Want to Successfully Invest in Blockchain? Stop Buying Crypto
In 2020, the savvy few who have invested their personal time and energy into becoming an integral part of the top global decentralized blockchain networks will be the most handsomely rewarded, rather than the pure speculators whose purchase of coins and tokens contributes greatly to price volatility, but does nothing to increase the real value of the network.
PART I — Size Matters
It’s Jan 2, 2019. I’m talking to Charles from San Diego, who I just met on a ski lift overlooking Lake Tahoe. He asked me what I do for work, and then reacted by expressing his confusion about Bitcoin. He admitted he was hesitant to buy any Bitcoin and asked me why I thought that “better” coins -and future coins that don’t even exist yet, being created by the likes of Microsoft, Amazon and Facebook- won’t “blow it completely out of the water”, causing the price to fall to zero.
“Brace yourself, Charles.” I thought. “You just asked the wrong person the right question.”
“Are you on Facebook?” I asked him smiling.
“Sure.” he replied.
“Well you know there are lots of much better social media platforms out there?”
“Well sure…”
”Like, have you heard of Steemit? Which pays you tokens for getting likes on your posts?”
“Ha, no, that’s cool. It pays you a crypto-currency for getting likes?”
“Yep, and the more likes you get, the more valuable your likes are to other users.”
”Huh, that’s pretty cool. You said it’s called ‘Steam It’?”
“Yeah Steemit with two e’s. The tokens were worth a couple bucks each for a little while there. And there are a lot of other really cool new social media platforms as well, but you and I are both still on Facebook, basically because they have the largest network by far… am I right?
“Yeah pretty much, though I’m also on Instagram and LinkedIn, and they have pretty large networks as well.”
“Right, yeah, that’s a good point, those are two newer networks that have grown pretty large rather quickly… but don’t overlook how being connected to Facebook’s network has facilitated that growth. Facebook is like the primary network that many other networks now branch off of. For example, I get about 50 sign ups a day on my wellness blog, but that’s really only because you can sign up with one click if you are logged into Facebook. Signing up lets you access the forums and other content on my site. So even I tap into the Facebook network and use it to build my own.”
“Sure right, just like Airbnb and…uh….”
“Right yeah… there are many examples. Facebook has been embraced to such a degree that even new social media platforms that offer superior features have still remained mostly unheard of and have failed to compete with Facebook’s size….and they will likely continue to fail, precisely because new networks can’t manage to get big enough to compete with Facebook without using it’s network themselves, which only serves to reinforce Facebook’s dominance.
…It’s exactly the same with Bitcoin.”
PART II — The Curse of Euphoria
Flash back to Dec 17, 2017. I was hosting over a dozen friends at my home on Lake Tahoe for a crypto investing retreat, helping many of them to buy their first Bitcoin just before the whole market began to crash. Now, I am no crypto guru, but had been a vocal supporter of Bitcoin and crypto in general for awhile. Many friends know I have a degree in finance and have been successful in managing my own investments, so as the crypto market euphoria began to sweep the masses -especially right after Thanksgiving, I began getting Facebook messages from a dozen friends a day asking me about how to invest in Bitcoin, what other coins I thought were good, which exchanges were trustworthy, how to set up desktop wallets, how to read charts, etc. Due to being overwhelmed with interest, I decided to host some retreats at my home to walk friends through the fundamentals.
What really disappointed me most from these offerings is not just how ill-timed they ended up being -literally right at the height of the market euphoria- but also how few of my friends were interested in mining, or really even using the blockchain to transact with at all. Some of them were interested, to be fair, but they mostly just wanted to learn how to trade crypto to make quick profits.
Now of course, there is absolutely nothing wrong with buying low and selling high, but it is essential to realize that most of the people who made big profits in 2017 had been invested in crypto long before that -because they truly believed in the technology- and those who really made a killing had long been invested in mining. Those who bought into crypto coins and tokens in late 2017 as pure speculation to try and make a quick buck mostly all lost their investments.
Its critical here to understand how investing into mining is comparable to opening up a franchise for a company. Mining directly contributes to the growth of a given network, just like opening a franchise directly contributes to the growth of a company. Simply buying and holding a crypto coin or token is like speculation on a stock, wherein profits can be made and value obtained without doing anything to support the company at all.
Using a coin or token to transact for daily needs -or in the case of 3.0 blockchains like EOS, using the token to claim bandwidth resources on the network and use dApps (some my favorites on EOS being Chintai and EOSPlay, by the way) is comparable to buying a company’s product, which is the very simplest way to truly support a company and help to increase its value. The more a blockchain is used, the more valuable it is, just like how a company’s stock price sustainably increases with higher sales. Investing into a franchise (mining) and actually buying the product (transacting for daily needs, or staking tokens to use dApps) both serve to gradually and sustainably increase the real value of a blockchain network.
In contrast, the more pure speculation on an asset-without any of the above mentioned fundamental supports- the more that volatility, disruption and ultimately devaluation will occur -in any given asset- and especially a crypto asset. Pure speculation causes bubbles that skyrocket and then burst, and crypto-currencies -with their small market caps and unregulated exchanges- can be very easily thrust into massive melodramas by a mere handful of speculators.
PART III — Building Blockchains for the Future
So now imagine for a moment, what would have happened to Bitcoin’s price if all of the starry-eyed new investors who bought in as pure speculation during the market euphoria in 2017 would have invested that money into a few nice ASICs and an array of solar panels to mine Bitcoin with instead? I’d bet a million HOT that the price would not have skyrocketed to nearly $20k in a matter of months and then crashed back down almost as fast.
Instead of hordes of speculators causing a bubble and crash, there could have been hundreds of billions invested into developing a more secure and resilient network, which would have increased the real value without spiking the price. If investors around the world had invested their money into mining for a few years instead of just buying coins, this would have tremendously supported the real growth of the networks, and would have caused a much slower, steadier and more sustainable price increase per coin.
The real value of a blockchain is based almost entirely in the size and usage of its network, which is directly impacted by all the typical blockchain pissing contests like Transactions Per Second (TPS), privacy features, accessibility of dApp layer software coding languages, strategies to preserve decentralization, etc. So the more people who invest long-term into creating and using any given blockchain network, through mining it, hosting nodes, using it to transact, hosting and using dApps, storing data, tracking products, etc., the more that network’s coin or token will gain real value.
In my opinion, the fact that Bitcoin is still retaining even 1% of the value it gained in 2017 is not due simply to the balance of bullish buyers and bearish sellers in the market, but much more fundamentally tied to the fact that the Bitcoin blockchain network has continued to see very substantial growth and development, despite the price consistently falling throughout 2018.
There is a ton of new investment and development happening on Bitcoin at all levels, and thousands of new users are joining daily. There is now a satellite in orbit which will allow Bitcoin transactions to be sent without an internet connection; development of the massive Lightning Network project is making great progress and gaining hundreds of new users and merchants; many other improvements are happening as well, including various new software layers which will allow dApp development directly on top of Bitcoin in a wide variety of coding languages.
Bitcoin developers have been focused on what really matters, which is not current market price, but the growth of the network and development of the platform. They, like Ethereum devs, have been working overtime in 2018 to develop their network so that it can continue to maintain dominance in the space over the long-term. The factor that will determine which coin price goes the highest is really very simply whichever network has the most integrated and loyal users, and this is not simply determined by having the highest TPS, the best privacy features or greatest dApps, but rather, by having users who truly believe in the promise of the network long-term and are incentivized to participate in both the creation of the network through mining and hosting nodes, as well as in using it for making many various types of transactions.
Many have gawked at Bitcoin’s Lightning Network because it basically requires everyone who uses it to run a full node. But when you see that the underlying value of a blockchain comes from having the most users who are committed to participating in both creating and using the network, then you see this is actually a genius strategy for dominance in the space.
Likewise, Casper/Sharding (now called Serenity) promises an Ethereum 2.0that will allow practically anyone to participate in mining on the network without having to load up on pricey GPU rigs or spend a ton on electricity. Instead, anyone will be able to mine ETH on their laptop, phone, tablet or in the cloud by staking an investment of tokens in a light-client Proof of Stake wallet.
To my eyes, the real goal of both Lightning Network and “Serenity” Ethererum 2.0 developers is not simply to increase transaction speed and scalability, but to increase the overall level of integrated user participation (which with smart design, can also serve to improve both TPS and the level of decentralization.) These new upgrades on the world’s two biggest blockchains (by market cap) will serve to allow and incentivize more users to directly participate in both creating and using the network in their daily lives… and this is precisely what drives the real value of any blockchain network.
PART IV
A DASH Case Study: Buy, Mine or Stake?
So now to really drive this point home, I want to walk through the top three ways to invest in DASH, and look at the overall impact on DASH’s value that each of these different options would have. Remember that when we invest our wealth into an asset, it is extremely wise to do anything we can to support the value of our investment, and to not participate in activities that serve to deflate it.
Buy & Hold
The first investment option is simply to buy and hold DASH. This, of course, has some small effect on the price. But unless you are a “whale” and are buying or selling millions of dollars worth of DASH, then your purchase or sale is very unlikely to affect the price much at all, and it certainly does not increase the real value, as we have discussed.
Now if we imagine that everyone who wants to invest in DASH simply buys it and holds it -perhaps even keeping it on an exchange wallet, ready to sell instantly at the next big pump- then there would be no new masternodes providing increased liquidity and speed to the network, and no new hardware miners to help verify the on-chain transactions and preserve decentralization to prevent 51% attacks and maintain network security. The more that people simply buy and hold DASH without contributing anything to the actual growth of the network -as we have discussed- the more that the price becomes unsustainably inflated.
Mining
Mining DASH with an ASIC (D3) in January 2019 looks on the surface, from a short-term perspective, like a very bad investment. But let’s take a closer look at both the numbers and the impact that this investment into mining has on the value of the coin.
You can purchase one D3 ASIC miner and a Bitmain power supply for a total of $250 (I did on Amazon anyway, prices may vary) and run the single miner for 1 year (at 10 cents a KwH),paying around $800 total in annual electricity costs + the $250 in equipment costs. This will mine approximately 3.2 DASH coins, and about 0.2 of them will go to pay mining pool fees, for a total net gain of appx. 3 DASH, and a total cost of $1050.
To the short-term mind, its clearly wiser to just take option #1 and simply buy 3 DASH coins at current market prices of around $75 each (on 1/2/19), for a total of just $225. This is obviously a much cheaper price per coin than mining them over a year’s time for roughly $1050 in costs, and so it looks on the surface to be a much smarter investment to just buy the coins.
But now lets stop and examine how investing into mining DASH, even at a seemingly much higher cost than buying it at current market price, serves to sustainably increase the value of the DASH coin. When miners invest into equipment and continue to pay the power bill to run it, this means they believe in the future of that given network. If they really do believe in it, then they will even be willing to mine it at a short-term loss for many months and even for many years. The more that miners are willing to continue to invest into mining any given coin, despite its current low market price, the more the market will begin to assess that the coin is undervalued, due to the strength and resilience of the network. Speculators will buy in, and the price will rise.
Now lets flash forward to 2020, when the next Bitcoin Reward Halving occurs. This is when all mining rewards are cut in half, but miners will still spend the same on overhead. Miners are likely to hold all earned coins until the price goes up, in order to eventually cover their costs and make a profit. So it’s likely that another big price increase will begin at this time, which also very likely will snowball into another big bullish speculative market wave cycle.
DASH miners -who let’s say have been mining at a loss (on paper, compared to buying equivalent amounts of DASH at market prices) throughout 2018 and 2019- will then be able to sell their mined coins at a hefty profit, even though they were mining them for years at what looked like a steady loss.
This is exactly the opportunity that was available to the miners of hundreds if not thousands of different crypto-currencies in late 2017. Many miners who had been mining for a long time stuck with it even during the down market times, even when mining didn’t make sense from a short-term perspective. They did not simply buy into a coin that they could dump in an instant, they made an investment into algorithm specific hardware and coin-specific software which comprised the very infrastructure of the networks that they were investing in.
So they kept their major infrastructure investment alive by continuing to invest into maintaining the basic operating costs of their “franchise” into mining, and so continued to accumulate coins. This long-term strategy paid off massively in 2017 and I believe will be viable once again in or around 2020 for those who are willing to take a more long-term view and put more effort into truly supporting their investment.
Masternodes
DASH is one of the few blockchain networks that is supported by both Proof of Work ASIC miners and Proof of Stake masternodes. To explain to any newcomers in a single sentence, Proof of Work mining uses energy intensive mining equipment to create a secure network while Proof of Stake mining uses token deposits -aka “stakes” of liquidity- stored in wallets on desktops, phones or cloud servers, in order to create a network which is arguably less secure, but also far less energy intensive. DASH currently uses both POW and POS at the same time. Essentially, POW provides DASH with security and decentralization, while POS provides it with speed and liquidity. A POS DASH masternode (1000 coins staked, locked & earning 7% APR rewards) was worth over $1 million at the height of the market in 2017, and at writing, has fallen to around $80k.
In 2019, you don’t have to have $80k to buy 1000 DASH in order to stake the coins in a POS masternode and earn 7% APR. There are now various DASH masternode sharing pools which allow anyone with as few a 25 DASH to participate in earning passive rewards for staking their liquidity on the network. Not only does staking coins in a shared masternode provide a return on investment, it also serves to increase the real value of the network.
CONCLUSION
Despite the many conspiracy theories out there as to how and why the crypto market pumped to nearly a trillion dollars and then back to $200 billion in 2017–18, in my humble opinion, it is most likely that the massive speculative bubble which occurred -and nearly ruined the already dubious reputation of crypto-currency in the process- was caused, not by the central banking cartel, Bitfinex & Tether, Coinbase & Charlie Lee, or even Roger Ver & Jihan Wu, but much more simply by the hordes of purely speculative new retail investors who wanted to make a fast buck on this crazy new asset they didn’t really understand or believe in.
And, of course, it was precisely these wide-eyed newbies gambling big for a fast buck that got dumped on by those who had long ago invested into the real infrastructure of decentralized blockchain networks. This is why I say that if you want to successfully invest in blockchain, stop buying crypto! Instead of speculating on a portfolio of many various coins and tokens, realize that there is more success to be had by researching carefully to find a few (or a few dozen) blockchain networks that you truly believe will stand the test of time, and then invest into being an integral part of the network.
Directly investing into both POW and POS mining as well as POS masternodes is very arguably the most effective way to support the value of your blockchain investment. And to ensure that the network you have invested into grows and stays relevant, you really want to exchange at least some percentage of your mining rewards for everyday goods and services, wherever possible. You want to use the blockchains that you mine or invest in. This type of real use is precisely what blockchain networks and crypto-currencies need to sustainably gain value over the long-term. Moreover, this is what decentralization is truly all about: cultivating a vast network of users whose widespread cooperation serves to create a private network that can be safely, affordably and profitably used by all stakeholders.