How I’m investing and evaluating the cryptocurrency space.

This is a mind map I’ve made to show why I like this space and see opportunity in it. Much of this is common knowledge to people interested in this area but sometimes we miss things right in front of our face. Once a new technology gets institutional support, an easy user interface, and shifts some power back to the people, then it’s setting up for a bright future.

The Ethereum Alliance was a big step toward validating this technology. The price of ETH (Ether), the currency behind the Ethereum infrastructure increased from the mid 20s to around 50 and then to nearly 100 after this announcement. That caught my attention! There was also news that Japan and Russia were embracing Bitcoin as a currency, furthering the acceptance. Ripple, another blockchain technology, is being used by Japanese banks (and other banks) as a means of transacting directly on their blockchain technology. I think this is a big deal.

Aside from institutions, companies and individuals can use these technologies to fund their businesses, create tokens, and rent out unused assets (think Airbnb). Golem is an example of a project I’m invested in where you will be able to rent your idle computing space out to those who need it for complex tasks. This may seem unnecessary but thinking ahead to the advancements in AI and medicine the computing power needed is going to increase.

Blockchain is disrupting middlemen. VPNs, the MLS service, Stub Hub like ticket exchanges are a few examples of this. Success isn’t guaranteed for any of these ventures but you can see the potential of this. So how do we make money around it?

It’s important to understand how these tokens work. The above paragraph are a few projects that have their own crypto tokens built on the Ethereum infrastructure. Think of Ethereum as the railroad tracks and these crypto token projects are rail cars built on the tracks. We can invest in the actual tracks (Ether currency that powers Ethereum — ETH) and/or we can invest in the individual token, which is kind of like investing in a stock. Check out this great podcast for more information. I’ve chosen to invest the majority of my money in the infrastructures (Bitcoin and Ether) but I also invested in a few crypto tokens. I look for ones that have the potential to disrupt a large industry, have a large market and are simple to understand. There are so many to pick from some you have to be choosy. For instance I’m more interested in a technology that a large group of people are using and that’s solving a big problem. Two that I’m currently watching are Mysterium and Rex; a decentralized VPN service which solves the problem of the VPN selling your data and a MLS disrupting service that has the potential to lower real estate transaction costs. Contrast that with something like medical or legal record keeping blockchain technology, which is a public good, but not necessarily a good investment. A key point is that every time someone builds another token on the infrastructure, the infrastructure itself (Bitcoin or Ether) becomes more valuable and commands more developer talent. Here is a great post on understanding why.

A completely different benefit of cryptocurrencies are as a means of payment and a store of value. Why would I want a costly physical asset like gold when I could have something similar that is free to store and can be used for payment? Governments all of the world are experimenting with their currencies by printing them to buy various kinds of assets. This game keeps humming along but we don’t know how it will end up. Owning a digital store of value with a fixed supply solves that problem. One could ask, what if the US bans Ether or Bitcoin? Unlikely for a few reasons. It’s already being accepted in other parts of the world as an official currency and given that the US uses their currency as a political tool I would imagine other countries are eager to see that influence wane. If the US were to resist this new technology it could lessen the influence of the dollar. It’s the same reason why banks are rushing to embrace blockchain technology, get in the game or be crushed by it.

We will undoubtedly get regulatory headlines, technology issues, and cyber crime problems that will provide buying opportunities. I think regulations are needed in the space and knee jerk reactions to them will present opportunities for investors who study the real impact.

I’m excited to see where all of this goes and I’d love to learn from people out there who can offer some insight. A question I’d like to throw out there: How do we value these assets? As I write this Ether is around 8.5 billion in total market value, does that make sense? My feeling is that it’s still too low but I’m trying to understand how to wrap my head around it. I’d love to hear from people on this.