Invest Like the Best with Patrick O'Shaughnessy
Hash Power – Ep. 2 - Investing in Cryptocurrencies
Episode guests
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Quick takeaways
- Cryptocurrencies have a total market cap exceeding $130 billion, with Bitcoin and Ethereum representing 75%.
- Understanding the underlying technology of tokens is crucial due to the complexity of valuing them.
- Different investment strategies exist in the cryptocurrency space, including long-term, buy, and hold approaches.
Deep dives
Exploring Block Chains and Crypto Currencies
Block chains as a technology and crypto currencies like bit coin and etherium are discussed, with a total market cap exceeding $130 billion. The podcast examines various use cases of block chain protocols, including store of value, programmable money, anonymous transactions, and prediction markets. The complexity of valuing tokens, the importance of understanding the underlying technology, and the potential future impacts on traditional financial systems are highlighted.
Investment Approaches in Crypto Currencies
Different investment approaches within the crypto currency space are explored. Meta stable is portrayed as a value investor focusing on long-term winners across diverse use cases like store of value, programmable money, and anonymous transactions. The importance of technical understanding, engineering trade-offs, and the balance between top-down and bottom-up portfolio composition is emphasized.
Evaluating the Crypto Currency Market
The dynamic nature of the crypto currency market is analyzed, with over a thousand currencies and a hundred actively traded ones. The concept of ICOs and the evolving investible universe in crypto currencies are discussed. The podcast delves into the ever-changing landscape of investments and trading in crypto currencies, spanning from traditional investments to the emergence of new proyectos.
Risk and Skepticism in Crypto Currency Investments
Risk factors and skeptic viewpoints in crypto currency investments are presented. Specialists warn about the volatility, speculative nature, and potential risks associated with investing in these assets. Concerns about inflated market valuations and the need for thorough research and technical understanding before entering the crypto currency space are underlined.
The Concept of Crypto Tokens on the Ethereum Network
Many new tokens are being launched on the Ethereum network to capitalize on its existing security and development infrastructure. These tokens operate as new cryptocurrencies within the Ethereum ecosystem, with over a hundred already in existence and more expected to emerge. By leveraging Ethereum's robust architecture, these tokens avoid the need to recreate network frameworks, allowing for quicker and more efficient token issuance and transactions.
Diverse Token Functions and Market Dynamics in Cryptocurrency Trading
Cryptocurrency tokens serve various functions, such as acting as digital gold or facilitating transactions within specific networks. For example, Bitcoin functions as a store of value and a means of transacting within its network. On the other hand, tokens like Filecoin enable pricing for scarce resources like file storage, creating marketplaces to efficiently allocate and trade resources. These diverse token functionalities contribute to the cryptocurrency market's dynamic nature, offering unique opportunities for active management strategies and long-term value creation.
In episode 1 of Hash Power, we explored blockchains as a technology—how they work, why tokens (also known as cryptocurrencies) are an integral part of any blockchain, and how these new networks might change the world. In episode two, we spend time with the leading investors in the field. Like any frenzied asset class, there are countless cryptocurrency hedge funds popping up everywhere. But founders from three of the original firms—Polychain, Metastable, and Blocktower Capital—are our primary guides this week.
As I speak, the total market cap of cryptocurrencies is $136B. There are hundreds of tokens currently available, but bitcoin and Ethereum represent 75% of the total market cap. $136B sounds like a big number, but its tiny relative to any other asset class—and I use that term with hesitation. To put it in perspective, that’s exactly the same size as the market cap of IBM. But IBM had more than $10B of earnings in 2016. Tokens have none. As you will hear, valuing tokens is a very hard exercise.
In such a nascent world, we are seeing investing strategies take hold. Olaf Carlson-Wee, Josh Seims, and Ari Paul walk us through different takes on cryptocurrency investing, be it early stage, long term buy and hold, or more hedge fund style strategies.
Hash Power is presented by Fidelity Investments
For comprehensive show notes on this episode go to http://investorfieldguide.com/hashpower
For more episodes go to InvestorFieldGuide.com/podcast.
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Links Referenced
Show Notes
0:05 – Recap of part 1 and introduction to part 2 of Hash Power
2:58 – Ari Paul, CIO of Blocktower explains how he got involved in cryptocurrencies
5:23 – Why do we need bitcoin
7:23 – Polychain Capital founder Olaf Carlson-Wee on why the value of tokens accrue
9:23 – How main stream money is getting into this space
12:26- Useful comparisons when talking about ICOs when compared to IPOs
15:01 - Naval Ravikant, CEO of Angellist, is asked to explain the protocols of cryptocurrencies to platform businesses like Uber or Airbnb
17:43 – Naval’s interest in investing in cryptocurrencies
23:07 - Olaf Carlson Wee on the lifecycle of a token
24:02 – SAFT note, Simple Agreement for Future Tokens
25:31 – What is the earliest stage that edge is most present for investors in cryptocurrency protocols
28:12 – How do you mitigate the volatility that is present in blockchain
31:18 - Jeremiah Lowin, a risk and statistics expert, who runs risk management for a large private family office, talks about why he no longer owns cryptocurrencies
34:19 - Jordan Cooper, a venture capital investor, is optimistic about blockchains in general, but thinks there may be some overvaluations in current currencies
37:02 – How Jordan would value a single cryptocurrency
42:10 – Fat Protocols (Joel Monegro)
43:52 - Josh Seims, of Metastable, the value investor in blockchain?
51:15 - Ari Paul on the equivalent of listed stocks in the crypto currency world
52:33 – Understanding the concept of a coin in blockchain and how people are getting access to them
55:07 – The fairground analogy to understand cryptocurrencies
57:57 – What lessons from traditional markets can you apply to investing in cryptocurrencies
1:06:51 – Ari is asked to discuss some of the alternative cryptocurrencies outside of Bitcoin and Ethereum. He starts with Ripple
1:10:27 – What would help firms or traders create edge in investing in cryptocurrencies
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
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