Many of us were sitting around the dinner table at Thanksgiving or Christmas and someone youngish started talking about blockchain cryptography. They probably called it something different though: “crypto,” “bitcoin,” maybe something about a “doge”-coin?
Breathless talk of massive returns may have followed. A cult leader would be impressed by the level of evangelism.
Inevitably a wiser individual asks some variation of the question: “But what is it and why do I need it?”
“It’s digital gold.”
“It’s replacing the U.S. dollar.”
“It’s a tool for the decentralization of corrupt centralized power structures in a post-capitalist world.”
Ok. Blockchain cryptography (a.k.a. crypto) may be some or none of those things, but here’s why I think it matters – a lot.
Blockchain Cryptography Brings Ownership to the People
Blockchain cryptography can put an explicit PRICE – a value – on nearly any asset. It can do this because the combination of blockchain databases and cryptography enables the creation of tokens (like bitcoin, but there are thousands more) that embed inalienable rights. These tokens are secure, tradeable 24/7/365, and most importantly, verifiably OWNED.
When you put an explicit price on something it starts to matter in a very different way. Suddenly you own something worth X dollars and you can sell (or buy) it at will. Ownership is the ultimate incentive and the simplest explanation for crypto’s explosive growth and adoption (now a $2 trillion asset class). It brings ownership to the People.
Economic systems have evolved to proliferate asset ownership and blockchain cryptography is the latest revolution. We’ve transitioned from medieval titles and landed gentry to 20th century home ownership to 401ks and ETFs – and now to digital tokens. Each step along the way brought the possibility of ownership closer to the People.
What if Uber paid its drivers in Uber tokens that were the equivalent of Uber stock? What if they did the same for customer loyalty points? Remember, these Uber tokens would have a verifiable dollar value (the equivalent of Uber’s stock price).
Would drivers eschew working for Lyft when they became owners of Uber? Would customers immediately see the value in heretofore nebulous loyalty points when paid in Uber tokens, and isn’t this a great incentive for them to use Uber instead of Lyft or DoorDash ?
During its latest earnings call, Starbucks talked about tokenizing its “Stars” loyalty program. How many other loyalty programs would benefit from an easily valued and tradeable token? Credit cards, hotels, airlines and retailers come to mind.
No more logging in to an opaque rewards system and hoping that you have enough points for that flight to Ireland, or that hotel in Orlando. No more lingering suspicions that you were taken advantage of. The price is the price – just go check it on Coinbase (note: this hasn’t happened yet).
Not happy with the value of your American Express tokens? Go trade them for Chase tokens on an exchange in an instant. Accrued a bunch of Hilton tokens but need to stay at a Hyatt? Trade them for Hyatt tokens.
Simply want to cash out? You can do it in an instant. If Marriott tokenized its rewards wouldn’t Hilton have to follow? What customer wouldn’t want such an easily verifiable value proposition?
A simple framework to think about blockchain-based tokenization is to imagine that most major assets traded on exchanges like stocks. Your house, your car, your ownership stake in a private business. The price is clear, the fees are low, and the transaction hassle is minimal. Jettison the realtors, auto dealerships and other middlemen.
Blockchain Cryptography Is Eating Financial Markets
Financial markets facilitate the ownership, transfer and pricing of assets in a secure manner. Blockchain technology and cryptography are tailor-made for this purpose.
We’ve built a labyrinth of financial markets with countless entrenched participants – banks, exchanges, governmental entities, payment networks, complicated remittance networks, countless intermediaries and the list goes on.
We generally did this for the right reasons, to ensure trust, provide liquidity (i.e. good pricing), expand asset ownership and grow innovative economies – to make everyone better off.
Blockchain cryptography will do most of this financial market stuff better – i.e. more efficiently and for a broader group of people.
Why shouldn’t I be able to trade stocks any time I want – early morning, midnight, on the weekends? The world doesn’t stop. The reality is that trading during non-market hours is sort of available now. You just need a bunch of money, a close relationship with an investment bank, and the willingness to pay a hefty commission. Crypto markets have traded 24/7/365 for several years and, while not perfect, have largely done the job they were designed for.
Legacy financial markets are messy. Different participants use different technologies. Systems don’t “talk” to one another very easily. Everyone has their own database of record and reconciling those databases is half of the problem (and the reason transaction settlement often takes days).
With blockchain cryptography, the blockchain is the database, cryptography is the security, and the token is native to the digital world and therefore easily transferable as “bits.” Moving digital money or assets will be cheap, fast and painless.
The “eating” of markets will be a gradual process and it doesn’t mean that J.P. Morgan or Mastercard is going out of business. It will, however, create opportunities for crypto-forward companies.
The Future of Investing in Crypto-Related Markets
Companies building crypto-related businesses are already issuing tokens instead of traditional stock and many of these tokens have rights to cash flow and/or governance. These crypto companies are very different from the current crop of public equities. They are often early stage, internationally-based and/or creating entirely new and disruptive business models.
With tokens, almost any investor can access opportunities that until now were primarily the domain of venture capital or private equity. This is happening at the individual level and increasingly will be available through institutional investment strategies (my firm, Dana Investment Advisors, is beginning to offer separate accounts for crypto-tokens).
Venture capital has been the most lucrative asset class of the last few decades but blockchain-based tokens could take that mantle in the decade to come.
With great potential, however, comes greater risk. Crypto’s trajectory as an asset class will be full of twists, turns, dips and peaks. The reality today is that many tokens, even some of the most valuable, are probably worth close to nothing.
The ecosystem remains a hotbed for get-rich-quick schemes and outright fraud. Future regulation is uncertain and will have a significant impact.
Notwithstanding, there are valuable businesses being built in blockchain infrastructure, finance, commerce, gaming and entertainment – and more are on the way. It strikes me as rare to be living through the creation of an asset class as innovative and potentially widespread as crypto-tokens. It’s definitely worth your attention.
Article by David Weinstein, JD, Senior Vice President, and Portfolio Manager. David joined Dana Investment Advisors in May 2013. He is the Lead Portfolio Manager for Dana’s Unconstrained Strategy and co-Portfolio Manager of Dana’s Social ESG, Catholic ESG and Large Cap Equity Strategies.
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