GM frens!
No, it’s not a typo, it’s a greeting acronym (good morning, friends), borrowed from the vibrant Twitter and Discord chats of the crypto community. Because, dear frens, I am going to share my views on this fascinating topic, from the eyes of an old-school investment professional. But please, don’t expect insightful recommendations on the most promising digital assets.
The reason is simple: we do not have the level of expertise which is required to form a professional advice on cryptos for your hard-earned money. On a scale between total ignorant and grandmaster, we are not even in the middle. Having said that, we know a thing or two about investments, and we are of course working on cryptos with the objective to apply the same robust fundamental framework, including, importantly, valuation, as we do for the other assets we cover.
New, Clever, Confusing
Let me start with a clear statement: the blockchain technology bears the unmistakable stamp of genius. Decentralised trust is a revolution: it solves critical issues, it empowers people, and it has the potential to create immense economic value. Crypto inventors and builders are among the brightest minds of our time, bringing creative solutions to complex problems. Indeed, as adoption grows, the trilemma between decentralisation, scalability and security is becoming exponentially hard to deal with.
This dynamic is part of the issue when it comes to investing in crypto assets. In a centralised world, complexity is solved by the dominant players, who add resources and see their competitive advantages only being reinforced by heightened barriers to entry. In an open, decentralised world, anyone can bring its bit.
At the beginning was the layer 1 (Bitcoin, then Ethereum, then many others): protocols set the rules for an entire blockchain, and all transactions are settled there. It’s clear, but it has limitations. So came the layer 2, to improve scalability and efficiency, typically with “off-chain blockchain protocols” (yes frens, it sounds weird).
And of course, it’s not just about currencies anymore: the layer 3 is for applications, handling smart contracts in every possible field, from finance to games. It’s decentralised and autonomous, which means that there are tokens everywhere, with different functions and economics: to incentivise the validators, govern or own the organisation, invest, play, sign, reward, vote, communicate, anything else, and any combination.
And then, came the exciting non fungible ones, which are not a generic category but the cryptographic proof of ownership of an individual object, which can also be anything: art, a digital asset for a game of the metaverse, membership in a community, anything else, and any combination.
Hundreds of thousands of tokens, complexity, interdependency, profusion of new entrants: it’s a headache for fundamental investors, especially as it’s still early days of adoption. How do you pick the winners, with a reasonable level of confidence? And how do you fundamentally (not “technically”) estimate the fair value?
Lessons from history
This is where the inevitable parallel with the late 90s starts, with a comparable technological revolution. Back then, Yahoo and Nokia were not less dominant than Google and Apple in the following decade. Anything with a dotcom in its name raised millions in IPOs regardless of their business models. Valuations were three-digit multiples of highly hypothetical future sales.
Everyone was fascinated, the proverbial taxi driver was discussing the merits of Priceline.com (IPO at $16, trading at $80 two hours later). The pressure was immense on those who weren’t in, because everyone was making money, until, gradually, then very suddenly … It crashed. Massively.
There are similarly abundant signs of a speculative bubble in the crypto sphere: parabolic rises in prices, undifferentiated valuations, hype, euphoria, fear or missing out, the certainty that “this time is different,” and very questionable projects raising money – including outright scams like “rug pulls” – without any regulation to provide minimal investors’ protection.
From an investment point of view, it’s a jungle. You have either to be an expert and DYOR (“Do Your Own Research”), including deciphering the code of the smart contracts you interact with, or just be well aware that you are speculating and that it is a dangerous game.
Opportunities Ahead
Now, the positives. The blockchain is changing the world and it won’t stop. While the vast majority of tokens may be grossly overvalued, winners will survive and thrive. At the top of the internet bubble, Amazon shares were at $100. The price crashed to $10 in 12 months, but 20 years later it’s above $3,000.
The highly decentralised, crypto-powered web3 will rebalance power and value from platforms to users. Finance will be more efficient and less intermediated, with all business models from banks to venture capital being impacted. And this disruption already reshapes the opportunity set in conventional markets. Will Facebook be as successful in the metaverse, following their change in name, as they have been in cryptocurrencies (remember Libra)? And what about Microsoft, who heavily invests in gaming and allows crypto metaverse projects to use Minecraft as a platform?
This is the kind of questions we currently focus on for your investments, rather than compromising with our fundamental approach to give poor advice on tokens. We are working on the matter, but it takes time. Anyway, the potential of the blockchain revolution is big enough to be patient. It’s not too late, and with time will come better insight, in the same way that the best investments in internet-related stocks were after, not during, the bubble.
WAGMI (We Are All Gonna Make It)!
Maurice Gravier, Chief Investment Officer, Wealth Management at Emirates NBD.
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