How do you make money??
(Originally posted on Cryptobuzz on 5 Oct 2017)
The Big News: How do you make money??
Wait, how can a business make money in the crypto space? This is a question I got this week, and one that I had as I first dove into this space. If this is a world where everything is decentralized, where there is no rent-extracting middlemen, and all the value accrues directly to the participants in the network, how can you create a business and generate profits?
We have to change the way we think about traditional business models. Fred Wilson said:
The crypto playbook is a disruptive one. It is not a new way to raise money. It is a new way to architect a business. The profit motive is flipped upside down. You extract profits with your currency, not your business model.
Crypto is such a different way to go about creating things that the typical phrase "I'm starting a new business" sounds a bit strange. Are all these ICOs businesses? Lots are scams, some might look a bit like a traditional business, but most are a completely revolutionary blend of decentralization and anarchism.
There are two main factors in crypto that have contributed to this environment for new value creation:
First, we can now attach a price to things that before we knew were valuable but we couldn’t quantify. We see this most clearly in protocol development. All of us use internet protocols all day, every day; there is obviously tons of value in things like TCP/IP or SMTP, but we have no idea how to quantify that value. We can readily cite the market cap of companies built on top of these protocols, but the protocols themselves remain largely forgotten and unimproved. Cryptocurrencies and tokens allow us to attach value to things that used to be invisible.
Second, cryptocurrencies and tokens have introduced entirely new ways to align incentive structures. Network creators have tremendous flexibility in aligning the incentives of the network participants. As the creator of the network, you can control how you make “profits” by how you control your currency. In addition, once this new ship has sailed, entirely new ways to create value will be born as a result of a healthy ecosystem. Bitcoin is the most proven example of this. What started as a 9-page white paper outlining an incentive structure has exploded into a $70 Billion network and caused all kinds of “businesses” to be created around it from mining operations to exchanges and everything in between. We also see tokens as a way to solve the chicken and the egg problem of early networks by incentivizing early adopters through potential financial gain instead of just a cool t-shirt for contributing to a kickstarter campaign.
The new “business model” of crypto raises a whole series of new questions. How do you determine if a network is successful? Cash flows and revenue are typical tools used to measure success of traditional businesses but they don't really apply in crypto. How will mergers and acquisitions work in a world where the term "EBITDA multiple" has no meaning?
This is why this space is so fascinating, because not only do we have new innovative technology, but is also bringing a completely new asset class with loads of financial innovation with it. So, how do you make money in crypto? It’s up to all of us to figure that out :)
Interesting Articles
Websites are exploring enlisting visitors to mine crypto to replace or augment the traditional ad revenue-based web design model. Link
William Mougayar (someone you should listen to carefully) explains what China’s effect on blockchain and cryptocurrencies will be moving forward. Link
An extremely bearish argument for cryptocurrencies, if you’re into that kind of thing, as told by gold enthusiast, Jim Rickards. Link
For all those Utah based crypto millionaires or future Utah dwellers, there’s a $2.9 million dollar home in Sundance with your name on it that can be purchased with Bitcoin. Link
Proshares files for 2 Bitcoin ETFs. One to go long and the other to go short. Link
What if instead of being in a bubble, we are at the beginning of a huge spike in a long-term adoption S-curve? It might mean we’re in store for $50,000 per Bitcoin. Link
Chart of the Week
Willy Woo with yet another interesting analysis on the price of Bitcoin currently based on what he's calling the MTV ratio or the PE ratio for Bitcoin. This is the market cap to USD volume transmitted ratio. According to this, the short answer is we're not in a bubble.