Tokenomics Redux: time for a second look at crypto?

AS I WRITE this piece, crypto-markets are crashing. BTC has broken through its $19 000 support level and ETH is below the $1,500 price region. Of course all of this is happening in the run-up to the much vaunted ETH upgrade (or merge) and the Cardano Vasil hard-fork, and following Fed chairman, Powell’s Jackson Hole speech, signalling higher interest rates.

I’ve written about my misadventures with crypto-markets before. You should probably take a look here.

And had ample time to reconsider my strange journey. Lo and behold, I now find myself more interested in crypto than ever before. It’s no longer the FOMO that keeps me inserting coins and pulling the crypto-chain, but rather a return to first-principles. And yes, on second thoughts, my early experiments with these digital tokens wasn’t so crazy after all.

My latest take is entirely consistent with my initial summation.

Yep, like Warren Buffet I still don’t see BTC as anywhere near an investment grade instrument, not a traditional asset to put in one’s portfolio alongside an EFT or equity (at least not without a massive firewall). According to Forbes contributor Wayne Duggan “most cryptocurrencies are not tied to physical assets or intellectual property and don’t generate cash flow or pay a dividend or interest to investors. Instead, their prices are connected exclusively to supply and demand, making it difficult to assess their fundamental value.”

Tokenomics is the topic of ‘understanding the supply and demand characteristics of cryptocurrency‘.

In his investment book, Margin of Safety, value investing legend Seth Klarman explains that, “In the short run supply and demand alone determine market prices.” Stuart Langridge, Head of SEO at CoinMarketCap writes “If we believe that to be true and that it applies to cryptoassets using blockchain technology as well as the stock market, then understanding the factors that will impact either supply or demand are of vital importance to both speculators and investors.”

But investment in market supply isn’t why I find the cryptospace fascinating. In fact this idea of finite or rather predictable supply may be a chimera leading us astray. Who holds and who sells (i.e market supply) is not a factor of the innate rules of the blockchain (i.e total supply). Always check sites such as CoinGecko which show a cryto’s circulating, maximum and total supply. Ultimately, one only pays what you think a coin is worth at the spot rate, and we may all be driven by ‘greater fool theory’ if you believe Bill Gates.

Rather, I wish to focus here not on foolishness, but on the sheer utility of exchange, the logical expression of BTC unbridled innovation — the exuberant energy we observe behind the cryptosphere — energy which is being sorely tested right now by brutal financial markets. A ‘crypto winter’ event which may just put paid to any further misallocation of capital and the needless ‘dissipation of scarcity’ by the creation of unnecessary derivative coins? (Are you a crypto bull or a bear? Let me know in the comments below). Characteristics such as speed, efficiency, a rules-based monetary system and what Elon Musk calls ‘solving for scarcity’, in other words a trend driven by information science, towards creating a better financial system.