Crypto Madness From the Cheap Seats

I can’t tell you how many conversations I have had in the last six months about cryptocurrencies. It’s mainly Bitcoin, but these conversations are happening within my friend and family circles now. Yes Grandmom, it probably got the most out of hand with you over lunch. I‘m glad I talked you out of your day-trading plans before the December crash (and subsequent series of crashes).

I do have a strong opinion about the topic, however. I believe that while the currencies themselves have garnered public attention, the underlying technologies have certainly not yet hit their stride.

That said, here is a bit of personal texture I can share that has allowed me to land at a place of informed crypto opinion, although I would by no means call myself an insider or an expert.

Crypto Past

Crypto first hit my radar about 5 years ago via the VC blogosphere. It’s been a fun bottoms-up evolution through the eyes of progressive, early-stage VCs with their focus on the future.

Late 2013, Overstock.com announced it would be the first retailer to support Bitcoin at checkout. That fall, we (RevZilla) entertained trying to join the race to plant the “first” flag for publicity’s sake, but ultimately stood down when ”the O” implemented in early 2014. The subsequent press and novelty were captured, leaving only the volatility of a new tender type for the next implementers. 

About 18 months later in July ‘15, we experienced a legit DDoS attack. Right in the middle of our M&A rodeo, RevZilla went down. Not the time for the site to lose days of revenue and miss our projections, so cooler heads pointed to quickly paying a few thousand in BTC to ensure the site came back up and the threat was quickly eliminated. Even post Q1 ‘18 crypto correction, the few thousand in BTC we paid is still worth a few hundred thousand dollars, now.

The Internet hostiles honored their promise. The site came back and we went back to the joys of ibankers and lawyers. One BTC stayed at around the $200-300 mark for a while, so I never really thought about that attack until things started going bananas in 2017. It would have been a hell of a silver lining if we would have bought some extra BTC in ‘15 and forgot about it for a few more years.

A year later in June of 2016, I was out golfing with my buddy, a fellow tech founder, when I asked him where he acquired his Cuban cigars.

He mentioned a few rogue sites would ship from Switzerland, had great reviews and only took Bitcoin at the time. So I opened a coinbase account and bought a few BTC at $590 to buy some cigars. With a coinbase account open, I also bought a handful of Ethereum and Litecoin, just to be a nerd.

Weeks later, the Swiss site started taking Visa, which was super easy, so the purchased crypto then sat forgotten on Coinbase, where it still sits today (not so forgotten).

Crypto Recent

Next, fast forward to the spring of 2017 when things were already a hot speculative mess in the crypto world. A close friend’s son had bird-dogged us the opportunity to deploy capital to the first crypto hedge fund, called Polychain, which has early access to ICOs and load balances its risk profile across multiple (aka “poly”) coins over time.

I got in around the end of Q2, knowing that the early investors that got in 3-6 months previous had had quite the ride. For frame of ref, BTC was at $2500 when we closed, but had been about 900 bucks just six months prior.

In December of 2017, I thought Crypto Kitties was hilarious so I spent some ETH to buy and breed a stable of overpriced and hilarious crypto collectibles (Tomagotchi cats that you can sire). I then gave them to the people I cared most about and usually buy normal holiday gifts for, at the end of 2017.

You can see my current  stable here, along with cats I gifted here, here and here. I’ve already “cooled” on this and the only real joy of ownership came from personally naming the cats and trolling my friends with them. Still no crypto utility besides laughter and the joy of speculating (gambling?). #responsibleinvesting

However, it was telling to see how the ETH network struggled under the load when Crypto Kitties were at their peak, highlighting potential early scalability issues with blockchain tech. Even more interesting that Union Square / Fred Wilson has formally invested in the digital pets in Q1 of ‘18. Would love to know how that round was valued…

Lastly, in the first quarter of this year the opportunity to follow on into a new early-stage venture extension of the crypto hedge fund became available. While the risk profile and return math on VC funds are  distributed logarithmically, it’s still very exciting to have potential access to greenfield opportunities on a new digital protocol layer. This represents a contrast to most internet investing in the last two decades, which has been done at the application layer. Obviously I’m hoping performance will be more congruent to the VC funds of 2004 and beyond vs 1996-2000, but there is a good chance we’re all still too early.

I’m certainly curious to see when the tokens will stabilize over time as an asset class and how regulatory measures will continue to affect things, including the tax implications instituted in the new 2018 tax bill. For the foreseeable future, I’d imagine, it will certainly carry an early-stage risk profile. Again, I’m long on the sector so, at present I’m not expecting much in the near term.

Crypto Future

So all in, I have some texture on this and have an opinion (guess) on where it’s going. Keep in mind there are way more savvy analysts out there covering it way more closely than I. You can read about all of this ad nauseum. Just Google it. Here are my answers to the common questions that have frequently come my way.  

• Do you think BTC and other large cap cryptos (ETH, LTC) are toast after this last correction / crash? No, but define toast. With the speculative nature of this and the fact that so many non US markets are driving it – and people are hoarding it like gold – I would not be surprised if we see levels flirt back up over 10k BTC for periods, but I can’t see another q4 run up like last year. The masses have wised up – or got hosed – at this point. Disclaimer: I’m not giving investment advice here, I’m just a dude guessing at the future along with everyone else. Don’t go buy crypto assets with any money you can’t afford to lose!
• How are people valuing crypto to command such prices? They are not, even at some of today’s lesser levels. It’s completely speculative at this stage with very few use cases, and limited utility. There are a lot of use cases out there for tokens and blockchain technology, but unfortunately the landscape is early and they have yet to emerge or be scalable. The current value is mostly driven by demand (emotion).
• Where do you see the value in crypto? I see it in the ability to fund projects and solve use cases that typically have major regulatory, cross-border, transparency and fidelity issues. For the tokens themselves, some stabilization has to occur before they could be considered a bankable tender or store of value.
  
• Do you think Bitcoin is here to stay? No. I think Bitcoin and a chunk of this first wave are going to be the Webvans and eToys of this phase of the internet. They will garner attention, bring crypto into the public awareness (as they have done), generate the bubble we’re seeing and eventually crash and go away. The very early adopters and insiders will have made money and sadly the middle- to late-moving general public is going to take a bath on this for the most part. We have seen a chunk of this already, starting in late December 2017. Of course this didn’t affect your cousin’s friend, who everyone knows paid for his house and wedding by day trading crypto for the last 12 months. Does anyone remember 1997-2000 in tech? Yeah, it’s probably gonna be some of that again.
• What will happen after that? The current influx of capital into the crypto landscape will continue to accelerate awareness, infrastructure growth, adoption and hopefully the maturation of real utility in the token economy. This should be coupled with applications of crypto signature, blockchain or tokens which create value that benefits not only investors, but hopefully humankind. The biggest and most transformative companies in this space are probably still living on the back of a napkin or in a dorm room somewhere, waiting to emerge.
• What are you actively doing with crypto right now? In short, I’m just watching, learning and digesting, curious to see more applications evolve. I’m also trying to be very selective and pragmatic about placing any additional bets. Like many, fighting the urge to speculate.
  
  More specifically:
  • I’m sitting on my coinbase account from the cigars, seeing if it gets stupid again in 2018 or I cash out at some point on the ride down. Major haircut in last 3 months. Easy come, easy go…
  • I’m curious to see how my Polychain hedge fund and venture fund bets perform and what I can learn from following their approach from a pure economic sense. I don’t consider it an alternative investment like other traditional hedge funds. I look at it as an early-stage direct investment and accept an appropriate earlier stage risk profile (i.e. I’m aware it could go to zero).
  • I’m rooting for the next wave of above board crypto entrepreneurs and their ability to be transformative in their spaces. I have some close friends applying crypto technology to digital advertising at a company called Amino Payments in Philadelphia. I’m happy to support them with time, capital or connectivity where I can. It’s also fun to live vicariously through them here and there. #goteamcyan
  • I did calculate the risk profile of giving my wife a special Crypto Kitty for our 10th wedding anniversary last month, but chickened out.  I need to monetize or offload these damn things. What better utility than more gifting! I’ll probably keep Captain Lou, though. An homage to pro wrestling’s golden era…

Overall crypto is has been fun to watch, fun to learn, fun to speculate and certainly fun to imagine the possibilities of the medium to long term. Tokens are the protocol layer. The mature applications have yet to show up. Imagine if you could have invested in TCP/IP (internet protocol) in the mid 90s? Way early. Amazing upside…. But I would caution that anyone should expect that speculative or early bets will also have the requisite and associated risks.

So remember kids, the Bitcoin in the red dress may leave the party with you, but I promise it’s not going to marry you. We’ve seen this play out before in the 2000 tech bubble and again in the 2008 real estate collapse. The damn internets are certainly condensing the hype/fund/bust cycles, so place your bets wisely and don’t get caught up – or do dip an toe in, and get ready to #HODL along with everyone else.

…and yes I know Warren Buffet doesn’t like crypto investments, but he didn’t like investing in the internet for a long time as well.