{"id":15600,"date":"2020-12-04T20:30:02","date_gmt":"2020-12-04T20:30:02","guid":{"rendered":"http:\/\/mediashower.com\/blog\/?p=15600"},"modified":"2020-12-09T06:06:19","modified_gmt":"2020-12-09T06:06:19","slug":"principles-for-blockchain-investing","status":"publish","type":"post","link":"https:\/\/www.mediashower.com\/blog\/principles-for-blockchain-investing\/","title":{"rendered":"3 Principles for Blockchain Investing"},"content":{"rendered":"<p>I\u2019m an admirer of investor Ray Dalio, who founded <a href=\"https:\/\/www.bridgewater.com\/\">Bridgewater Associates<\/a>, the world\u2019s largest hedge fund. It\u2019s a fascinating origin story: as a young investor, Dalio was cocky and headstrong, making a number of lucky bets and quickly building Bridgewater into a successful investment firm.<\/p>\n<p>\u201cThis game is easy,\u201d he thought.<\/p>\n<p>Then he made a bad market prediction \u2013 even going on national television to tell everyone about his prediction \u2013 only to find out that he was wrong. Bridgewater had made a bad bet, and he lost everything. (I can relate to this story, since it\u2019s so similar to the story of my company <a href=\"https:\/\/www.mediashower.com\">Media Shower<\/a>.)<\/p>\n<p>Dalio had to lay off the entire company, except for one person: himself. Working alone from his kitchen, Dalio began to rebuild the company in a different way: by gathering different points of view, and trying through dialogue and debate to \u201cfind the truth together.\u201d<\/p>\n<p><center><\/p>\n<div style=\"max-width: 854px;\">\n<div style=\"position: relative; height: 0; padding-bottom: 56.25%;\"><iframe style=\"position: absolute; left: 0; top: 0; width: 100%; height: 100%;\" src=\"https:\/\/embed.ted.com\/talks\/ray_dalio_how_to_build_a_company_where_the_best_ideas_win\" width=\"854\" height=\"480\" frameborder=\"0\" scrolling=\"no\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<\/div>\n<p><\/center><\/p>\n<p style=\"text-align: center;\"><em>Watch Ray\u2019s terrific TED Talk.<\/em><\/p>\n<p>He began collecting <strong>principles<\/strong>, or guidelines, for being a successful investor, running a successful company, and living a successful life.<\/p>\n<p>At first, he collected these ideas in a Word doc and distributed them to employees as a PDF. Using these principles, Bridgewater became very successful indeed\u2014causing some to wonder if Dalio was forming some kind of cult. The media began to wonder about the \u201csecret document\u201d that Dalio was using to indoctrinate his employees, so he made it freely available on their website.<\/p>\n<p>That\u2019s where I was introduced to Dalio\u2019s principles. I downloaded the PDF, which contained over 200 principles, broken into three sections: The Importance of Principles, My Life Principles, and My Management Principles. Dalio was clear that these were <em>his <\/em>principles, and you were free to take or leave them: the point is to find your own principles.<\/p>\n<p>Later this PDF was turned into a <em>New York Times<\/em>-bestselling book called <a href=\"https:\/\/www.amazon.com\/dp\/B071CTK28D\">Principles: Life and Work<\/a>. I highly recommend the book (it\u2019s on our <a href=\"https:\/\/www.bitcoinmarketjournal.com\/read-and-grow-rich\/\">Read and Grow Rich<\/a> book list), or you can watch the 30-minute animated video, which is worth the time investment:<\/p>\n<p><center><br \/>\n<iframe title=\"Principles For Success by Ray Dalio (In 30 Minutes)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/B9XGUpQZY38?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe><br \/>\n<\/center><\/p>\n<h2>The Dalio Bitcoin Throwdown<\/h2>\n<p>Dalio recently made headlines in the blockchain community by inviting the Twitter community to <a href=\"https:\/\/twitter.com\/RayDalio\/status\/1328731042690306048\">open his mind on bitcoin<\/a>. (Watch Dalio\u2019s thoughts on bitcoin and blockchain investing in this <a href=\"https:\/\/www.youtube.com\/watch?v=UyVIuNI797w\">2-minute video<\/a>.) Our columnist Mati Greenspan wrote one of the <a href=\"https:\/\/www.bitcoinmarketjournal.com\/bitcoin-to-18000\/\">most-retweeted responses to Dalio\u2019s invitation<\/a>.<\/p>\n<p>My own view on Dalio\u2019s question is simply that <strong>bitcoin is the \u201con-ramp\u201d to the new world of digital assets<\/strong> (tokens, cryptocurrencies, and the like). We\u2019ve compared this to the traditional stock market by calling it the \u201cblock market.\u201d<\/p>\n<p><img loading=\"lazy\" class=\"aligncenter size-full wp-image-131248\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/12\/stock-market.png\" alt=\"Stock market\" width=\"977\" height=\"400\" \/><\/p>\n<p>Because bitcoin was the first blockchain project, and the most successful blockchain project (as measured by users and total market cap), it is typically the way that people are first introduced to the \u201cblock market\u201d: they buy a little bitcoin. It\u2019s like exchanging your dollars for Euros at the airport: suddenly, you\u2019re part of a new economy.<\/p>\n<p><strong>I agree with Dalio that bitcoin is not a storehold of wealth.<\/strong> It has failed its original vision as a digital money, because the price is so unpredictable. I also agree that it is primarily held by those who are hoping the price continues to go up, but I hesitate to call them \u201cspeculators.\u201d Here\u2019s why.<\/p>\n<ul>\n<li><em>If<\/em> bitcoin is the on-ramp for the entire digital asset market (the block market)\u2026<\/li>\n<li><em>And<\/em> we expect this market to have rapid growth over the next decade (similar to the growth of the Internet)\u2026<\/li>\n<li><em>And<\/em> there are no regulatory agencies to limit bitcoin\u2019s price growth\u2026<\/li>\n<\/ul>\n<p>\u2026then I see it as a sensible long-term investment, not a short-term speculation.<\/p>\n<p>Put another way, the mistake is in thinking of bitcoin in its original purpose (a universal digital money). <strong>Let\u2019s think of bitcoin instead as an <em>on-ramp<\/em> to get people <em>into<\/em> digital money<\/strong>. From bitcoin, it\u2019s easy for anyone to get into cryptocurrencies, tokenized assets, DeFi applications, and so on: a parallel universe of money.<\/p>\n<p>In this model, <strong>the biggest threat to bitcoin is that someone else comes up with a better blockchain on-ramp<\/strong>. In my view, this is likely. But where are these solutions today? Facebook Libra is tangled up in the nets of <a href=\"https:\/\/www.nytimes.com\/2020\/04\/16\/technology\/facebook-libra-cryptocurrency.html\">regulators<\/a>. Central Bank Digital Currencies <a href=\"https:\/\/www.coindesk.com\/goldman-sachs-digital-yuan-report\">are coming<\/a>, but they\u2019ll be national (bitcoin is global). Stablecoins are making it easier to stablize the price of digital assets, but bitcoin has the biggest brand.<\/p>\n<p>Technology moves quickly, but I can\u2019t see any bitcoin killers on the horizon. That\u2019s why I invest.<\/p>\n<p><center><br \/>\n<div id=\"attachment_131250\" style=\"width: 314px\" class=\"wp-caption aligncenter\"><img aria-describedby=\"caption-attachment-131250\" loading=\"lazy\" class=\"wp-image-131250 size-full\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/12\/principles.png\" alt=\"Principles\" width=\"304\" height=\"368\" \/><p id=\"caption-attachment-131250\" class=\"wp-caption-text\">Dalio\u2019s original Principles PDF.<\/p><\/div><br \/>\n<\/center><\/p>\n<h2>Blockchain Investing Principles<\/h2>\n<p>In the spirit of Dalio\u2019s principles, I\u2019ll recap some of the blockchain investing principles that I write about frequently (explained in more detail in <a href=\"https:\/\/www.amazon.com\/Blockchain-Everyone-Unlock-Secrets-Millionaire\/dp\/1982113545\">my investing book<\/a>). Like Dalio, I\u2019ll also reveal some of our early mistakes, and what we learned from them.<\/p>\n<p><strong>Principle 1: Think of blockchain investments like stocks<\/strong>. Even though many blockchain projects are not companies, think about the underlying project <em>like<\/em> a company. If the underlying protocol or app is large, useful, and growing, it\u2019s worth further consideration.<\/p>\n<p>When we started this newsletter during the great Blockchain Boom of 2017, we spent a lot of time trying to analyze Initial Coin Offerings. The problem is that it\u2019s really hard to invest in a project without any users: you\u2019re going on the team and an idea. In the stock market, this is \u201cangel investing.\u201d In the block market, it\u2019s pretty much gambling.<\/p>\n<p>It\u2019s a better strategy to find established blockchain projects that are large and growing. Here the block market offers a huge competitive advantage to the stock market: <a href=\"https:\/\/explore.duneanalytics.com\/dashboard\/defi-users-over-time\">it\u2019s transparent<\/a>. So you can see for yourself whether a blockchain \u201ccompany\u201d (read: project) is strong, healthy, and growing.<\/p>\n<p><strong>Principle 2: Understand the underlying \u201cbusiness.\u201d<\/strong> Like investing in a traditional business, be able to explain what the blockchain project actually <em>does.<\/em> What unique problem does it solve? If it\u2019s attracting lots of users, why? Can you try out the product or service yourself?<\/p>\n<p>Here again, the early days of blockchain were rife with speculators, and \u201ctrading tokens\u201d became a pastime, without any thought of the underlying value. This behavior caused a lot of people to write off the whole industry as a \u201cscam,\u201d but there <em>is <\/em>value: a tremendous amount. You have to do homework.<\/p>\n<p>Way back in 2018, we created a \u201chomework framework\u201d with our <a href=\"https:\/\/www.bitcoinmarketjournal.com\/blockchain-investor-scorecard\/\">Blockchain Investor Scorecard<\/a>, which helps you analyze the strength of the underlying \u201cbusiness.\u201d This framework has been <a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3146191\">academically published<\/a> and peer-reviewed, and used by thousands of investors. We hope you find it useful.<\/p>\n<p><strong>Principle 3: Look for tokens trading at a discount.<\/strong> If Principle 1 is quantitative (analyze metrics that show you blockchains that are large and growing), and Principle 2 is qualitative (evaluate the strength of the underlying \u201cbusiness\u201d), then Principle 3 focuses on <em>price<\/em>.<\/p>\n<p><center><br \/>\n<img loading=\"lazy\" class=\"aligncenter size-full wp-image-131251\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/12\/dune-analytics.png\" alt=\"Dune analytics\" width=\"956\" height=\"514\" \/><br \/>\n<\/center><\/p>\n<p>For a recent example, I recently bought a large position in Uniswap. I saw the user growth in the chart above (Principle 1). I used the product myself and thought it was not only easy to use, but incredibly useful (Principle 2). When they launched a new governance token, I got in early \u2013 at $5.50 per UNI.<\/p>\n<p>A few days later, UNI was trading about $2.00. In just a few days, I lost more than half my investment.<\/p>\n<p>In retrospect, this was like buying a traditional IPO on the day it launches. It may have been better to wait to see where the price landed before investing. It has not dampened my enthusiasm for Uniswap (and the price is already above $4.00 as I write this), but it shows the importance of price.<\/p>\n<p>Price is relative. Just as we might value home prices by comparing similar homes in the same neighborhood, we can value similar blockchain projects to get baseline metrics, like price per user. For blockchain platforms and protocols, we can add in metrics like app growth, or price per power user.<\/p>\n<p>But as the legendary investor Ben Graham taught Warren Buffett: \u201cPrice is what you pay; value is what you get.\u201d So sometimes we have to look across categories of blockchain investment and compare apples to oranges.<\/p>\n<p>Imagine you\u2019re at the grocery store. Per pound, the apples are cheaper than the oranges, but what\u2019s the value of the apples relative to the oranges? Will the apples keep longer? Do you enjoy oranges more? Are you hankering for an apple pie, or do you have scurvy?<\/p>\n<p>When we compare the market cap of bitcoin ($339 billion) with Ethereum ($57 billion), does that mean bitcoin is overvalued, Ethereum is undervalued, neither, or both? What is the value \u2013 especially the <em>future<\/em> value \u2013 relative to the price?<\/p>\n<p>In my view, Dalio is right: nobody really buys anything with bitcoin. The price is too volatile. Banks are afraid of it. But it does serve as a powerful on-ramp to the block market. <strong>Bitcoin is the gateway drug, and that has incredible value.<\/strong><\/p>\n<p><strong>Ethereum has become the <em>de facto <\/em>platform for blockchain development,<\/strong> and history teaches us that technology platforms usually consolidate into one or two big winners: Apple and Windows, iPhone and Android, Google and Bing. Currently Ethereum is #1, with lots of platforms trying to be #2. That makes a long-term investment in ETH a pretty good bet.<\/p>\n<p><center><br \/>\n<img loading=\"lazy\" class=\"aligncenter size-full wp-image-131252\" src=\"https:\/\/www.bitcoinmarketjournal.com\/wp-content\/uploads\/2020\/12\/btc.png\" alt=\"BTC is on ramp\" width=\"977\" height=\"731\" \/><br \/>\n<\/center><\/p>\n<h2>Blockchain Principles in Action<\/h2>\n<p>Now, let\u2019s put these principles into practice with BTC and ETH.<\/p>\n<ul>\n<li><strong>Qualitative<\/strong>: If Bitcoin and Ethereum were companies, we\u2019d say they each have a big role to play in the future financial system. Indeed, they are the foundation of the new \u201cblock market\u201d (the on-ramp and the development platform, respectively).<\/li>\n<li><strong>Quantitative<\/strong>: Bitcoin and Ethereum both show strong and growing user adoption (Ethereum even more so, because of the network effects of new apps built on top of it). They are both battle-tested, with healthy communities of both users and developers.<\/li>\n<li><strong>Price<\/strong>: If blockchain is eating the global financial system, what percentage will it eat? And what percentage of that value will we give to BTC and ETH, the two leading projects? These same questions can be applied to every part of the financial system as blockchain swallows them up: mutual funds, derivatives, commodities, collectibles real estate, and so on.<\/li>\n<\/ul>\n<p>In broad strokes, those are our principles in action. But we\u2019re always looking to get better. This space moves quickly, so we try to keep a beginner\u2019s mindset and remain lifelong learners. In the spirit of \u201cfinding the truth together,\u201d I invite your feedback.<\/p>\n<p>Like Dalio, I invite you to change my mind.<\/p>\n<p><em>John Hargrave is CEO of Media Shower, and bestselling author of <\/em><a href=\"https:\/\/www.amazon.com\/Blockchain-Success-Stories-Studies-Business\/dp\/1098114825\">Blockchain Success Stories: Case Studies from the Leading Edge of Business<\/a><em>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>I\u2019m an admirer of investor Ray Dalio, who founded Bridgewater Associates, the world\u2019s largest hedge fund. It\u2019s a fascinating origin story: as a young investor, Dalio was cocky and headstrong, making a number of lucky bets and quickly building Bridgewater into a successful investment firm. <\/p>\n","protected":false},"author":2,"featured_media":15601,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[459],"tags":[],"_links":{"self":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15600"}],"collection":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/comments?post=15600"}],"version-history":[{"count":7,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15600\/revisions"}],"predecessor-version":[{"id":15603,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/posts\/15600\/revisions\/15603"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/media\/15601"}],"wp:attachment":[{"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/media?parent=15600"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/categories?post=15600"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.mediashower.com\/blog\/wp-json\/wp\/v2\/tags?post=15600"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}