Cryptocurrency: A tale of three actors

Cryptocurrency: A tale of three actors

My history with cryptocurrency started in 2012 and has been a long, meandering path of missteps, misunderstandings, and misplaced conviction. I've watched crypto grow up in some ways and calcify in others, but I've never seen such a wide swath of individuals getting involved in cryptocurrency as I do now.

Interest in cryptocurrencies, particularly Bitcoin, is at an all time high. In this post, I want to describe the crypto world through the lens of three actors at play in the crypto ecosystem: the institutional investor, the speculator, and the technologist.

Each actor sees the future through a slightly different lens, but understanding all three is essential to brokering a more holistic understanding of where we are and where we could be going.

1. The Institutional Investor

Crypto focus: Bitcoin and, to a lesser degree, Ethereum.

General World View: Bitcoin is the new gold, deflationary asset classes will rise in value, Crypto represents a novel asset class.

Time Horizon: Generally Long (though some trade on volatility)

Institutional investors, those operating at hedge funds and managing volumes on the order of billions of dollars, are getting into cryptocurrency more than ever before. Growing anxieties about USD inflation and a desire for diversification are major drivers of this interest, but they underlie a broader view held in the investment community that Bitcoin is essentially the new Gold. It's a market-uncorrelated store of value for large quantities of money, but it also operates as an asset class unto itself.

Pivotally, though, these players initially directed the majority of their funds toward Bitcoin and, to a lesser degree, Ethereum. There are varying reasons for this focus, but the largest one is a question of risk. Altcoins have a more aggressive risk profile than Bitcoin, which itself already is a risky asset. They also value the deflationary nature of Bitcoin, which is often used as justification for the asset class' presumed ever-increasing value.

These investors make a splash in any market into which they enter, but this has particularly been the case for them in the past year. Much of Bitcoin's rise is attributable to the entrance of large institutional investment.

2. The Speculator

Crypto Focus: Broad – Bitcoin, ETH, Dogecoin, other alt coins

World View: Crypto is a growing market with major opportunities for asymmetric upside.

Time Horizon: Short

There's a tendency to see speculation in the market as an inherently destabilizing element, but the history of cryptocurrency has been rife with speculative action, so it's not exactly unusual in this case. However, there's a particular element of the cryptocurrency market that is divorced from reality.

For example, take Dogecoin. Dogecoin was a cryptocurrency founded as a joke, but it nonetheless has persisted as one of the highest valued alt coins. The rise of dogecoin embodies the approach of the speculator. They seek momentum across the crypto ecosystem and tend to pursue short term profits in these highly volatile markets.

The individuals buying miscellaneous alt coins more often embody the independent investment ethos that drove the GameStonk movement than they do the market thesis of the institutional investor. As long as crypto enthusiasm remains high, these individuals stand to benefit considerably from their bets. Indeed, many assets have been seeing 10x returns – if the music stops playing, though, their short time horizon could be to their detriment given the boom / bust cycles of the crypto market.

3. The Technologist

Crypto Focus: ETH 2.0, AVAX, DOT

World View: Smart contract / Defi / blockchain-based platforms show promise. We need to develop the ecosystem and choose the most technically sophisticated winner.

Time Horizon: Long

Technologists are seemingly the most misunderstood actors in the crypto space, yet they are also the individuals that are amongst the most enthusiastic about the potential for blockchain technologies. Technologists, predictably, get excited by technology. As a result, many are more excited by various alt coins or EVM applications than they are about Bitcoin itself.

As a technologist myself, I see the slow transactions, outdated proof of work protocol, and GPU-intensive mining processes as a major mark against Bitcoin. While these challenges have absolutely no bearing on its price or its ability to serve as a store of value, they do cripple it in terms of its potential as a future currency of the world.

Instead, many technologists get more excited about new consensus protocols like Avalanche consensus, or they are seen staking their coins as part of the move to ETH 2.0. These individuals are often the ones that are quick to stake their coins in a risky alt coin or join an ICO. As a result, they often capture upside in places that the other two groups would be unlikely to look. However, the flipside is they may become too excited about the technical details without realizing that the winners in the cryptocurrency space will be defined by more than simply who has the best technology.

Concluding Thoughts

These are far from the only three tropes of actors at play in the crypto market right now, nor are they mutually exclusive. They don't represent real individuals so much as they embody ways of thinking about cryptocurrency today.

If you are investing in a cryptocurrency on the basis of its potential as a store of value, you might also consider whether it has the technical fundamentals to enable that cryptocurrency to succeed. Alternately, if you are investing in a cryptocurrency soleley on its meme potential, consider if your timeline matches with that of the other short term investors driving that price and always have an exit strategy.

Cryptocurrency markets remain the wild west in terms of oversight. They are replete with pump and dump schemes, wild price fluctuations, as well as some genuine long term opportunities. I believe everyone should keep some diversified exposure to cryptocurrency, but never invest more than you would be comfortable losing and always consider the perspectives of others in the ecosystem in your calculus.

Disclosure: I own stakes in AVAX, Bitcoin, Ethereum, and Polkadot.