Analysing the crypto landscape in Feb 2021

Over the past few weeks I’ve been educating myself about cryptocurrencies, and related trends such as NFTs. There is a huge amount of excitement about the space and underlying technologies, which made me think whether I should also become part of it. Having done some research, as far as I can tell there currently are four main use cases for crypto:

  1. Storing value and hedging against inflation (HODL)
  2. Trading and speculation
  3. DeFi (Decentralised Finance): lending, insurance and other financial products done via DeFi
  4. Unique digital collectibles (via NFTs)

Here is how I think about each:

Use case 1 is the obvious one; Bitcoin for instance is up by around 150% in the last 3 months. While this bull run can’t be sustained forever and in the next 3 months BTC can easily lose 50% of its value, if you take a long term view you can see that Bitcoin tends to go up over the long term and the floor after each peak is higher than the floor before the peak. Probably everyone can take advantage of use case 1 by buying some Bitcoin or another relatively stable asset like Ethereum or Cardano, forgetting about it for 5 years and then coming back pleasantly surprised. While riskier than index funds, there are good arguments for why in the long term the value of these investments could multiply many-fold. As such, having a portion of your portfolio in crypto could be a good idea, but there is not much I can do to advance this cause, so let’s move on.

Use case 2 involves day-trading in the vast universe of speculative alt-coins (less mainstream crypto assets) – hoping to buy low and sell high. But future can’t be predicted, and a huge amount of people trying to do that end up losing money, not to mention the extra stress and time this requires. No thanks.

Use case 3 is interesting and has lots of room to grow. Imagine that you supply half a bitcoin as collateral, which is literally the only condition for a low interest (sometimes as low as 1% APR) $15,000 loan. No paperwork to fill, no one asks you a trillion question about your life and income, and the money is available instantly. This is already possible and growing very rapidly. As for me, I think the area is fantastic, but I’ve never been a finance person. Working in this area is probably better left to people who better know what they’re doing.

Use case 4 is getting big right now. NBA teams and European football clubs are already on it. Same with digital artists. In essence, NFTs are digital objects that can’t be copied, so now is basically the first time that legitimate unique digital collectibles can be done. Read more about NFTs here. I think this will also grow by a huge amount – imagine unique virtual Star Wars collectibles or Pokemon cards. Personally however, I’ve never been big on such things. I wouldn’t spend money on scarce digital objects with no utility.

I haven’t found anything in crypto beyond these four use cases that would A) be already functional with people creating value and B) uniquely enabled by the blockchain/crypto technology – something not possible before with regular software and databases.

There are a few ideas particularly related to social networking and monetising social status that I’m thinking about as of now; I’ll probably post more details soon.