Investing in a Financial Revolution : How I do it ( Part 6, Economies and Scale )

Cryptocurrencies continue to rise, both in adoption and in price. The whole Industry has had its own internal Revolutions and popularized new Industries within 1 Year and a Bull-run cycle. These new Industries were there before, just nobody knew about them, just like few know about Cryptocurrency in traditional Finance. But everybody is starting to notice the potential of what Cryptocurrency can bring and what it is capable of. Critics have less and less reasons and arguments to discredit it and slowly the Technology Adoption Life Cycles are moving forward towards the inevitable. The question before was never IF, it was always WHEN. The questions now are : how long will this last and how far is there room to go. And most importantly the question of whether Cryptocurrencies have reached a tipping point.

The tipping Point

“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident”, by Arthur Schopenhauer.

The Cryptocurrency Industry is only now starting to go mainstream. With many important and rich people talking about it. Many governments, institutions, companies and banks slowly implementing Blockchain technology into their systems. Many regulatory concerns slowly fading away as frameworks for regulatory clarity are starting to emerge and on top of it all it is becoming easier and easier for anybody to be a part of this Revolution. But has it reached a Tipping Point ?

Tipping Point is when an idea, a trend or a social behavior crosses a threshold, tips, and spreads like wildfire. In the book “The tipping Point” by Malcolm Gladwell, some factors according to the author, seem to influence and ultimately initiate this spread. The book talks about this concept in a bit of a different context, but I found some similarities in the Crypto world that could explain this recent rise of the Industry’s popularity.

The book suggests that there are 3 main Rules within a Tipping Point :

  • The Law of the Few ( The social factor in Crypto )

Malcolm Gladwell suggests that three types of people contribute to the success of the spread. Connectors, people who know many other people. Mavens, information specialists. Analysts, researchers and developers in our case. Salespeople, social persuaders and influencers.

The growth of the digital world made it so all of these people could be more interconnected and have a higher and faster impact on the whole Industry.

  • Connectors nowadays have their own shows on television, social media or online video platforms, encompass many different demographics and have the ability to reach out to almost any corner of the digital world. The word about this Revolution is slowly spreading to every person ( with access to internet ) in the world, so much so that in some 10 years everybody would have heard about it at least once in their life. Even people without digital access will likely hear about it from others. The spread of information today is unimaginably high. Add to that the fact that most Cryptocurrencies are Globally available ( in countries where it is banned, peer2peer offer a solution ), Censorship Resistant and are not limited by traditional Stock Market rules such as Times of day that they can be traded. With it all you have something that spreads fast and something that most people can easily get. Take the recent surge of the meme Cryptocurrency Dogecoin and its biggest influencer Elon Musk as an example. It took him a couple of tweets to create a trend that spread like wildfire in all of the social media. He introduced so many new people to the world of Cryptocurrencies, because many young people look up to him. After being introduced to this new Financial paradigm, some of these people will be eager to learn more and want to participate more, by Investing, Building and Spreading the Information even further.
  • Mavens. These information specialists have the ability to perform Research and Analysis on a larger scale, thanks to the fact that most Cryptocurrencies are Global and Accessible ( Blockchains ledgers are open and public and most Cryptocurrency Projects are open-source ). Due to it being digital, not only is it cheaper ( due to available technology such as stronger and faster computers, stronger algorithms and Artificial Intelligence ) it is also faster and easier than performing Research and Analysis on something that is non-digital. For example, it is much easier to create Analytics and Statistics Platforms that would show the Performance of a certain dApp or Network than it is to Access the Performance of a Traditional Business of almost any kind, as long as it is not focused on digital Services. All of this is coupled with the fact that Mavens can give access to their findings and results to virtually anybody in the world. The information they convey to the Public has also become easier to understand since they started to do it in a more simplified way so that ordinary people could understand it. There is also a noticeable impact of Digitalization on the level of Knowledge and Intelligence of the global Population. Digitalization made it so Information would be easily accessible to more people, which in turn made it easier for them to learn. All of this made it possible so that more people can understand the data that these Mavens produce.
  • The presence of Salespeople can also be seen in the Cryptocurrency world, although in a different way since their presence is boosted by some factors. One which correlates very highly with the Stickiness Factor ( or the dream Factor ). Some form of advertisement is done on a daily basis by the Connectors and if Cryptocurrency coins and tokens can be seen as Investments into the Protocols, it means that Connectors automatically become Influencers ( Salespeople ). It will be clearer why once you read about the other two factors below. But there are, again, things in this Industry that help this concept be more powerful. Global availability plays a part in it. It helps to paint a clearer picture of an Investment and also gives the ability to Invest with any amount ( All Cryptocurrency coins and tokens are divisible, so you don’t need to have 1 coin / token, you can have any fraction of it and still be able to use it and even able to participate in Governance in some cases ).

If you are researching a Cryptocurrency Project, you will notice that some of them have higher Transparency than many Businesses today. You can’t compare the quality of Transparency of a Tech Giant with a newly created Cryptocurrency Project that dedicates more money in research and development than in releasing Transparency Reports. You can however compare it to more established Projects that do quite well in being Transparent, partly because it is hard not to be ( since it is all an open Ledger, everybody can see all the transactions ). Their Reports and all or most of their activity ( depending on the Project ) is available to everyone, not just the Stakeholders like in Traditional Finance. Thus a lot more Information is available to anybody Interested in learning more about the Project. Since most Project’s Ledgers are open and Immutable, it becomes much harder to do any crime or malicious activity behind the curtains than it is in Traditional Finance where it is easier to falsify Information that goes out to the Public or “Cook the Books”. All of this gives the person that is interested a simple concept, in contrast to traditional shares which are conceptually non-divisible ( there are Fractional Shares, but they need to be accepted by the broker ), all Cryptocurrencies can be both seen as Shares and Currencies at the same time.

Also mentioned in the Book, there are two factors that amplify this growth even further.

  • The Stickiness Factor ( The dream factor in Crypto )

A simple concept packaged and delivered just the right way will make it irresistible. Currently for a lot of people it’s not about Technology or Innovation. The majority of current Investors don’t even understand the underlying Technology. The markets are still very irrational with some Projects being undervalued and others being overvalued. So then why do majority of people buy Cryptocurrencies ?

They want to become rich because they heard stories of people who became rich by buying Cryptocurrencies. If you would ask people what they would do if they could travel to the past, most would answer by saying that they would buy Amazon, Apple or Microsoft Shares. Same would happen if you would ask somebody who knows about Cryptocurrency, they would buy Bitcoin or Ethereum or whichever other Crypto they currently know that had the biggest increase in price to date. You wouldn’t hear people say that they would Invest in the Project with the best Technology. It is very simple, people want to get rich, and most people want to get rich quick. The dream of financial Independence became synonymous with Cryptocurrencies once people heard and read stories of Success in the Crypto World. Now Cryptocurrencies are starting to appear more in traditional news Websites and TV and new people are starting to see the simple message, that if you Invested 100$ in 2010 you would have a total profit return of 113968795.173% and would have approximately 113 968 895 $ today, and we are only at the beginning of the Adoption Cycle, there is more to come.

The Cryptocurrency Market is just generally more profitable than Traditional Markets, with Volatility and Global 27/7 availability playing huge Roles. Some Interesting Articles about this :

This irresistible message can also be found from the Crypto ICO Bubble of 2017, when many Projects were rising 50–100 of % daily. It made a lot of people very rich but the bubble bursted bringing the Crypto Industry to a bear market. The Idea that anybody can become rich just by buying magic money on the Internet is what gave it so much popularity, not the Innovation that the Projects brought. Now things are slowly changing and the Industry is slowly starting to mature, but it is a long road and it will take years until it is at least a bit more rational.

  • The Power of context ( The context factor in Crypto )

Something that is also emphasized in this General message of becoming rich with Crypto, is the Idea that if Bitcoin did it, so will other Projects. People value big and flashy Announcements, embrace the Hype ( Marketing ) and give it higher credence than Innovation, because they want to one day wake up and simply be rich. Not only do they not understand the concept of Supply and Demand, they think that people who bought Bitcoin, one day woke up being Billionaires. Of course anything is possible in a completely irrational market, but you still need to have a Perspective. One tool that can help you have such a Perspective is thecoinperspective.com where you can choose a Cryptocurrency and use the tool to see what Market Cap a coin / token would need to reach a certain price ( marketcap does not represent the amount of money invested into something, but it helps you have a better idea ). What people need to understand is that different coins / tokens have different Amounts of Total Supply in existence. It means that some coins / tokens need a substantially bigger demand in order to increase the price. Currently Bitcoin has the highest demand worldwide and a relatively small Supply, that is why its price is so high.

All of this leads people to focus on the context without seeing the bigger picture. A mere announcement of partnership or collaboration in the Cryptocurrency Market can send the price to new highs, while milestone or scientific achievements barely make any noise. The price is less influenced by adoption and usage than by speculation and irrationality. The same thing happens in traditional finance, however traditional finance is not available to the entire world 24/7 and 365 days a Year. Analysis and research are optional things and everybody just wants to get rich.

So have Cryptocurrencies reached that Tipping Point ? I would like to distinguish Bitcoin from the rest of the Cryptocurrencies and define a Tipping Point from the perspective of Adoption ( Usage ) and Price ( Investment ).

From the perspective of Adoption, I think both Bitcoin and the rest of Cryptocurrencies have reached a Tipping Point, but its only the beginning ( very early beginning ). Today Bitcoin is seen as a more convenient Store of Value, being better in every way then any of its competitors. Not only because many rich and smart people say it is, but because it is self evident once you understand it. Other Cryptocurrencies are starting to be used by Governments, big Banks, Institutions and Businesses. They are building many great things and it is all becoming so user friendly, that nobody even knows that a Service is using Blockchain Technology. Many Services such as Social Media Platforms, Video Streaming Platforms, News Platforms and even Browsers are also implementing Cryptocurrency into their Systems, thus creating Micro-economies ( benefits of which I will also cover ). These become more attractive because of Incentives and the above described Stickiness Factor.

As for the Price, well its complicated. Despite almost all Projects having huge returns ( even ones that are essentially dead ), I would still want to argue that coins / tokens in my Portfolio are undervalued while the ones i don’t have are overvalued, but I suppose that would be the case for everybody, even in Traditional Finance. Personally I think that Bitcoin has reached the tipping point, but the rest of the Cryptocurrencies have not, yet. Bare in mind that I am not simply ignoring the huge profits most coins / tokens are doing, which are in some cases 10x higher than bitcoin ( you can compare different Cryptocurrency coin’s / token’s Performance using this tool to have a perspective of just how much more $ some projects made in a shorter amount of time than Bitcoin ). I simply think there are factors that play a role in my disbelief that Cryptocurrencies other than Bitcoin have reached a Tipping Point in the Price perspective : ( so if profits are already this high, I think they will be even higher )

  • Technological comparison

Bitcoin’s technology compared to a lot of other Projects is laughable. Taking Ethereum as example, which created two new Industries ( DeFi and NFT ) and is capable of many things, while Bitcoin struggles to even handle more than 650 000 transactions a day. Of course its not only the amount of transactions per day that makes it better, it’s what is in those transactions that matters. While in Bitcoin you are only able to send coins from one wallet to another, in Ethereum you are open to a whole world of interactions with different Smart Contracts, Applications and Services built on them. I have also discussed Bitcoin’s lack of innovation before and it still stands. Comparing Bitcoin to anything else other than Ethereum would be pointless since the Scale would be too enormous. Certain Projects are even more Technologically advanced than Ethereum ( and Ethereum is already far superior than Bitcoin from a Technological standpoint ). Yet the Amount of Money Invested in Ethereum ( the Platform only, without counting the value of the whole ecosystem of dApps ) or other Projects that are superior to Bitcoin in every way, is still very small.

  • Price dependence

Currently Bitcoin’s volatility affects most of the Cryptocurrency Market. Without going into too much detail about money Flow Cycles between Bitcoin and altcoins, almost the entire Market will be in the red if Bitcoin would drop 5% tomorrow. Altcoins would still recover ( sometimes even faster than Bitcoin ), but there is still dependence present on the Market relative to Bitcoin’s price.

  • Safe space for bigger players

Retail Investors can acquire their Cryptocurrencies on Centralized or Decentralized Exchanges, while big Institutions and funds have higher standards while also having more money to Invest. The Cryptocurrency Industry first needs more regulated and trusted Exchanges, as well as things that facilitate the purchase of Digital Assets such as ETFs ( Exchange traded funds ). Currently ( as of May 2021 ) in the US ( which has the biggest impact ) there are no Bitcoin ETFs or Ethereum ETFs available ( some applications however were already filed with the SEC ). For Cryptocurrencies other than Bitcoin or Ethereum there hasn’t even been any applications for an ETF yet, which would allow for a much easier, regulated and safer Access to the relevant Cryptocurrency coin for giant Institutions and Funds.

But that is just my opinion, if you want to practice critical thinking you should always hear more opinions. Here is what some reports say on the topic of Tipping Point :

“There are a host of risks and obstacles that stand in the way of Bitcoin progress. But weighing these potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point and we could be at the start of massive transformation of cryptocurrency into the mainstream. […] For all these reasons, we conclude by noting that Bitcoin is at the tipping point of its existence and the path forward from here may have broad and widening repercussions.”

Blockchain is going to become an infrastructure technology — like the internet. No one really cares how the internet works, but it has become integral to our daily lives. The same will be true of Blockchain. We haven’t reached that tipping point yet because there are no dominant players. At some point soon, this will change.

So there are many challenges and problems to solve, but it will eventually reach a point where the Cryptocurrency Market will not be seen as a joke anymore and will be more respected once it matures.

But how much more can it grow ?

Scale

Let us focus on the Technology part of the Cryptocurrency Industry. As already said in previous posts, DLT ( Distributed Ledger Technology ) whether in form of Blockchain or in form of a DAG may or may not have a Cryptocurrency attached to it. If it does have Cryptocurrency attached to it, it has an Incentive for participation in securing that DLT and make it globally decentralized. This Cryptocurrency can then be an Investment ( in the success of the Protocol ), can be a form of currency ( whether in form of value transfer or store of value ) and you can use it to transform something physical into something digital.

The Tokenization of assets refers to the process of issuing a blockchain token ( specifically, a security token ) that digitally represents a real tradable asset. You can tokenize almost anything and can either digitize the many parts of a Giant Economy, or create Micro-Economies for different Services. Just how much there is value in the world can be seen using this great visualization : All of the World’s Money and Markets in One Visualization, By Jeff Desjardins. I wont try to explain it because it is much easier to see such enormous scales than it is to try to visualize them, but just know that there is a lot of value that can be transformed into a Digital Form. To help you understand what can be tokenized, how it can be done and what benefits it would have in comparison to the traditional way, here are some Reports that cover tokenization :

Today’s capital markets are rife with industry-wide inefficiencies and limitations. In the long term, DLT enabled solutions may or may not be at the core of addressing these challenges. However, the emergence of these solutions — and the competitive pressures from new entrants and migration of value pools — presents an opportunity to fundamentally reimagine how the capital markets operate, perhaps a once-in-a-generation opening. Making progress on these challenges will require action, collaboration and innovative thinking from many parties, regardless of which technologies are ultimately used.

We foresee that tokenization could make the financial Industry more accessible, cheaper, faster and easier, thereby possibly unlocking trillions of euros in currently illiquid assets, and vastly increasing the volumes of trades.

The process of tokenization creates a bridge between real-world assets and their trading, storage and transfer in a digital world. The corresponding basis is built by using the Blockchain technology.[…]Tokenized assets may flourish as a complement to current “traditional” assets in the financial world allowing smaller companies access to capital market financing.[…]The tokenization of assets is not the future — it is the present.

So tokenization can be beneficial in reshaping the Economy of the whole World, once challenges and obstacles are addressed and solved. But there are also other things that can be reshaped using tokenization and Incentives, Micro-Economies.

Incentives and Economies

Incentives reinforce certain behavior. Imagine 3 newsletter applications. For the first application you need to pay in order to read the news. In the second application you are being paid in $ to read the news. In the third application you are rewarded with a Cryptocurrency token. Consider that all 3 newsletter applications are identical in the quality of their content in order to eliminate irrelevant factors to my example. Which one would you rather choose ? The third option not only makes the rewards somewhat unpredictable, it also triggers the previously mentioned “Stickiness Factor” and “Power of context”. In the second option you already know the value of your reward, in the third option you associate it ( psychologically ) to the success of the Cryptocurrency Market, and thus think that this token you receive as reward might be more valuable in the future. But you are receiving a Cryptocurrency that’s only purpose is being a reward for an action ( reading news articles ), how and or why does it have value ?

The creators of the third app subsequently add two extra functions. The ability to purchase real items with your Cryptocurrency tokens, and the ability to buy / sell them in the open Market using Centralized or Decentralized Exchanges. What this creates is a Micro-Economy within the app. This whole system is what eventually gives that token value. In this Micro-Economy system, different sectors within will find ways to make a profit. And there are many ways it can be done :

  • The developers can allocate a certain amount of the total supply to them, thus making a profit if the price of the token rises
  • The people writing the News articles can be tipped ( using this token ) by the users or have Incentive / Grant Programs from the developers, thus the developers would’t need to pay salaries
  • Advertisers can use the ads within the Application to advertise their product, thus being able to target certain audiences
  • Transaction fees or other fees of the token or within the platform can go directly to the developers or any form of decentralized governance system, thus paying for its research, maintenance and further development
  • Users or readers are rewarded with both Information that they gather from the Article and a Cryptocurrency token, this Incentivizes them to participate in this Micro-Economy in two ways : first by having potential Interest in Investing into this whole system ( by buying and or selling the tokens on the open Market ), and second by attracting more Advertisers who could also potentially be future Investors
  • And many more…

Such Micro-Economies can be created within many different Industries for many different actions. Creation of this form of Incentivization ( in form of Cryptocurrency tokens ) can give you a major advantage and create self sustainable environments from which you and others can profit.

You can also focus on the Social aspect of creating such Micro-Economies, where a social Media Platform will give people Cryptocurrency tokens as rewards from participating. You can then create Influencer / Celebrity tokens in which people can “invest”. Just like with paintings, people would buy those Celebrity tokens in hopes that their prices would reflect the success of that Celebrity.

These Incentives can used to solve real world Problems, such as exploitation of digital data. Big Platforms use your personal data and sell it to advertisers in order to make money. Admittedly you don’t pay to use the Services of these Platforms and the only reason why they are free, is because you are the product. But there are more ethical and privacy preserving methods to create a self sustainable system if you create a Cryptocurrency Micro-Economy. One such example is the Brave Browser, which has a focus on preserving privacy and rewards its users with Cryptocurrency tokens for actions such as clicking on non-invasive Advertisement pop-ups. The Brave Browser Environment allows users to tip their earned tokens to support their favorite Websites or people directly without any middlemen ( which means no extra payment will go to the middleman ). The tokens are also available on the open Market for trading, thus creating this self sustainable Micro-Economy where everybody is benefited and there is less invasion / exploitation of privacy.

Conclusion

Whether Cryptocurrencies have already reached a Tipping Point and are the biggest Investment opportunities of many Centuries remains for you to decide. But do keep in mind that it is never too late. There is and always will be a way up. Whether sky is the limit or it will go further than that remains to be seen. All I want to remind again is the quote by Arthur Schopenhauer “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident”.

This content is for Information and educational purposes only and should not be considered investment advice or an investment recommendation.

I study and read about : Cryptocurrency, DeFi, Blockchain and Human Psychology as a Hobby. Degree as a Computer Science Expert. Master in 4 Human Languages.