challenge lies in figuring out who the winners will be, and what a piece of them is really worth today”. 

[…] As usual, Buffet puts it as succinctly as anyone could: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

[…] I don’t think anyone would disagree that it’s one thing to innovate and change the world and another thing entirely to make money. Business will be different in the future, meaning that not all of the old rules will hold. On the other hand, profits come from taking in more in revenue than you payout in expenses, and I don’t think that’s going to change.

BOTTOM LINE:

The crypto ecosystem, with its blockchain, is widely recognised as an exceptional and innovative technology. Still, it does not mean companies and/ or Assets (crypto) should be priced independently from their capacity to generate revenue streams and hold a clear intrinsic value.  Great technology does not equal a great business or investment! In the case of Crypto, there are still too many Fads and Crooks out there facilitated by an unregulated market. (The FTX Scandal in November 2022 is a recent example). There is still too much financial porn.

When you buy financial assets to invest, besides “the returns ON the money” is important to secure “the return OF the money”. 

Keep it real. Sweat Your Assets.

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