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Reasons to buy crypto

Lesson in Course: Crypto (beginner, 8min )

There are many polarizing opinions about crypto. How can we tell if it's right for us?

Eureka!

What it's about: We might want to buy crypto to speculate or because we like the idea of using it in the world of decentralized finance.

Why it's important: The reasons we choose to buy crypto let us know if we are speculating or investing.

Key takeaway: It's still a risky asset, no matter why we might want to buy crypto.

News headlines have done a fantastic job painting very extreme views of crypto. Old-guard investors like Charlie Munger, Warren Buffet's protege, describe crypto as "disgusting and contrary to the interests of civilization." Yet, Elon Musk bought $1.5 Billion in BTC to hold on Tesla's balance sheet.

As with most things in life, the truth is likely somewhere in the middle. Supporters and critics of an asset class are a healthy part of well-functioning markets; markets must have both buyers and sellers. However, where does this leave us? How do we place ourselves on the spectrum and figure out if buying crypto is a good investment decision for us?

Utility

We may or may not find the idea of decentralized finance and a future where banks and financial institutions hold less power exciting. The underlying technology is evolving as brilliant individuals and teams around the world tackle different problems within the space. As interest in crypto picks up and becomes familiar to many, we can expect an acceleration of utility and value.

Many new ideas are viewed with skepticism in the beginning

Increased usage

For innovative technologies that take hold, growth becomes exponential instead of linear. Andrew Chen of Andreessen Horowitz, an investment firm that invests heavily in crypto startups, wrote a great slide deck that captures this phenomenon. He illustrates this point through the story of the telephone.

When the telephone was invented, instruction manuals were sent with every unit sold since consumers had no idea how it worked. People had to be taught which end to hear from, speak into, and how to dial a number! Sending letters and telegrams were still the main form of communication.

% of households is on the Y-axis

We can see from the graph above that it took 30 years for the telephone to reach 40% of households and many decades after to be in everyone's home. The costs of the phone and the learning curve required to use the technology slowed progress down. However, if we look at cell phones, we'll see that the adoption was much faster since everyone already knew how to use a phone. 

A similar argument can be made for crypto. As more people understand blockchain technology, the adoption of smart contracts and other tokens can be much faster than the adoption of Bitcoin.

More specific use cases

As the problems and limitations of the current financial system become better understood and mapped out, crypto technologies could help create more specific solutions. For example, instead of replacing an entire bank, teams may be able to significantly improve just how quickly our paychecks can hit our bank accounts. Investments in the technical development of smart contracts could solve specific problems that are difficult today.

Blockchain technology can coexist among the centralized systems

At this point, if our inner futurist is bursting out with all sorts of questions, perhaps investing in crypto for utility would be a perfect way to get involved.

 

Just trying  to make money

If we are interested in speculating, the volatility of crypto prices presents a great opportunity. While not the same as investing, speculation is exciting and can be done responsibly if we know exactly how much we are willing to risk. However, we need to be comfortable with the possibility of losing it all.

Dogecoin

Dogecoin is an excellent example of speculation. Two software engineers, Billy Markus and Jackson Palmer, created Dogecoin to make fun of the wild speculation in cryptocurrencies in 2013. They named the coin and branded it after the Shiba Inus Doge meme. 

Joke or genius? Either way, Dogecoin is speculative

Supply

Dogecoin started with a supply limit of 100 billion coins. By mid-2015, the 100 billionth Dogecoin had been mined with an additional 5 billion coins put into circulation every year after that with no limit. This makes Dogecoin an inflationary coin, unlike BTC — meaning that an individual coin's value will decline over time.

Initially intended as a joke, Dogecoin has no inherent utility and is a less stable store of value than Bitcoin. Speculators treated the coin like a meme-stock and piled in when they saw the price increase, hoping that it would continue to rise.

Starting in early April 2021, Dogecoin was trading around $0.05 per coin. A rush of folks on Robinhood and Coinbase pushed the price up to $0.70 a share. Those who bought early and sold at the peak made a lot of money. Unfortunately, those who bought late lost a lot of money as well.

The price of Dogecoin

Actionable ideas

It's important to note that crypto is still a volatile asset class, even if there is a strong case for its utility. If you are risk-averse and the potential to lose money would keep you awake at night, consider a safer investment alternative to cryptocurrencies.

Speculating and gambling are not effective investment strategies. However, if you skipped happy hour and have some extra money to play with, the crypto casino is open 24/7.

 

Supplementary material

Check out Andrew Chen's full deck
https://andrewchen.com/consumer-startups-at-a16z/

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