We all heard of cryptocurrency. However, just because we call something a name, that does not mean it is applicable.
This is the case within cryptocurrency. It is a name that is completely misleading, believing there are properties to these assets which really aren't there. Unfortunately, this is only furthering the confusion people have.
It is also one of the reasons, in my opinion, things have not taken off.
One of the major topics we cover is the tokenization of everything. For this to occur, it is best to understand what we are dealing with.
Hopefully, by the end of the article, people will see what things a big clear. From that, the ability to categorize project along with their tokens becomes possible.
When we saw the term currency, the most likely concept that comes to mind is a medium of exchange. This is one of the major properties of currency.
Remember, it is important to have something that can facilitate trade. Here is where the medium of exchange enters.
Certainly, cryptocurrency fills this use case. A token or coin can be used as a medium of exchange. That, however, does not mean it is effective in that role.
For example, I can pay off a bookie with a BMW. Obviously, there are a number of reasons why this would not work in many instances. How could I buy a gallon of milk using a car as currency?
The obvious answer is we cannot.
So why do we make the same presumption with cryptocurrency? We believe simply because the name says it is currency that we have a medium of exchange. This is not the case. It can fill that role yet most things are awful at it.
We know the mantra in crypto: When price go up and moon.
Volatility is a central premise in this realm. We all see the wild swings in cryptocurrency pricing. Bitcoin went for a few cents up to $66K, then back to $15K. In this arena, 90% pullbacks are not uncommon. Of course, 10x is not unheard of either.
Here is where we run into another issue with medium of exchange. Without price stability, we are dealing with something that is not suited for these purposes.
Another way of looking at this is as an online merchant. Let us look at an item that has a low profit margin. Early in the evening, while having dinner with the family, an order comes in. It is for the amount on the website, making payment in full.
Upon awaking in the morning, you see the currency you accepted for the order dropped by 15%. This is a major problem because you only have 8% profit on the product. Hence, while sleeping, the move in the currency took a profitable transactions and provided a 7% loss.
There is a reason the foreign exchange derivative market is over $16 trillion. FOREX risk is something the largest international players deal with. Now, we are asking the average merchant to take it on in another way.
The very factor that people discuss with cryptocurrency is the reason why it is a lousy medium of exchange.
For this reason, it is best to look at these as crypto-assets. When considering the tokenization of everything, do you think most of what will be created will be a medium of exchange.
If there are synthetic assets relating to the stock market, are people going to pay their electric bill using Home Depot tokens? While it is possible from a technology standpoint, it likely isn't preferred.
This is also the same problem bitcoin has. We know there are many forecasts as to what the price will be. Outside Warren Buffett and a few others, not many are predicting BTC at $500. The view is this asset will explode in price, reaching 6 figures during the next bull market.
Naturally, we are dealing with speculation here. It does highlight the medium of exchange problem. Why would someone give up their bitcoin if it is going to 4x or 5x? The answer is most would not.
When looking at crypto-assets, we have to realize that anything tied to a project, or blockchain, falls into the value capture category. The value of the network (or application) is quantified, based upon the market activity, in the asset. This is no different than how a stock or an ownership stake in a private equity venture operates.
Simply put, increase the value of the network and that is paralleling in the token. Of course, the market might have a different idea but you get the point.
Here is where the problem enters.
Many are looking at adding "utility" to their token. This usually means "what can I buy with it". By now, it should be painfully obvious why this is the wrong path to take.
Project teams then begin to try and make the token worthwhile by setting up payment options. Of course, this doesn't work since we are dealing with a different type of asset. If these people realized the task at hand is to build value for the platform which then could be captured in the token, they would be on the right path.
Alas, this is not how it is handled.
Then we have the next great crypto idea: token burns. Here again, we have people taking the approach of less tokens means same value spread over a smaller number of units.
While this is accurate, there is one problem. If we are dealing with something that captures value, why do markets react the other way?
Let us used stocks as an example. The market goes crazy when a stock buyback is announced. This is money that came from operations that is used to buy shares off the open market and remove them.
Everyone loves a good stock buyback.
The problem is we see this being dwarfed by the way markets react to stock splits. When a company announces a 2-for-1 or 3-for-1, we are like junkies who just got a fix. It is pure nirvana. My 100 shares in company ABD suddenly became 300.
In reality, no additional value was delivered. This is simply an accounting exercise. When I have 100 shares at $60, that is the same as 300 prices at $20. However, the mindset is each dollar move puts me further ahead.
If most cryptocurrency are truly value capture, why do we regularly do the opposite. The answer resides in the fact that people are trying to monkey with the tokenomics rather than building value.
There is a time when the stock market hates stock splits. This occurs when the company is crap. If we are dealing with a zombie corporation, stock splits make no sense. In fact, they entities tend to do reverse splits, reducing the shares. It sounds very similar to a token burn.
Here is where we find most crypto projects. The reality is they have little to nothing going for them. Companies like Apple or Tesla have no problem with their shares outstanding being in the billions. We cannot say the same about something like Sears.
We are dealing with a wide range of assets. Stablecoins are now popular because they effectively operate as a medium of exchange. A base layer coin could be wildly different in utility, dynamics, and usage than one tied to a project. Of course, NFTs are a completely different matter.
There appears to be a lot of confusion because people call all assets tied to crypto currency when most do not have this as an effective characteristic.
Those projects that operate in a different capacity, coming from this perspective, are ones to watch. It shows they understand the categories and how to properly apply what they are creating.
