Crypto

The best performing crypto coin of 2021 is Shiba Inu, up 2.4million%.

That’s a far better result than Warren Buffett’s 60-year total investment return and for buying what exactly?

Well, Shiba Inu was created as a parody of Dogecoin which itself was a joke crypto coin in homage to a Japanese breed of dog. I am not making this up because honestly you couldn’t.

There is a load of other crypto coins also up hugely this year such as Doge, Terra and Polygon.

A major reason these coins have done so well I suspect; is each are valued at a very very small fraction of a dollar or pound. So someone can buy 1million coins for a only few thousand dollars. 1 Bitcoin is currently over $55000.

It is well known that intuitively many people will think a million coins with a total value of X is a better investment that one coin with the same total value. It’s not obviously but if you don’t understand that then you’ve made a tonne of money believing something incorrect. Therefore the so say ‘smart money’ hasn’t participated in these gains, dumb money has smashed it. The stupider the better!

The roller coaster

I suspect the simple answer as to why this has occurred is the world has gone through a unique global experience which created a perfect storm of opportunity and heightened emotions.

  1. A global pandemic that initially had the potential to be a mass extinction event. Terror!
  2. A global financial response to hose free money everywhere.
  3. Stock markets booming into the teeth of the pandemic.
  4. Radical new medical interventions saving the day (Moderna/BioNTech with MRNA technology) Relief!

In short, the ultimate roller coaster ride mixing maximum initial fear with a successful completion resulting in maximum exhilaration. The motherlode of a collective adrenaline rush.

Couple this with digital innovations becoming mainstream allowing individuals to buy and trade any asset they wanted (Coinbase, Robinhood, BlockFi, PayPal and Square etc) and you had the perfect environment. People at home with free money, access to websites such as Reddit creating a community making everyone aware, with digital brokers giving the ability to transact cost effectively in whatever coin was wanted, in small size.

Is it all nonsense?

Ok, before going down the rabbit hole it’s crucial to state that anything said is not advice. The authorities in the U.K. and US are not allowing advisers to advise on crypto and are preventing the creation of mass market products such as ETFs in crypto currencies. Individuals can buy crypto coins, but they are on their own.

The Block Chain

Any blockchain is a system of interconnected computers which individually act in unison to verify and log transactions. The key is to understand there’s no hub or mainframe. The chain is global and every element of the chain is autonomous whilst working together.

This is a big deal because it decentralises everything. There is no hub so there is no country that can impose governance. It’s DEFI, decentralised finance.

It’s also a big deal because it’s unhackable, meaning because crypto currencies use blockchains; they are safe.

There is no Blockchain PLC. Any blockchain is created with individual software so it’s not an investable asset itself. What the technology allows to be created though is revolutionary.

The use case

When the internet 2.0 started to become visible the question most asked was what were its use cases, what could it do? The knock back was it was slow and clunky and difficult to use so the experience was interesting but limited.

Obviously, that changed as ‘network effects’ took hold. Network effects are powerful when many individuals all start to interact and use cases compound rapidly to improve and expand the overall entity.

The same question can be asked of Crypto coins currently, as the internet 2.0 early on.

It’s interesting and has some utility but very limited as of now.

Here again we need to differentiate between crypto coins and the Blockchain. The growth of DAO’s (decentralised autonomous organisations), Smart contracts, encrypted anonymous authorities etc are all Blockchain enabled technologies separate to crypto.

Bitcoin

There is a previous blog which gives a short history of Bitcoin. The perception as of now that the properties of Bitcoin make it analogous to digital gold. For any individual who wants to hold a liquid asset and is concerned at having it held in a bank in a specific country (say Russia, Iran or China as examples) then Bitcoin being DEFI, means it’s outside of any Authority risk. The use case for Bitcoin as a freely used currency is less clear as the blockchain protocols make transactions slow and cumbersome. This is good in that the protection from hacking is super high but bad for a mass adoption thesis.

Etherium

The coin related to Etherium is Ether.

Etherium is the protocol that uses the coins.

To put that in English, the easiest analogy to Etherium is the protocol used for the worldwide web (www) created by Tim Burners Lee, which is HTTP.

This was the standard language adopted by all programmers to build their software.

So, Amazon and Facebook and Google all used HTTP.

Now crucially in this case no financial benefit flowed to the creators of HTTP because it was given out for free. All the value accrued to the builders of the apps using it.

Etherium is a blockchain built to allow designers and programmers to use its protocol like HTTP as a compatible standard; Ether is the coin that will then be used.

If you buy Etherium you buy Ether, and the use case potentially is that unlike HTTP real value will flow to the hosting protocol.

Etherium is a much more scalable protocol than Bitcoin so should allow transaction volumes to be far greater.

Solana

This is a coin created by Etherium alumni which allows a higher level still of transactions to be processed than Etherium. The promise being it can in time rival the credit card companies such as Visa and Mastercard.

A central issue though is that Blockchains are likely safer at slower transaction speeds so the question unanswered is does the SOLANA model compromise security?

Picks and shovels

Whilst portfolios have not been allowed to invest directly into crypto coins it has been possible to invest in companies who are benefiting by participation in crypto infrastructure.

Depending on how far along the chain you go, there are a number of such companies already in our portfolios:

  1. PayPal and Square provide crypto wallets and purchasing facilities
  2. Nvidia design chips for the blockchain and crypto mining.
  3. Coinbase provides purchase and custody of crypto currency.
  4. ASML produce the machines capable of creating the most cutting-edge chips.
  5. Taiwan Semi use ASML machines to manufacture those chips.

It’s really early

Whilst the main technology markets have seen most of the 2020 winners rerate down in 2021 (Zoom, Peloton, Teladoc, Zillow, Ocado, as examples) which has been healthy. The crypto coin space has been on fire. It’s important to keep in mind though that it’s a super immature market which has been thrust to prominence far sooner than it may otherwise have been by the events of 2020.

The Metaverse or Web 3.0 which is best understood as the immersive web, meaning it’s the creation of a virtual digital world is currently being built by the smartest minds out there.

It’s going to happen just as the blockchain is going to increase in importance.

It seems therefore likely some crypto currencies will grow larger, and more use cases will be created for them within these new environments.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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