"A lot of traders are capitalizing on cryptocurrencies, but I wanted to provide the perspective of a VC in the space. A thesis removed from technical analysis and based on philosophical fundamentals."

How I Invest in Blockchain Companies

Blockchain is trending. It's almost shocking to see its tremendous growth in popularity as someone who first joined the space when it was exclusively known as the way for college students to buy drugs off the internet. Now it has about a half a trillion dollar market cap (although this will probably be outdated by the time you read this).

Experts and investors are touting it as the solution to everything, and also nothing; something that will change the world, but also something that will wipe out trillions of dollars of wealth. So how do value investors form a coherent thesis about a technology surrounded by so much hype, ill-informed opinions, market movements, and a fear of missing out on potentially the next big thing? Calling the blockchain "internet 3.0" is vacuous, as is calling it "the next big thing since the internet" - ask anyone who makes these claims about what those words actually mean and you will hear an awkward smattering of more buzzwords.

You can find several articles about how the blockchain works and a plethora of use cases, so what I really want to do here is guide investors through the philosophy underlying this phenomenon, create an intuition around why it is important, and my own investment thesis.

Source: https://www.coindesk.com/dilbert-com...oin-offerings/

For those truly seeking to understand the history of blockchain and the motivation behind the initial pioneers, one must look towards the cypherpunk movement of the late 1980's and 1990's. Nothing summarizes better the ethos of that movement than the Cypherpunk Manifesto, written in 1993 by Eric Hughes, an alumni of my very own University of California, Berkeley. (I always thought it incredibly fitting that U.C. Berkeley was, and continues to be, the vanguard of social revolution and is home to the leading college blockchain organization in the world.) I would highly recommend anyone who wants to potentially devote their career to this space to read the manifesto to see if they are actually passionate about blockchain's mission. I found the most powerful excerpt to be:

"We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence. It is to their advantage to speak of us, and we should expect that they will speak. To try to prevent their speech is to fight against the realities of information. Information does not just want to be free, it longs to be free. Information expands to fill the available storage space. Information is Rumor's younger, stronger cousin; Information is fleeter of foot, has more eyes, knows more, and understands less than Rumor.

We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do. We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money."

Well, what does that mean? Even though blockchain technology in its contemporary form is encompassing much more than the original manifesto, it illustrates that blockchain is not just a technology. Anyone evangelizing blockchain as a platform is missing the entire point - it is inherently a social movement. It's value is built upon societal adoption of a "protocol" without any one single person able to alter it without the network's approval. It is owned by the people in an unprecedented way. That is all very abstract, so to really understand the difference, let me compare it to other "trending" technologies - like AI.

My friends and I have always been deeply interested in figuring out which technologies we thought would push humanity forward, so when I decided to devote my future to this industry and its mission, I was naturally questioned about how it could possibly be more important than other frontier technologies like AI and gene editing. I had a tough time answering that question, until I realized the question itself is fundamentally misleading. Trying to compare blockchain with AI in terms of societal impact is like trying to compare democracy with the steam engine. One is a shift in a cultural paradigm upon which a society is organized, whereas the other is a change in what a society is even capable of doing. Different, somewhat parallel, frames of thought - none particularly more important than the other.

When we talk about progress, especially here in Silicon Valley, we myopically look only towards technological progress, and ignore the cultural. Technological progress is great in that it raises the standard of living for everyone and is able to help us, as a species, control our fate; however cultural progress is that which makes humanity more than solely a resource aggregating machine. It adds meaning, morality, love, and justice. It changes how we view one another, and how we experience life. Humanity has been through several Industrial and Technological revolutions, but now it is time for the next Renaissance.

The School of Athens - the intense humanity and emotion expressed in Renaissance art

So how does this tie into blockchain companies? Decentralized projects are a bit like pieces of art - their value determined by the market, their impact by societal acceptance, and their meaning never entirely alterable by the artist themselves.

Before you dismiss blockchain as a hippie art project, understand that art is only an incomplete analogy - just like the steam engine and printing press analogies are only barely able to capture what the impact of the internet has been. However, I found it a useful one when crafting my thesis. At the current maturity of blockchain technology, it is like economic art.

Consider the ICO model. While it has been abused, it is incredible to think about a future where early believers of a technology actually benefit proportionally from its success in the form of token appreciation. Look towards breakthrough startups such as Uber and Airbnb - all of them relied on the faith of early adopters, yet the rewards of their success were incredibly skewed towards the equity holders. Of course the users definitely captured some economic value through their platforms, but ICOs present an opportunity to more equitably distribute rewards to early believers. To tie it back with the previous point, this is a fundamental restructuring of the economics of our society. Capitalism 2.0. Now that is powerful in ways vastly different than any other technological phenomenon today, and is what I love so much about it.

Now, onto my investment thesis, most likely the reason why anyone is reading this post. It is guided primarily by projects whose existence are defined by a moral obligation, as opposed to specifically a technological necessity. Not to say those two are mutually exclusive, in fact they are most often intertwined, but a moral compulsion is what will drive the most successful and long lasting blockchain projects, just like how it was the reason why cypherpunks launched this movement in the first place. Sure, maybe blockchain could help with supply chain management, but that is a weak use case. On the other hand, blockchain being used to define a mechanism of value storage and exchange, like Bitcoin, that is free from the manipulation of potentially misguided entities, is powerful. It is incredibly unjust that individuals in developing countries, like Argentina, who have spent countless years working hard for their families and representing the fruits of their labor in a currency that the government promised would have value, had to see it go to nothing. Sometimes go to nothing multiple times in their life. This is why cryptocurrencies are becoming more and more popular in terms of actual usage in third-world, developing nations, where they cannot so freely trust the economic system like we can in the U.S.

This is not to admonish those governments as evil, or to say that our own is infallible, but rather to make it a point that coercive human institutions are prone to error, and often that error can have catastrophic ramifications on real people and their families. That is the power of blockchain - to make such institutions unnecessary. The greatest disintermediary. Skeptics may argue that the volatility of cryptocurrencies is evidence that cryptocurrencies are hardly a solution, but that is only due to the transitory period of the technology before it becomes mainstream. No one believed Mr. Tim Draper when he made the claim that Bitcoin will rise in value to $10,000 by the end of 2017, but look at what happened. The market cap of cryptocurrencies is about half a trillion, which is tiny compared to other comparable asset classes, but when it does mature, we can expect significantly more stable prices, and cryptocurrencies adopted as a dependable mechanism of value storage and exchange on par with fiat currencies. Eventually, people will make the decision that they trust algorithmic technologies more than human institutions.

Hyperinflation in Germany during the Weimar Republic
To continue onto applications of my thesis, it is also immoral that my family, among others, has to worry about the government of India not enforcing the property rights entitling us ownership of our own land, by displaying fake deeds and re-written histories. Thus making land titles on the blockchain, which provide an unalterable history of ownership, powerful. It is immoral that gigantic data centers accumulate unfathomable amounts of data about our daily lives without us knowing, and then turn around and give that data away to veiled organizations destroying any privacy we think we may have. That is what makes self sovereignty of our identity and data through distributed systems so societally transformative. This is just to illustrate the few most palpable examples and the necessity of looking towards projects that have a real moral raison d'être behind them when considering an investment. Those, and infrastructure level projects that make blockchain technologies more mature and usable - be it through privacy, scalability, identity, or governance. These are the most likely to survive the in-coming market correction.

I hope that communicates the core principle of how to value invest in blockchain technology, and how it is so fundamentally different than other trends. It is so much more than just a technology. We have a cultural phenomenon driving the Renaissance of the future, entirely owned by the people, and that is something to be excited for. Many believe things like the ICO will replace venture capital firms, but that is not the case. Presently, ICOs have been able to raise an incredible amount of money through the sheer hype around them caused by a few people making extravagant amounts of wealth, but it is hardly a trend that will last at the scale it has been so far. The role of the venture capitalist interested in creating value in the blockchain space will change, but will not be eliminated. That, however, is a post for another time.


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