The Case for Cryptographic Digital Assets
By Avraham Shisgal
Founder
VenTree / NYVC
March 2022
I am often confronted by traditional investors who will happily invest in highly speculative offline assets and derivatives, with varying degrees of sophistication and results, but will adamantly refuse to consider cryptographic digital assets as an investment.
Warren Buffett is often quoted for saying “never invest in a business you cannot understand”, a wise piece of advice that is equally true when it comes to investing in assets as well. For that reason, I never try to convince anyone to invest in an asset class that they don’t understand or feel comfortable investing in. The purpose of this essay, therefore, is to help potential investors understand the investment ecosystem of cryptographic digital assets so that they can feel more comfortable with their stance on investing, or not investing, in such assets.
Nothing in this essay is intended to suggest that any particular cryptocurrency has any intrinsic or inherent underlying value. I am also not going to discuss trading or platform technicalities but rather focus on clarifying the nature of cryptographic digital assets as an investment-grade asset class.
The information below is not intended to provide a history lesson but to highlight, identify, and re-frame, certain nuances that I will later use to explain factors that govern the circular vector-field of money flows affecting the values of fiat currencies and cryptographic digital assets.
This is not going to be short and may require some effort to follow, but every point that I will make here is intended to help readers truly understand the value dynamics of the cryptocurrency ecosystem.
A Brief History of the Evolution of Commerce, Payment-Tech, and Asset Valuation
Before Money: Arbitrary Market Value Direct Bartering.
Thousands of years ago, when humans wanted to engage in amicable trading, one would (presumably, for example) offer a few oranges in exchange for a loaf of bread. Market value, the big question in commerce being, in layman terms, “how much?”, i.e. the relative values of the loaf of bread and the oranges, the “exchange rate”, would be arbitrarily decided by the parties on the fly based on their needs, sophistication, and negotiation skills. Such a system would often lead to unfair exploitation and buyer’s or seller’s remorse, thus paving the way either to conflict or to the development of a better system.
Benchmarked Value Bartering.
In Benchmarked Value Bartering, members of society establish or adopt a unit of a stable commodity (a “gold standard”) as a benchmark value for other trades. Using the previous example, an educated buyer and an educated seller would know that three oranges are worth, for example, two cups of olive oil and that a loaf of bread is also worth two cups of olive oil and, therefore, an exchange of one loaf of bread for three oranges would be a fair trade. Given that seasonal, regional, and perishable consumer goods, which are also subject to quality fluctuations, are subject to fluctuations in supply and demand, and thus in value, civilization often adopted stable nonperishable commodities, such as copper, silver, and gold, as their ultimate benchmarks for trading, their “gold standards”.
This didn’t mean that one needed gold, silver, or copper to buy bread, but, as in the “cup of olive oil” benchmark referenced above, the seller and buyer would know that a loaf of bread is worth three units of copper and that an orange is worth one unit of copper, thus an exchange of one loaf of bread for three oranges would be a fair trade.
Benchmarked bartering also made trade easier by allowing merchants and traders to use merchandise for indirect bartering and as a form of payment. For example, a trader could barter potatoes for shoes in one town, using a benchmark such as units of silver to negotiate the values and prices of the potatoes and the shoes, but not as a means of payment, then barter the shoes for weapons in another town, again using silver as a trade benchmark but not as a means of payment, and finally return to his hometown and trade the weapons for other merchandise, or trade them, for example, for gold.
Such units of gold, silver, or copper were not coins but rather units of mass, i.e., weight. Israel’s currency, the Shekel, is named after the means of payment described in the Bible as a Shekel of Gold, a Shekel of Silver, and a Shekel of Copper, each weighing 11.34 grams. Genesis 23:16, for example, describes my namesake, the Hebrew patriarch Avraham, paying 400 Silver Shekels (10 pounds of silver) to acquire the Tomb of the Patriarchs in Hebron as a burial plot. The word Shekel is the root form of the Hebrew verb which means “to weigh” and the noun “weight”.
However, shoes or weapons don’t last. Fashions, for example, may change, leather can become moldy, swords can rust, and better steel may be developed — rendering a warehouse filled with shoes and weapons acquired only months ago — worthless. A warehouse full of shoes and weapons is also not a compact or mobile or cheap solution for storing one’s life savings.
For the purpose of preservation of wealth, mobility, and storability, civilization gravitated toward using and adopting trade benchmarks that solved several basic needs.
For example, gold and silver are:
Fungible: One sword could be very different than another, but any ounce of pure gold is practically identical to any other ounce of pure gold.
Fractionable: If all you owned was a very expensive sword and you were desperate for a loaf of bread, your only way of obtaining that loaf was either “by the sword” or by pawning your life’s savings for a slice of bread. On the other hand, if you owned gold, you could chip off a small piece of gold and trade it, legally and fairly, for a loaf of bread.
Mobile: It is not easy to store, flee, or travel with a warehouse full of shoes or pillows. It is, however, relatively easy to store, flee, or travel with their value equivalent, a few bricks of gold.
Concealable: A warehouse full of valuable commodities is not concealable, whereas a stash of gold can be easily concealed in plain sight by painting it, or hidden out of sight.
Relatively Scarce: A resource adopted as a trade benchmark needs to be legally obtainable, in limited amounts only, only in exchange for goods, services, or work, and not abundantly available. Even a vitally important resource such as drinking water, as long as it is available in abundance, can not offer a frame of reference for valuing other resources with greater demand than supply.
Durable: An instrument serving as a trade benchmark needs to offer a sense of “object permanence”, i.e., be impervious to the effects of time and technology changes. If you left a typical commodity in trust for your great-great-granddaughter, the commodity itself may decay or be obsolete by the time she receives it. But if you left her an ounce of pure gold as an instrument of value, the instrument itself, the ounce of pure gold, would be unchanged when she receives it.
Economic Utilities: Counterintuitively as it may seem, a trade benchmark needs to be valued by the market as such and not have a value linked to the commodity elements (if any) underlying the benchmark. As the demand for an element as a utility, i.e. as a commodity, will vary or wane over time, so will the value of the element. But if the demand for and the market value of a trade benchmark, such as gold, is linked primarily to its “economic utility” — the value of this benchmark will be linked primarily to the states of domestic and global economies and will function as a hedge against economic and geopolitical turmoil.
Trade Benchmark to Trade Instrument to Investment-Grade Asset Class.
Investment-class assets are assets that, when acquired, provide their holders with varying degrees of risk, i.e., the assurance of preservation of capital (loss prevention), and of reward, i.e, the likelihood and scale of any expected return on the investment (gain).
Assessing the risk of loss associated with any investment class asset is fairly straightforward, and competent potential investors would avoid investing in assets whose risk exceeds their risk tolerance. But how do investors assess and value the reward component, the likelihood and scale of an expected return on the investment?
If the likelihood of a return is high and the scale of the return is reliably predictable, as would be the case with a bond offered by a strong government with a solid economy and good credit, the simple value of the potential gain, the return on investment, would be the NPV of the future income. But it’s not that simple. An astute investor can generate a return on an investment in a bond, a gain that may greatly exceed the interest paid by the bond.
The reason for this is that there are primary markets and secondary markets. In a primary market transaction, a primary investor acquires an investment class asset directly from the issuer, the obligor. For example, a purchase of T-Bonds from the US Treasury, a purchase of shares directly from a company (typically by subscribing to an offering), or providing real estate financing secured by mortgage notes, are examples of primary market acquisitions of investment class assets, each with their own risk and ROI expectations.
Reselling these investment class assets, the bonds, shares, or notes, to secondary investors who are interested in acquiring the assets from the primary investors, are examples of secondary market transactions, which may be conducted through regulated exchanges, i.e., marketplaces facilitating such transactions, such as the NYSE or CBOE, or, subject to rules and regulations, through private off-market transactions.
The existence of secondary markets, the ability to resell investment assets, allows investors to gain from fluctuations in supply and demand.
Imagine a world in which marketplaces facilitate only primary transactions. Imagine you can purchase from the US Treasury T-Bonds paying a certain interest rate, say 5%, but you can’t resell them. Imagine you can buy shares of a company, from the company, but you can’t resell them. Imagine you buy a home from a builder, but you can’t resell it. Imagine that your great-great-great-grandparent left you a magnificent original Leonardo Da Vinci painting that he purchased for 10 pounds of silver, and you are not allowed to sell it.
Now, imagine that, three years later, the US Treasury is selling T-Bonds (with the same maturity) paying only a 0.5% interest, the company that you acquired shares from has since quadrupled its revenue, earnings, and the dividends it pays out, and is selling shares, like the ones you own, at a price ten times higher than the price you paid, and that builders in your state are now selling homes like yours at ten times the price you paid.
You would be considered lucky to have made all these great investments in the nick of time and your friends could only wish they had done the same, but you would not be able to profit from your good fortune.
Luckily, we have secondary markets, where you can resell your assets at a profit. You can resell your 5% coupon T-Bonds, at a substantial premium, to an investor who is looking to get more than the 0.5% the US Treasury is currently offering. You can resell your shares to investors willing to pay you far more than you paid back when the issuing company was much smaller. You can resell your home to a buyer willing to pay more than you paid for it years ago when homes were cheap but less than what builders are charging today. And you can sell your ancestor’s Da Vinci painting for hundreds of millions of dollars.
Strategic investors with a higher risk tolerance would typically allocate a portion of their capital for investments in investment-grade asset classes that may present a significant risk of loss but a realistic likelihood of high gains.
Cautionary investors and non-investors often call such investors, derisively, “speculators”, or even “gamblers”. But all investments involve some degree of speculation or gambling. Even the US Treasury may one day find itself unable to honor its debt. Successful companies can become obsolete overnight or find themselves embroiled in terminal legal trouble. Similarly, the demand for real estate in any particular region may go from high to nonexistent.
Venture capital, for example, is one such “speculative” investment class that, for decades, was considered by many asset managers to be too risky. But decades of impressive success (with some failures as one would expect from any investment strategy), have demonstrated to asset managers that increasing their allocation to venture capital investments, only improves their overall performance.
The reason that venture capital, as an asset class or an investment strategy, is able to consistently outperform much “safer” asset classes, such as real estate, global equities, and PE, is that while the risk inherent with any particular VC investment is substantially high, strategic diversification allows VC funds to comfortably write down 50% of their investments while seeing stratospheric returns on 20% of their investments. We will see that a somewhat similar approach, albeit with other factors at play, applies to cryptocurrency investment strategy.
From a decorative commodity, a pretty metal, gold evolved to become a trade benchmark, a neutral benchmark used in barter transactions for valuing other goods and services, then to a trade instrument, i.e., an object broadly accepted and used as payment for goods and services, then to a “savings account”, an instrument used for parking one’s life savings for use at a later time and, then, to an investment-grade asset class.
Gold took that final step from a savings instrument to an investment-grade asset class in two phases. At first, individuals who accumulated gold realized that, from time to time, opportunities arose to acquire other assets at a relative bargain price (measured in gold) and sell them later at a profit, and that only individuals with gold were able to act on such opportunities.
This meant that owning gold was not only a form of preservation of capital but also a means for obtaining more wealth. As a result, as the demand for gold increased and its appeal became broader, the value of gold increased. Since the value of everything else was measured in gold units (or in silver, which was measured in gold units), “the value” of gold refers to its buying power. Here too, we will see that a similar process is at work within the cryptocurrency ecosystem — which translates to real-world wealth.
Precious Metal Coins.
Benchmarked value bartering, using established units of weight as benchmarks of value, evolved into the actual metal, units of copper, silver, or gold of the same weight, being standardized, coined, and stamped by ruling authorities, and used as universal forms of payment. But even then, these coins, at least in ancient Israel, were referred to as units of weight of a specific metal (e.g. Gold Shekel, Silver Shekel, etc.).
Fiat Currency 1: Minted Denominational Coins.
As kingdoms expanded, authorities began issuing minted coins, or tokens, which were given named denominations that had an exchange value governed by a decree of the issuing authority, by the strength of the issuing authority, by general market conditions, and by the economy at large. Minted denominational tokens had less of an intrinsic value than precious metal coins or weights, and often had no intrinsic value other than the fact that the ruling authorities required citizens to accept them at predetermined exchange rates in relation to the ultimate benchmark, the gold standard.
Fiat Currency 2: Bills / Gold or Silver Backed Promissory Notes / Bearer Instruments.
Minted denominational coins later evolved into banknotes of specified denominations, which allowed any bearer of such banknotes to redeem them at the issuing bank and receive denominational coins in an amount equal to the face value specified on the banknote. Subsequently, governments began issuing standardized denominational paper bills. Government bills would, hypothetically, function as banknotes, i.e., their bearers would be able to redeem them from the government in exchange for gold or silver, practically serving as a zero-interest payable-on-demand government bond, but they quickly became a preferred form of payment, a currency, for larger transactions.
The British Pound Sterling, for example, represented the British government’s promise to allow any bearer of such bill to redeem it for a pound of sterling silver upon presentment.
Banknotes and denominational paper bills reflect the obligation of the bank or the government to honor the note and are not tied to or redeemed later against funds from any personal account. Accordingly, the loss of a banknote or of a government-issued paper bill was typically akin to the loss of coins, which were not able to be traced or recovered.
Fiat Currency 3: Market-Backed Currency.
The US Treasury issues the US Dollar, a fiat currency, but it does not back it in any way. I.e., the US Government is under no obligation to redeem or exchange US Dollars for any other asset. In other words, the US Government can, through a roundabout process involving the Federal Reserve and the Treasury Department, issue, or mint, and use as many US dollars as they decide to issue.
The relative value, price, or exchange rate, of a market-backed currency like the US Dollar, is market-based. This value is proportional to domestic and international appetite (in terms of volume and price) for assets such as exports, real estate, and securities, that are sold for that fiat currency, and to the average market value and NPV (i.e., anticipated ROI) of such assets, and inversely proportional to the volume of currency in circulation of such fiat currency.
I described these factors, earlier, as a “circular vector-field of money flows” because there is a constant ebb and flow of changes to these factors, sometimes systemic and sometimes insulated, sometimes rapid and drastic and sometimes steady and less alarming, and changes to any single factor cause changes to the others as well. Maintaining the stability of a market-backed fiat currency requires the issuing government to apply disciplined and wise preemptive and reactive measures and controls. The “circular” aspect of these factors refers to the way past trends become a factor of their own. For example, while “inflation” is technically a measure indicating the rate at which the value of a currency has already declined, this trend becomes a vector of its own, often leading to a downward spiral in the value of the currency.
Historic trends become factors when the government and or the markets react to these trends with measures that perpetuate, or even accelerate such trends. Inflation can cause employees to demand and receive higher wages, increasing money circulation while pressuring employers to raise prices to recover the added costs, and resulting in additional inflation. Past inflation also causes investor uncertainty and caution, reducing foreign appetite for debt and equity investments in the affected country, and resulting in scarcity of capital and higher borrowing costs for local businesses, which will have to raise prices to recoup such higher costs or become insolvent, triggering a domino effect.
From many perspectives, some cryptocurrencies represent a better market-backed currency than the US Dollar or any other fiat currency. The main reason for this is that, at least with certain cryptocurrencies, no person and no other entity or government, can dilute the value of issued and outstanding units of those cryptocurrencies by issuing new units of that cryptocurrency. Instead, the only means of acquiring new units of the cryptocurrency is through a decentralized and democratic process; anyone can invest in computing equipment and “mine” units in exchange for contributing to the operation of the underlying blockchain.
However, this essay is intended to help potential investors understand the ecosystem of cryptographic digital assets as an investment-grade asset class, and not to argue for or against the use of cryptocurrencies as a form of payment, or currency, so I will not elaborate on that here.
Account Backed Settlement Payments: Central Ledger Transactions.
As more and more people began opening bank accounts and depositing funds “in their accounts” for safekeeping, financial institutions developed instruments with no face value (e.g., checks, wire transfers, ACH transactions, debit and credit cards, electronic interfaces, etc.) allowing account holders to make payments in custom amounts by affecting a transfer of funds from the payor’s account to the payee’s account.
However, an important and obvious, but often overlooked, distinction of such account-backed central ledger transactions is that funds deposited “into a bank account” are in fact not in that bank account, and funds drawn from or transferred away from a bank account are not taken from the bank account. If you deposit a specific $100 bill “in your bank account”, you will not be able to get that same bill back. Instead, the bank acts as an institution entrusted to maintain a ledger of entries for each account holder and to record precise entries in each account holder’s ledger, documenting any increase or decrease in the “balance” of funds the financial institution is “holding for”, or owes to, the account holder.
When an account holder affects a transfer of funds, say $500, from his savings account to his checking account in the same bank, no funds are transferred. Instead, the bank records a negative sum, -$500, in the ledger that is the savings account and a positive sum, +$500, in the ledger that is the checking account. In intrabank transfers, the process involves additional steps, and in an intrabank/intraparty transfer, even more steps. But, in the end, any such transfer of funds from one account to another account, via check, debit card, credit card, wire transfer, payment app, etc., is merely a transaction in which a negative sum entry is recorded by the financial institution in the ledger representing the payor’s account, and a positive amount is recorded by the financial institution in the ledger representing the receiving account.
Another important observation is that, since a bank account managed by a financial institution for the benefit of an account holder is strictly an electronic/digital ledger of entries (whose aggregate sum reflects the “balance” of the account) — we can, and should, think of our bank account as a “digital wallet” managed for us by the bank. Just like a cryptocurrency holder refers to the distributed blockchain ledger of entries indicating that she received a Bitcoin and or transferred a Bitcoin away — as a “crypto wallet”.
This reframing will allow us to compare and contrast central-ledger transactions to and with cryptographic distributed-ledger (or decentralized-ledger) transactions.
The term central-ledger (in this context) refers to an electronic account ledger, or “digital wallet”, that is controlled by a centralized single financial institution in a private and protected internal network. The term distributed-ledger refers to the architecture and protocols underlying the blockchain platforms (such as Tezos, Hyperledger, Hedera, Ethereum, EOS, etc.), which are not controlled or managed by one or a few centralized entities, such as a bank, but rather hosted on many thousands of nodes, i.e. networked but independently managed computers running software that can authenticate and verify transaction data on the network, in the blockchain.
Cryptocurrencies Should Not Be Deemed Securities.
We’ve seen earlier that gold transitioned, step by step, from being “commodity” to a “trade benchmark”, to a “trade instrument” (a currency), to a “savings account”, and ultimately to an “investment-grade asset class” because gold is fungible, fractionable, mobile, concealable, relatively scarce, and durable, and because its market value is primarily based on its “economic utility”.
Cryptocurrencies, too, are fungible, fractionable, mobile, concealable, relatively scarce, and durable, and, to some extent, much more so than gold. While, historically, gold made it relatively easier to store large sums or carry them around the world, cryptocurrencies make storing large sums or transporting them around the world an endeavor as easy as ordering groceries online.
Cryptocurrencies skipped some of the steps that gold went through. Bitcoin started as a “proof of concept”, then it became an insulated fad, then a currency with limited adoption (we’ve all heard of Laszlo Hanyecz who, back in 2010, paid 10,000 BTC for a couple of slices of pizza), but then, cryptocurrencies quickly made the leap to a speculative investment-grade asset class when, in 2017, Bitcoin’s price rose over 2000%, from under $1,000 to almost $20,000.
Cryptocurrencies did in a decade what gold did over hundreds of years because cryptocurrencies are pure assets, i.e., assets whose values are determined by the secondary markets purely based on their “economic utility” and are not bound to an underlying intrinsic value or cost or to any physical asset of a fixed value.
One of the key attractions of gold is that, because of the attributes explained above, it has historically been able to hold its value, or even gain value, in the face of economic malaise and geopolitical turmoil, while market-backed fiat currencies, equities, and bonds (including gold-backed government notes) became more volatile in the face of such challenges. The irony is that the “real money” flowing into the cryptocurrency ecosystem is coming from market-backed fiat currencies that have no intrinsic value themselves.
The very same point used by skeptics to criticize cryptocurrencies, the argument that Bitcoin, for example, has no underlying “real” value, is, therefore, the reason that cryptocurrencies, in aggregate, and the cryptocurrency ecosystem itself can attract an exponentially increasing volume of “real” investments. This trend will continue to the point where market-backed fiat currencies managed by irresponsible governments will no longer be the primary currency of choice.
Stocks and bonds are “securities” and not assets because their prices and value reflect the issuers’ implied or explicit representation to investors to endeavor in an effort to make these securities generate a return on the investors’ investments. A stock in a company is an instrument indicating that you have purchased a share of the company, an instrument whose initial and subsequent values are based on the company’s promise to perform well in terms of growth, earnings, and dividends. Similarly, a bond is a promissory note whose current and future prices are based on the profit you have been promised to make on your initial investment. For that reason, the SEC regulates securities like stocks and bonds to ensure that issuers of such stocks and bonds, certificates whose entire value is based on representations of future performance made by the issuer to the certificate holder, are held accountable and do not mislead investors.
Investment real estate, for example, is an asset class that is typically acquired by investors expecting the asset’s market value to appreciate and to receive a return on their investment in the form of a net operating income. In fact, investment R.E. is typically sold at a price derived from a cap-rate, a formula that reflects the NOI of the property and a factor representing an inverse of the property’s price to earnings (P/E) ratio. But the SEC does not regulate the sale or resale of investment real estate even though sellers and brokers may exaggerate the earning potential of the property or may conceal caveats that will adversely affect the earning potential of the property.
Collectible art and gold are assets that have a limited intrinsic value but are often purchased by investors hoping for the market value of these assets to increase over time. Here, too, the SEC does not regulate the sale or resale of collectible art even though sellers or brokers may mislead buyers regarding certain factors affecting the market value of the art being sold.
Being pure assets, the allure of cryptocurrencies is based on their “economic utility”, not on any expectation that the asset itself, the cryptocurrency, will produce income, or that any third-party will endeavor to produce an income for the benefit of the cryptocurrency holder. Buyers may believe, or just hope, that they would be able to sell the cryptocurrency down the road for a profit, but that is no different than a person buying one of a limited production of baseball cards, or a limited-edition sports car, or a book signed by a famous author.
The SEC wrongfully classifies many creative cryptocurrencies as “regulated securities” even though the issuers, buyers, and resellers of a cryptocurrency all agree that the issuer and the sellers of the cryptocurrency are not making any representation to any buyer that the issuer or the seller, or any other party, will endeavor in any way to cause the cryptocurrency to generate a profit for the buyers. A mere suggestion that a coin could increase in value down the road, without such increase being derived “from the efforts of others”, should not be used by the SEC to cripple US innovation.
Unfortunately, as long as the SEC continues to impede blockchain innovation in the US by regulating innovative cryptocurrencies as if they are “securities”, which they are not, innovators will continue to develop the cryptocurrency ecosystem outside of the USA, which will only serve to hasten the demise of the US Dollar as the benchmark for global commerce and trade. By the time US regulators come to their senses, it might be too late to save the US Dollar.
The Cryptocurrency Ecosystem.
Another point used by skeptics to criticize cryptocurrencies is the fact that there are tens of thousands of cryptocurrencies. But they are missing the point. The cryptocurrency ecosystem of 20,000 coins, provides investors an opportunity to create a diversified portfolio of cryptocurrency holding and to reallocate funds from one coin to another in order to capitalize on the ebb and flow of the supply and demand within the cryptocurrency ecosystem. This is not very different than investors of old using gold to buy commodities in one town and sell them in another for a profit.
I look at the cryptocurrency ecosystem as a dynamic dot-map of a new virtual planet, with a few large dense cities where real estate is expensive (with the largest and most expensive named “Bitcoin”), and 20,000 other medium and small cities, some with almost no population, with cheaper real estate.
Newcomers and “old-crypto-money” alike do not need to invest their entire portfolio in Bitcoin. Instead, they can invest, online, in some virtual properties in up and coming “cities” and move in and out of positions across the entire planet’s landscape as buying opportunities present themselves.
I call cryptocurrency buyers “investors” because they have decided that the cryptocurrencies they are purchasing have, in their eyes, a greater value than the hard-earned fiat currency they used to pay for these cryptocurrencies.
The cryptocurrency ecosystem, complete with NFTs, STOs, and other tokens being purchased and traded, is a system that is increasing in overall volume. That is not to say that there aren’t any investors who have lost money to the system. There are, and that is true with every investment class. But, in the aggregate, the system is growing in value and in volume, with ups and downs, as longtime cryptocurrency holders, who have profited from the increased value of their holdings, acquire new coins from new investors at increasing valuations, while providing hefty ROIs to these selling new investors. And vice versa.
The fact is that (according to www.slickcharts.com/currency at the time of this writing), while the cryptocurrencies with the ten largest market caps command 80% of the $2 trillion total cryptocurrency market cap, and the cryptocurrencies with the 35 largest market caps command 90% of the $2 trillion total cryptocurrency market cap, there were 87 cryptocurrencies with a market cap greater than $1 billion. This ecosystem allows small and large investors to climb up the ladder by profiting on gains generated by intercurrency investment flows.
Until now, the fiat US Dollar has served as the benchmark for valuing cryptocurrencies. But, as the prominence of the US Dollar in international markets continues to wane, the cryptocurrency ecosystem will eventually provide a stablecoin benchmark that is not tethered to the US Dollar or to any other fiat currency. As more and more investors invest in cryptocurrencies, the global standard will become a cryptographic value benchmark.
NFTs and the Cryptocurrency Ecosystem.
We saw earlier that fungibility, the fact that any and every Bitcoin, for example, is no different than any and every other Bitcoin, is one of the important attributes of cryptocurrencies.
NFTs are nonfungible tokens and each one is different than the other in that it functions as a container with content that can be customized and unique. The NFT ecosystem is presently dominated by enthusiasts buying and selling NFT with embedded digital art.
Digital artists like Beeple and CryptoPunk have sold NFTs for hundreds of millions of dollars, while millions of NFTs are offered for pennies, some being purchased and many not. The buyers are typically individuals who made fortunes in the cryptocurrency ecosystem and they consider these acquisitions a means of supporting the emerging NFT ecosystem.
But NFTs are not just for art. Once NFTs mature, they will be used for things like NDOs (non-deliverable options), offered on exchanges like FTX, allowing investors to purchase NFTs representing custom hedges and option combinations (packages of multiple contracts) and other customizable financial instruments.
Since NFTs “live” on the blockchain, as financial institutions begin offering NFT contracts, these NFTs will be purchased and resold on cryptocurrency exchanges, further boosting the cryptocurrency ecosystem.
Web 3.0 and Cryptocurrencies.
Web 3.0 is the next phase of the internet, an internet for global citizens who prefer to have their online presence secure in a decentralized borderless blockchain cloud rather than being confined to the whims of centralized governments and corporations. As such, cryptocurrencies will be the financial engine and backbone of Web 3.0, and the growth experienced by either one will benefit the other.
In Conclusion.
As I’ve mentioned at the start of this essay, my goal was not to convince anyone of the value of cryptocurrencies as investment-grade assets, but rather to shed some light on the nuances affecting the cryptocurrency ecosystem.
