Is there value for investors in blockchain technology?
Creators, developers, and investors in blockchain (commonly referred to as crypto) compare the current state to the Internet of the mid-1990s. Back then, few understood the extent our lives would depend on email, search engines, social media, and an endless array of websites. Looking back, it seems to have happened all at once, but we waited years for the user interfaces and functionality that made the Internet user-friendly – and powerful.
The same can be said for crypto. It seems the most interesting projects aren’t solving everyday problems or creating value in a user-friendly way. So, it makes sense for investors to question whether there is anything there.
At Bangor Wealth Management, we will continue to watch closely as this technology matures so we can help our clients explore its potential for meeting their goals. Image courtesy of Michael Wilson, 2020
Perhaps one reason crypto hasn’t been accepted is the lack of a “killer app.” Easy-to-use, functional applications that sit on top of blockchain technology will eventually generate greater adoption and attract more people into the blockchain ecosystem.
On the other hand, many hardcore Bitcoin enthusiasts would vehemently disagree and say Bitcoin is the killer app – it has been around almost 12 years and is the largest in terms of users and value. But that doesn’t guarantee it will remain the technology of choice. Will Bitcoin be the blockchain developers build the most useful, sought-after functionality and capabilities on? Or will it simply remain a digital repository as a substitute to its physical competitor – gold?
Regardless, Bitcoin has already shown value and can be safely and efficiently transferred over the Internet by a decentralized network of computers. This amazing step opens many doors for innovation.
What about the risks?
It is still very early in the development of blockchain and the risks to using or buying crypto assets are high. You can think of it like early-stage venture capital investments: many will fail, but a few could create tremendous value in what is being referred to as Web 3.0.
Along with typical risks in venture capital, crypto investors must also consider these:
Regulatory Risk – There continues to be a drumbeat of rules issued by regulators around the globe. Some countries have banned owning and trading crypto assets outright. It is unclear what others will do to limit crypto or delegitimize the properties of specific crypto assets. Governments are not likely to sit idle if their central banks’ monetary power is eroded.
Extreme Volatility – Another important consideration is price swings. Imagine if venture capital investments traded in real-time, every day, all day long. The volatility would be similarly dramatic. As an example, the price of Bitcoin dropped from over $64,000 to $31,000 a coin a few months ago. Drops of this magnitude are not uncommon in crypto and can lead skittish investors to make poor decisions at the wrong time; just as they have historically done in traditional investing.
Asymmetry of Information – Crypto projects do not have regulatory filing requirements like publically traded companies. Information about the development and enhancements of these projects is generally known only by a select group of people.
Technological Complexity – If one is unfamiliar with the source code running these protocols, how would they know whether there are fatal flaws? Capitalism will eventually flush out the winners and losers, but for now, specialized knowledge would seem to be required.
Storage – Investors must do additional due diligence to find appropriate custodians, or if they choose to custody themselves, into how to secure their keys. One need look no further than news stories from early this year about an investor seeking permission to excavate a trash dump in England to retrieve a hard drive with $280 million worth of cryptocurrency stored on it.
What should investors do?
As our lives become more digitized over the next few decades, it will be important to stay on top of crypto. As with any investment, you’ll need to do your homework and truly understand what you are investing in before committing your money.
At Bangor Wealth Management, we will continue to watch closely as this technology matures so we can help our clients explore its potential for meeting their goals.
