The True Value of Crypto
By: Bosstaco Farms
Tags: Cryptocurrency, Defi, Investing, Yield Farming, Risk Management

The OG Crypto

Dog coins and bitcoins and prices going to the moon and then crashing back to earth! What is happening with cryptocurrency? People are getting rich, some are losing everything, and no doubt you’ve heard plenty to scare and/or excite you. I can’t blame you, the media headlines make it seem like cryptocurrency is nothing more than a casino at best and a total scam at worst. While there is plenty of speculation going around in 2021, many people have the impression that cryptocurrency is nothing more than that.

Let me pull back the curtain and show you WHY cryptocurrency has value and WHY there are plenty of serious investors in this market who believe in the transformational technology behind cryptocurrency. But first, we need to talk about the concept of value. What is value and how is value determined?

The Concept of Value

Let’s get this out of the way up front. Price does NOT equal value. Price is a representation of the cost to buy/sell something of value in that moment. This is the biggest pitfall for investors, especially for investments that are volatile, like stocks and cryptocurrency. If you have a firmly held belief in your investment, then you have assigned it a value. If the price exceeds the value you assigned to it, you sell. If the price is lower than your assigned value, you buy and accumulate.

Value is something that we, as humans, assign to everything we interact with. We determine what we do, how we spend our time, what we purchase, where we live, who we interact with by assigning value to each of these things. This is obviously done without any intentional calculation, but we assign value nonetheless. Value is determined by individuals: one man’s trash is another man’s treasure.

One man’s trash is another man’s treasure

But clearly some things are determined by large groups of people to have more value than others — prices reflect this assigned value. The price of socks, Tesla stock, Bitcoin, housing, cars, food all have value. But why are socks cheap compared to a car? Well, this should be obvious: the relative scarcity of cars vs. socks due to the cost of production. Scarcity is driven by the cost of production. Demand is a result of this valuation, and more demand drives up price.

The Golden Trivergance

The three most important properties that result in a high valuation and therefore a high price:

- Scarcity (a function of the cost of production)

- Legitimacy

- Utility

One of the most expensive purchases that most people make in their lives is buying a house. Why?

- Houses and land are relatively scarce (therefore expensive to produce)

- Housing is seen as a legitimate source of protecting and growing capital

- Housing has utility; it can be lived in or rented out to earn income

By contrast, socks are neither scarce nor have inherent legitimacy as money. Socks do have utility — they keep your feet warm, dry and clean and are priced accordingly.

Crypto”currency”

So what gives cryptocurrency value — why is all of cryptocurrency worth $1.5 TRILLION as of July 2021? First we need to understand that cryptocurrency is built on a new(ish) type of technology and is inherently technology at its core.

Blockchain

The underlying technology is known as a blockchain or distributed ledger. This technology allows for thousands of computers to run the same software and simultaneously record transactions that occur on that network. This provides security — no one person or group can change the outcome of these transactions. The mechanics of how transactions are verified depend on the underlying network.

All transactions are therefore public and anyone can view the details. Your identity, however, is not known — only the transactions that have occurred on a wallet. This makes most cryptocurrencies pseudonymous and gives the user privacy — not anonymity. It is this public nature that provides network security and allows users to trust that their cryptocurrency is protected and cannot be changed/altered.

This means that each cryptocurrency coin/token cannot be double-spent and is interchangeable without the need for a trusted third party (can you guess why banks don’t like crypto?). A network’s security and HOW it manages this process is critical to understand before investing. This is part of what makes crypto complex and difficult to fully understand. At the end of the day, you are relying on publicly available code written by humans. You don’t have to be a programmer, but you do need to be able to understand what exactly is happening and have trusted sources of information.

Scarcity

Gold is rare and mining it is expensive

Each cryptocurrency has its own economy and monetary policy. Value is created through the scarcity of the coin and its cost of production. Bitcoin, for example, uses computing power to distribute the blockchain rewards; a miner exchanges their capital asset (equipment) and capital costs (electricity) for Bitcoin rewards. In Bitcoin’s case, there will only ever be 21 million coins and no more can ever be created. As the network expands and more people want access to the network (read: buy Bitcoin), the scarcity of the coin causes price to rise. Bitcoin could be compared to gold in this way; gold is a scarce resource that has to be mined by making the same capital exchanges for the ability to sell gold for a profit.

It’s important to know the economics of the crypto or the “tokenomics”. This includes how many will be created, how they are created and how they are distributed. This varies for each crypto and helps the market determine the price of the crypto. In most cases, crypto is originally distributed to users (known as “mining”) in exchange for some economic input: utilizing electricity and computing power to secure the network, buying directly from the protocol to finance the network operations, or “staking” some of your crypto to facilitate ongoing network operations and earn rewards for doing so.

Legitimacy

Ah but what about all these other cryptocurrencies? They can make endless Bitcoins! Not exactly…several variations of “bitcoin” exist already when users (those mining Bitcoin) in the past have disagreed about how or whether the network should change. So those miners created a new network, also known as a “hard fork” that has a new coin with a new name (Bitcoin SV, Bitcoin Gold, Bitcoin Cash, etc). But what these networks lack is legitimacy. People do not assign the same value of legitimacy to these networks for various reasons. They are not more Bitcoin but an entirely separate network and coin. It does not change the scarcity of Bitcoin. This also does not mean that forked networks do not have legitimacy at all, but it is not the same, just as the Euro is not the same as the British Pound.

Utility

This is where the technology part of cryptocurrency becomes very important. Unlike traditional asset markets like the stock market, most legitimate cryptocurrencies have an underlying utility. This may be similar to a traditional business, where owning the coin or token gives you a share of the profits of the protocol. This is accomplished through “staking” your coins/tokens. You are using your asset to provide security to the network and are rewarded for doing so. Others may be useful as a store of value (Bitcoin), means of transfer (Litecoin), as a way to vote or govern the platform, or as a currency to pay for network services (Streaming services with THETA). Many smart contract platforms (Ethereum, Polkadot, Polygon) have a coin that is used to pay transaction fees (aka “gas”).

Digital Assets

As you can see, currency is a bit of a misnomer. Think about cryptocurrency as a digital representation of value. I like to call them Digital Assets. A unique aspect is that decentralized networks allow you to have control over your assets outside the confines of traditional corporate business structures. This is a very powerful tool for humanity to maintain our freedom of choice; imagine a YouTube that isn’t run by one corporation but by thousands of connected computers. There would be no forced censorship by one person or business; censorship would be enforced by the community. That exists today with several crypto businesses. The possibilities are truly limitless.

Now that we are thinking differently about what cryptocurrency is — a digital representation of value — let’s start to break down some of the different coins and tokens by looking at categories and some examples.

Stablecoins

These are some of the most important in crypto. These represent a stable asset, usually a currency. Most are pegged 1:1 to the US Dollar, meaning each coin is worth exactly $1 at all times.

Examples: USDC, DAI, USDT

Store of Value

A way to store significant sums of money for preservation and growth; gold and silver are real world examples of ways to store value. This type of crypto also allows for fast, easy and cheap transfer of money to anyone in the world.

Examples: Bitcoin (BTC)

Decentralized Finance

These tokens represent some sort of utility or value in the underlying protocol or platform. DeFi is an entire world unto itself and warrants a much deeper dive. These can sometimes be thought of as a type of stock in a company, in that these tokens typically reward you for participating, similar to how American Express may give you points in return for using their credit cards or Apple pays you dividends.

Examples: AAVE, Compound (COMP), Curve (CRV)

Meme Coins

These dog coins may bite

You may have seen or heard about these — they typically do not have underlying utility but rely on a community to support it. In some cases, these communities have been strong enough to push the coin to sky-high prices as well as developing utility to support long-term development and growth. I consider these highly speculative.

Examples: Dogecoin (DOGE), Shiba (SHIB), SafeMoon (SAFE)

Smart Contract Networks

A bedrock of cryptocurrency and most likely to survive the ups and downs, these coins are usually used to pay transaction fees for using the network. There are varying underlying technology differences that make each unique, but most use Smart Contracts (a type of reliable code that allows trusted exchanges).

Examples: Ethereum (ETH), Polygon (MATIC), Solana (SOL), Cardano (ADA)

Non-Fungible Tokens (NFT)

The $69M digital art NFT

NFTs hit the mainstream in early 2021 with some insane price action. NFTs are best thought of as digital proof of ownership. Each NFT is unique and cannot be replicated, although its contents could be. A real-world comparison would be the Mona Lisa; there is only one original authentic painting and it is priceless, but there are millions of copies that are worthless. NFTs prove authenticity. Unlimited use cases exist here; identity solutions, digital real estate titles, digital art ownership, patent records.

Examples: NBA Top Shot, OpenSea, Rarible, CryptoPunks

Storage

Dropbox is great, but it’s dependent on one or two big companies and requires complete trust in them. Blockchain technology allows for decentralized storage; imagine that you have sensitive data that you want to backup — crypto storage protocols allow you to do this in a distributed way, meaning that your data is not located in one central location but broken up across thousands of computers and able to be reassembled when needed.

Examples: IPFS (Interplanetary File Storage), Filecoin (FIL), BitTorrent (BTT), Storj (STORJ)

Oracles/Analytics

Providing data services including real-time, real-world information to the blockchain and analysis of data.

Examples: Glassnode, Chainlink (LINK), The Graph (GRT), Band Protocol (BAND)

Gaming

Axie Infinity

Potentially providing a significant increase in adoption of crypto, there are many ways that gaming utilizes blockchain technology to bring new ways to game. This includes digital ownership of in-game items through NFTs, digital worlds where you can own digital land and run a digital business using VR, and bringing gamification to crypto protocols.

Examples: Axie Infinity (AXS), Enjin Coin (ENJ), Atari (ATRI), Decentraland (MANA)

As you can see, there are plenty of use cases for crypto today. Some other categories are Internet of Things, Borrowing/Lending, Insurance, Prediction Markets/Gambling, Tourism, Music and Video Streaming.

Starting Your Journey

Research

Before you throw your money in, you need to determine your own valuation and decide where, when and how you will invest. It starts with research. Find the crypto website and begin there — read all of the documentation and then find Social Media links and read some more. Ask questions if you don’t understand. Get a feel for the community and how the developers interact with users. Seek out people you can trust and follow them and consider their research as you do yours. Watch out for scammers and pumpers — if they are telling you to BUY something, they probably stand to gain if you do.

Resources

- CoinBureau

- Zapper.fi Learn with DeFi Dad

- coindesk.com / cointelegraph.com / decrypt.co

- Platform documents

- Platform social media (Twitter, Discord, Telegram)

Develop a Strategy

What outcome do you want — is it to get rich? Look elsewhere; the majority of people who have profited from crypto were not lucky or savvy traders; they are early adopters who had a foundational belief in their investment and were holding and buying when prices were low. What’s your time horizon — is it less than a year? Look elsewhere; crypto is highly volatile and not everything will regain price just because “bull market”.

Write down your strategy. Review it constantly. Evaluate your progress against your goals.

Dollar Cost Average

Don’t invest all of your money at once unless you have a strongly held belief and can stomach the ups and downs. Successful investors continue to invest on a regular basis regardless of price. If you bought $1000 of Bitcoin at it’s peak, it may be worth half of that right now. If you bought $100 per week over 10 weeks, you would very likely more Bitcoin because you bought some high and some low. This is the most sound and reliable investment strategy of them all.

Tools

You will need several things to get started and owning crypto is NOT like owning stocks. You can and should use your own crypto wallet to store your crypto and not leave it up to a third party. You also need to determine your “on-ramp”, or where you will exchange your US Dollars for crypto. Here are a few tools that I use for you to begin researching.

- Hardware Wallet: Ledger

o Hardware wallets are among the most secure ways to store your crypto

o Buy ONLY from trusted sellers

o ALWAYS save your recovery seed phrase and NEVER enter it online

- Web 3.0 Interface: MetaMask

o This allows you to use DeFi protocols and easily send/receive funds

o Ethereum and EVM-compatible blockchains can use this

- Exchanges: Coinbase/Coinbase Pro

o Swap your US Dollars for USDC at no-fee

o Trusted public company

o Coinbase Pro offers some of the best pricing and low fees

o Not many coin/token options but has most of the Top 25

o Great learning platform that rewards you in crypto!

o Upcoming rewards debit card

o Can move all crypto to another wallet

Fin

Crypto is a developing technology that offers nearly limitless options for revolutionizing a lot of industries. Investing in crypto is highly risky but potentially highly rewarding. Decentralization gives us trustless ways to directly interact without requiring a third party. Expect this to be a bumpy journey but an amazing ride. Only risk what you can afford to lose. Have a firmly held belief that forms your strategy. Never stop learning. Good luck and welcome to the wild, wild west.