Bitcoin City and the future: where is the value of cryptocurrencies?
Do not expect here a quantitative analysis, but only some analogies that can stimulate thinking about investment opportunities in the crypto field.
Look to Bitcoin as a city where people are building innovations. A land limited to 21 millions m2.
We are still exploring what can be built in this land. What if someone could rent your part of the land and pay something for that? This is being explored in some projects in the Decentralized Finance (DeFi) area. How to have a simple way to bring to this city the activities of lending and borrowing money?
Until now the market developed a lot around this city, with exchanges, wallets, miners. One of the exchanges, Coinbase, may make an IPO this year.
In this moment of building on the land, I believe the greatest advances will come from the financial area. Here lies the first wave of opportunities. We have a big number of crypto millionaires that could find a way to invest their bitcoins and earn interest without leaving Bitcoin city. In this analogy, Litecoin can serve as a complement to Bitcoin, as a lab of monetary innovation and working as one of the currencies of this city, as it is faster and costless. Moreover, it takes advantage of Bitcoin technology advances as the networks are similar. As the transfer of this land becomes more expensive, we can expect an impulse for these other cryptos that work as currency in this city.
The smart contract platforms as Ethereum and others are the infrastructure of this city, the streets, public lighting and sanitation. Each platform, one neighborhood. These neighborhoods are under development and we are going to discover which one will better serve their residents in terms of cost and scale.
Something to keep in mind. Every sector with high growth open space for competition. When we talk about smart contract platforms, it is possible that we see fierce competition and we are far from knowing who are the ones that will win. A boom of stablecoins is one of the drivers that increase the demand for these platforms and tend to gain traction as this bull market advances and investors realize their profits. On the other hand, a regulation and possible weakness in some of these stablecoins can retard the adoption on a larger scale.
Bitcoin city is long term business. As happened with the internet, we will have bubbles of excitement and only after years of hard work from the ecosystem, we will have important deliverables for the mainstream. We will see traditional players using this technology. One current example is Paypal broadening the access to Bitcoin, Litecoin, Ethereum e Bitcoin cash.
In waves, highs and lows, we are going to see this technology permeate our daily life. The mainstream will not need to understand how it works technically, but only use it to solve their needs. Just like the internet today.
The big question in this innovation tsunami is: where is the value? Following the lessons from Warren Buffet and Benjamin Graham, the value is where we can find entry barriers. Where are the entry barriers in this crypto land? In which projects we can find the power of habit, high substitution and search costs? The substitution cost is related, in the case of digital platforms, with the network effects. In other words, more users in the network, more exchange between them, more value the platform has and harder to change for another platform.
As Bruce Greenwald says, the biggest entry barriers are the combination of attributes related to users/clients with scale economies. In the case of Bitcoin, economies of scale make this city safer and more protected from foreign attacks.
Investing in projects inside this city is a business of Venture Capital. Some projects will be tenbaggers, multiplying the capital 10x and many others will have zero value in the end. Also, to the ones that invest in this wild west, custody risks must be observed.
We cannot know now what will happen in the next 10 years, but we have a sea of possible paths that will be interesting to follow. Subscribe to this newsletter to follow specific project analysis in the next weeks.
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