https://www.bitcoinmarketjournal.com/the-parable-of-the-bitcorn/

Bitcoin – and by extension, the entire crypto market – is going bananas.

Prices are growing upward, which is great news for those of us who have been patiently following our steady-drip investing approach. Bitcoin is back, baby!

The question we should ask is, why?

Remember: no one really knows. But people make up answers, and those answers get repeated and retweeted … and before long, expectations become reality.

The made-up answer, this time around, is that investors are excited about the possibility of a bitcoin spot ETF.

The question we should ask is, why?

Why is a spot bitcoin ETF a big deal? And why would this drive prices upward, even when there may never be a bitcoin spot ETF? Also, what is a bitcoin spot ETF?

I’ll answer these questions using a story: The Parable of the Bitcorn.

The World’s Most Expensive Vegetable

Imagine a rare breed of hybrid corn that is incredibly delicious. Corn aficionados have declared this the world’s tastiest variety. One bite, they say, will make you swear off grocery-store corn forever. It’s served in Parisian bistros for $200 a cob. You’ve got to try it with the artisanal salt.

It’s called “bitcorn.”

Why all the hype? Bitcorn has been genetically modified so that 21 million ears will ever be produced. It’s very hard to obtain, only grown on tiny independent farms in remote locations. It’s not illegal, exactly, but they can’t sell it in U.S. supermarkets for bureaucratic FDA reasons.

The corn has taken on a kind of cult status. Hipster corn lovers publish lengthy blogs and unlistenable podcasts about their experience traveling to a remote Chinese village to hand-pick an ear of bitcorn — or maybe just a few kernels, since that’s all they can afford.

Because bitcorn stays fresh for years, some stockpile as much as they can, hoping the price of a single ear of bitcorn will eventually reach $100,000, or $1,000,000, or whatever future price they can get enough people to believe.

You get the idea. It’s expensive corn.

But then something radical happens: the FDA approves bitcorn, which means your local Whole Foods can carry it.

Hang on. Turns out, they haven’t approved bitcorn after all. It’s a rumor. But the FDA might approve bitcorn to be sold in Whole Foods. Top agriculture analysts have said there’s an 85% chance, or a 93% chance, that the FDA will approve bitcorn to be sold in Whole Foods.

The bitcorn market goes bananas. The price soars upward, and even the price of regular corn, strangely, gets a boost. (Corn is suddenly hot. And buttery.)

Remember: the FDA has not actually approved bitcorn. But people are expecting the FDA to approve bitcorn, and the more that people expect it, the more the price goes up.

The question we should ask is: why?

A Total Game-Changer

If the FDA approves bitcorn to be sold in Whole Foods, it’s a total game-changer for the corn community … and the world. Here’s why:

Accessibility: You no longer need to travel to the mountains of Tongo to get an ear of bitcorn. It will now be available at your local Amazon-owned Whole Foods Market.

Trust and Familiarity: Whole Foods is a store you know and trust. You can buy your bitcorn without fear of getting a counterfeit ear of ordinary farm corn.

Safety and Convenience: Traveling to the Himalayas to get your bitcorn is risky; you might get lost, or your corn could be stolen. Whole Foods takes care of all that.

Quality Assurance: At the bitcorn farm, you might not be sure if you’re getting the real deal. At Whole Foods, there’s an assumption of quality and legitimacy.

Integration into Daily Life: Most importantly, Whole Foods approval would bring bitcorn to the masses. Everyone could enjoy it.

This is why millions of dollars are being spent lobbying Gary Grocer, the head of the FDA, to hurry up with the bitcorn approval.

Are you hungry yet?

Bitcoin vs. Bitcorn

Back in the real world, a bitcoin spot ETF simply means that bitcoin would be turned into a financial product that anyone could buy with their E*TRADE account, like any other company stock or exchange-traded fund. It would bring bitcoin to the masses.

Just like the bitcorn story, this would make bitcoin more accessible, trustworthy, and convenient. Today, it’s still difficult to buy bitcoin – you have to create a wallet or open an online account, go through all the KYC checks, keep track of all your keys, etc. Forget it.

But bitcoin that you could just add to your IRA? Now we’re talking.

(The “spot” in “bitcoin spot ETF” means that this financial product would be directly backed by bitcoin, held in an account for you. Thus, the price of a spot ETF would reflect the current price of bitcoin “on the spot”—as opposed to bitcoin futures ETFs, which are based on future prices.)

It is the SEC, not the FDA, that needs to approve this bitcoin spot ETF. To date, they have resisted because of concerns about price manipulation. This is a reasonable concern, because bitcoin is not like ordinary corporate stocks: it is global, decentralized, and unregulated.

(On the other hand, bad behavior happens even with SEC-regulated stocks, as we are reminded every time we hear about another case of insider trading.)

Make no mistake: we want this to happen. A bitcoin spot ETF would make our dream of the Blockchain Believer’s Portfolio much closer to reality: you could just set up a monthly purchase through any online brokerage, and that really would be a game-changer for investors.

So it is a big deal. But it hasn’t happened yet. If you’re buying bitcoin right now – or any other crypto asset – you’re “buying the rumor.” And rumors can be either right or wrong.

It’s like bitcorn prices doubling overnight on the rumor that the FDA might approve them for selling in Whole Foods. Double price, but it’s still the same corn.

Investor’s Takeaway

There’s nothing that changes about our approach.

We buy bitcoin, plus a small number of high-quality digital assets, as part of a balanced diet. (Rule of thumb: 65% stocks, 25% bonds, 10% bitcoin and crypto.)

We buy the same amount each month – whatever we can afford – regardless of price. This gets us the long-term average price, and protects us from market craziness (like now).

It’s common sense, but it’s uncommon practice.

But with a bitcoin spot ETF, our approach may become a little more common for a lot more investors.

Subscribe to Bitcoin Market Journal to discover more investing opportunities in blockchain! 

The post The Parable of the Bitcorn appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/the-4-3-billion-binance-deal-explained/

You’ve probably read the headlines about the $4.3 billion fine that Binance – the world’s largest crypto exchange – has agreed to pay the U.S. government.

In my view, it’s worth every penny.

With this fine, Binance has essentially bought its freedom. Binance is now legit.

I have not read a single article that explains clearly what the deal means for crypto users – especially investors in the Binance token (BNB). (Full disclosure: I’m an investor.)

Here’s what happened, and what it means for the coming age of crypto.

A Brief History of Binance

Binance was founded in 2017, during the heyday of crypto. Initial Coin Offerings were all the rage, when entrepreneurs would launch a new crypto company, mint new tokens to raise money (just like issuing shares in an IPO), then use the proceeds to build the company.

Bitcoin was reaching new all-time highs, new tokens were launching every day, and a new class of “crypto trader” sprung up to provide liquidity between all these digital assets: buying, selling, and occasionally hodling them for the long-term.

Changpeng (“CZ”) Zhao, a developer who worked on trading software for the Tokyo Stock Exchange, started Binance in the midst of this maelstrom. With Binance, users could buy, sell, and trade all the major cryptocurrencies, with Binance getting a cut out of each transaction.

It was a money-printing machine.

In the beginning, it was easy to open an account without providing much identification, which attracted both legitimate customers (by the millions) and illegitimate customers (the occasional money launderer, ransomware scammer, and terrorist financer.)

Where Binance erred was in not implementing stricter customer checks, sooner: as the Department of Justice has documented, CZ prioritized growth of the company above compliance with the law.

The company helped “VIP customers” (crypto whales moving a lot of money and generating hefty profits), even when their behavior seemed sketchy. And Binance seemed to know that money was illegally flowing between the U.S. and sanctioned countries like Iran.

In CZ’s defense, the company spun off a subsidiary called Binance.US in 2019, blocking U.S. users from the Binance.com platform and redirecting them to Binance.US instead. The idea was that Binance.US would adhere to the more stringent U.S. regulations.

The problem, according to the DOJ, was that determined U.S. users could still use Binance.com through a VPN or proxy tool, so the bad behavior continued … and Binance knew about it.

Meanwhile, CZ made it a point to establish Binance in a kind of no-man’s-land, getting rid of any physical headquarters, and constantly staying on the move. He asked employees to use encrypted messaging services, so there was no paper trail.

When the U.S. government began turning up the heat in 2021, CZ resisted, but eventually the threat of a massive lawsuit changed his thinking. He had just seen how a run on FTX crippled the company and landed Sam Bankman-Fried in prison. (In fact, he helped FTX crash and burn.)

If it came to an FTX-style trial, customers might get spooked and withdraw all their funds, and that really would be the end of Binance. (It was also in the government’s best interest to settle: remember how the contagion from the FTX collapse spilled over to traditional banks as well.)

So Binance and the U.S. government came to a deal.

The Deal, Explained

In plain English: U.S. customers will not be allowed to trade on Binance.com, and the government will appoint compliance monitors to audit and ensure that Binance is behaving, for real this time.

U.S. customers will still be allowed to use Binance.US (if you’re reading this from the U.S., you can try Binance.com and Binance.US for yourself). Binance.US will, of course, be more closely monitored for compliance, which should be a good thing for customers.

CZ will step down as CEO, to be succeeded by Richard Teng, a former CEO of Abu Dhabi’s financial services regulator. CZ still maintains his ownership stake in Binance, though he is giving up voting rights.

And then there’s that pesky $4.3 billion fine. ($4,316,126,163, to be exact.) Binance claims it had set aside up to $8 billion for an eventual settlement, so apparently they were saving for a rainy day.

The news media keeps saying Binance is making a “complete exit” from the United States, which is inaccurate. U.S. customers are some of Binance’s most valuable. They’re critical for the long-term growth of the company.

To be clear, U.S. users cannot use Binance.com, but they can continue to use Binance.US. Which is the same way it’s been since 2019, only now with better compliance. But saying “Things remain exactly the same at Binance” does not make for a great headline.

The Investor Takeaway

I am supremely bullish on this turn of affairs.

I don’t condone breaking the law, so I think Binance was absolutely wrong to help criminals get around their controls. When you build a company culture around skirting the edges of the law, it’s hard to wash that out of your system. That worries me.

On the other hand, I learned a lesson from watching the rise of Uber under its founder Travis Kalanick. Here was another disruptive technology company breaking into a heavily-regulated market. At the time, taxis were terrible, and Uber truly provided a better customer experience. Under Kalanick, Uber played hardball to win new markets, often skirting or flouting the law.

We should all feel conflicted about these moral dilemmas. Is it right or wrong for an enterprising entrepreneur to aggressively promote a better product — even if it means breaking laws that might be outdated or unfair?

In the case of Uber, the taxi industry was ripe for disruption, Uber was a far superior product, and society benefited as a result. (In fact, I took a NYC taxi the other day, and was astonished at how much better the taxi experience has become – it’s a lot like taking an Uber.)

Binance legitimately provides great products and services. It’s one of the most user-friendly, trustworthy crypto exchanges in the world. It keeps funds secure. It continually innovates, from high-yield staking products to its own blockchain. It even has its own charity.

Would the company have become successful if it waited for U.S. regulators to catch up? The SEC still cannot even define whether a token is or is not a security. If you want to see the results of the “wait and see” approach, just look at U.S. banks. No crypto innovation.

For me, this settlement allows the DOJ to score a political win, lets Binance play nice with the government, and releases the entire industry to move forward.

This is why I am very pleased about Binance’s $4.3 billion fine. The company can afford it, and now there is an understanding in place. The U.S. government will monitor Binance, they’ll appoint a grownup CEO, and the company is now legit.

(Remember, Uber ultimately ousted Travis Kalanick and brought in a grown-up CEO in Dara Khosrowshahi. The company launched an IPO and now its stock price is approaching all-time highs.)

I’ll repeat those four important words: Binance is now legit. This is a huge deal. It’s worth every penny of the $4.3 billion.

My belief is that investing in the BNB token is like investing in Binance. Now that Binance is “government approved,” my view is that the company will not only survive, but thrive. They have great products, an enormous competitive moat, and now they’re officially regulated.

For my money, BNB is a better buy than ever.

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The post The $4.3 Billion Binance Deal, Explained appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/is-solana-sol-worth-the-hype/

Crypto investors are buzzing about Solana again, and with good reason: the value of SOL is up over 350% since a year ago:

It has many of the hallmarks of a good investment: it’s a real project (a leading Layer 1), with real users (about 100K/day), generating real revenue (about $100K/day in fees).

But is it a good long-term investment?

At Bitcoin Market Journal, we’re in this for the long haul. And personally, I think Solana is a long shot in the long term. Here’s why.

There Can Be Only One (or Two)

Our first investing thesis is that while lots of experiments happen in the early stages of a new technology, ultimately only one (or sometimes two) big platforms survive in the long run. (Think PCs and Macs, Androids and iPhones, etc.)

In the traditional tech world, this is because big players get bigger, mostly through network effects: the bigger you get, the easier for new customers to join you. The smaller companies either get acquired, or driven out of business.

This is how we end up with Google gobbling up all the search business, OpenAI overtaking AI, and Salesforce forcing out other CRMs.

In the emergent world of blockchain technology, we are only just starting to understand what the categories even are. But one category is definitely smart contract platforms (a.k.a. Layer 1s), the operating system for crypto.

Ethereum (ETH) is, by all measures, the 800-pound gorilla in this space. They have the most users, the most revenue, the most developers. So for a competing Layer-1 like Solana, Ethereum is the one to beat.

For all the hype, let’s look at how Solana stacks up:

Source: Token Terminal (rounded for readability)

This is not to say that Solana must beat Ethereum in order to survive. Niche search engines like DuckDuckGo or WolframAlpha (I’m still waiting for WolframBeta) have survived against Google. But their market share is tiny by comparison.

As long-term investors, we don’t want to pick the projects that will survive; we want to pick the projects that will thrive. The numbers above show you that Solana has traction, but it still has a way to go.

It’s Not the Technology, It’s the Users

Blockchain nerds get really excited about Solana’s faster throughput (due to its Proof of History consensus algorithm vs. Ethereum’s Proof of Stake), and its developer friendliness (they can use languages like Rust and C, vs. having to learn Ethereum’s Solidity).

The tech crowd gets really excited about the tech, but no one else does. This is because the market does not really care about technology, the market cares about the users.

If a company is building a new blockchain application, where would they want to build it?

• The one with a better consensus algorithm, or the one where more users are going to be able to use it?
• The one with an easier programming language, or the one that’s going to generate more revenue and fees?
• The underdog, or the existing leader?

Companies will generally go with bigger tech platforms, because they’re a safer bet. There’s safety in numbers.

But what about investors? My experience is that investors also do not really care about the technology, they care about whether they can make money. The technology is only relevant if it’s going to lead to a higher price multiple in the end.

VHS vs. Betamax, MP3 vs. FLAC, QWERTY vs. any other keyboard layout: often the inferior technology wins. In blockchain, especially, the tech is only relevant if it leads to more users.

More users = more network effects = more value.

You want to find winning long-term investments? Look for blockchain projects with userbases that are large and growing. (Remember that before this recent price rally, the crypto outlets were bemoaning Solana’s drop in daily users.)

Where are the Killer Apps?

Layer 1s are like operating systems: to grab those critical users, you’ve got to have some killer apps. For example, VisiCalc put the Apple II on the map, AOL introduced the Internet to the masses, and Siri made the iPhone indispensable.

(In blockchain, we call them decentralized apps or “dapps,” but c’mon, they’re just apps.)

On Solana, you’ve got the usual assortment of dapps: a DEX (Serum), an AMM (Raydium), wallets (Phantom), borrowing/lending (Solend), NFT marketplaces (Magic Eden). I think of these as copycats of bigger, more popular dapps on Ethereum.

However, there are a few dapps that take advantage of Solana tech:

• The decentralized music platform Audius lets artists publish directly to listeners and cut out the middleman, using Solana’s higher throughput and lower transaction fees to handle a large volume of microtransactions.
• The MMO game Star Atlas runs a complex game economy with real-time transactions—all those tiny transactions are easier and faster to process on Solana than Ethereum.
• Mango Markets offers decentralized spot trading and perpetual futures, which is nothing new, but Solana’s speed and efficiency can allow for higher-frequency trading with lower latency.

So it’s possible that Solana can carve out a niche around dapps that require high-speed microtransactions. If that’s the case, we’d want to see a lot more of these specific dapps launching over the next year: dapps that you simply couldn’t build on Ethereum.

Investor Takeaway: So Long, Solana

The recent price gains are likely due to excitement over Solana’s Breakpoint community conference, and bullish sentiment from influencers like Cathie Wood.

But it’s unlikely that Solana will unseat Ethereum anytime soon. I don’t see any reason to jump on this bandwagon, especially when prices are triple what they were just a month ago.

But technology is full of surprises, and the early leaders aren’t always the later leaders. Ethereum may not be the Layer 1 for the long term, and Solana may carve out a profitable niche. But at the moment, ETH is still the one to beat.

So for now, it’s so long, Solana. But we’ll keep an eye on you.

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The post Is Solana (SOL) Worth the Hype? appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/how-warren-buffett-got-so-rich/

Happy days are here again: as I write this, bitcoin is back up over $35,000. ETH is surging above $2,000. The entire crypto market is up +76% year-over-year.

Which should be a reminder to all of us crypto investors: patience is a virtue.

Most crypto investors are not patient. I’m sure you know about the crypto “degens,” who are constantly chasing money-making schemes, no matter how ill-advised. Get rich quick, or die trying.

But the nature of investing means that patience pays off. (Literally.)

The author Morgan Housel, in his excellent book The Psychology of Money, devotes a whole chapter to the magic of compounding interest, pointing out that Warren Buffett made the vast majority of his fortune after the age of 50.

As of this writing, Buffett is 93 years old and worth about $118 billion, most of which accumulated well after middle age (courtesy of Finmasters):

Housel points out that perhaps the most important factor to Buffett’s success is that he’s been investing since he was literally a child. “None of the 2,000 books picking apart Buffett’s success,” he says, “are titled This Guy Has Been Investing Consistently for Three-Quarters of a Century.”

“The most powerful and important [investing] book,” he suggests, “should be called Shut Up and Wait.”

Shut Up and Wait

Bitcoin’s fortunes have risen so high, in such a short period of time, that crypto investors are not used to waiting. (And we’re definitely not used to shutting up.)

As of this writing, bitcoin’s three-year returns are 23%. The five-year returns are 56%. The ten-year returns are about 60%.

(By comparison, the U.S. stock market has grown about 10% on average, over the long run.)

Of course, we don’t know what bitcoin will do next year, or even next week. But the point is, patience has paid off.

If you have been patient with many of your “old-school” crypto investments, you have been rewarded in recent weeks.

• Chainlink (LINK) is up 109% year-over-year, based on excitement around transferring real-world assets via its Cross-Chain Interoperability Protocol.
• Solana (SOL) is up 187% year-over-year, based on excitement around Visa, Shopify, and others building on its network.
• And of course, bitcoin (BTC) and Ethereum (ETH) are up 111% and 60% year-over-year, respectively, based on excitement about a spot ETF for both.

Slowly but surely, despite all the FUD and FOMO, despite the SEC and the CFTC, crypto is making inroads into the world of traditional finance.

Our patience is paying off.

Instead of screaming at every setback, the loudmouths on crypto Twitter would be better served to just heed those four simple words: SHUT UP AND WAIT.

The One-Month Millionaire

Take a penny and double it every day for 30 days. You’ll be a millionaire by Day 28, and you’ll have over $5 million on Day 30.

Many forms of growth happen the same way. Take compounding interest, which moves really slowly until it suddenly explodes. This is the principle behind putting aside, say, $100/month and putting it into a retirement plan. The longer you do it, the bigger your retirement nest egg:

In crypto investing, there’s more to the story. Blockchains have network effects, which have a similar growth trajectory. Thanks to Metcalfe’s Law, as the number of users grows linearly, the number of connections grows quadratically:

As blockchain investors, then, we can harness two powerful forces: both the network effects of good projects that are continually growing their userbase, and the compounding effects of these investments over time.

This is what’s happening today with COMP, SOL, BTC, and ETH. Through good times and bad, crypto summers and winters, they’ve continued to move forward, finding real-world use cases, building partnerships, and upgrading their technology.

There is one thing wrong with these charts, though: it’s not a straight shot.

There are many other factors at play: fear of the SEC, the FTX trial, interest rates, and so on. These make the trajectory look more like a roller coaster, even if the fundamental value should look more like the smooth charts above.

But if we stay the course, like Warren Buffett, eventually our net worth can show the same kind of hypergrowth as his has.

Our Approach

I’ll keep repeating our strategy, because it has worked so well for us.

• Buy BTC, plus a handful of quality crypto projects (the tokens above are good places to start);
• At the same time, each month, regardless of price;
• As a small part of a balanced portfolio (consider 60% stocks, 30% bonds, 10% crypto)

It’s hard to keep doing this when crypto is dropping, but it’s easy when crypto is popping.

That might make this the easiest time to get started. Those who started five years ago have greatly outperformed traditional investors:

In short: shut up and wait.

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The post How Warren Buffett Got So Rich appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/an-open-letter-to-rep-patrick-mchenry/

Dear Rep. McHenry:

On behalf of the crypto investing community, we would love to see you installed as permanent Speaker of the U.S. House of Representatives.

It’s worrying to see the infighting happening within the Republican Party, between moderates who just want to get the work of government done, and extremists who just want to get their way.

In these turbulent times, it is not hard to see the similarities between extremists around the world, and those within our own government.

Amid the chaos, you have emerged as a voice of reason. You did not side with those who joined the Trump campaign’s attempt to overthrow the results of the 2020 Presidential election. That shows strength of character, courage, and conviction.

You have also emerged as a voice of hope – especially to those of us in the crypto investing community. Your work on the House Financial Services Committee has been helpful in moving the crypto conversation forward. You’re smart and well-informed.

In short, you’re the strongest ally that we’ve got. That’s why we want you installed as the new permanent Speaker of the House. We want you in.

The Night We Met

You and I met once before, though you may not remember it. (Or maybe you linger on the memory each night as you fall asleep.)

I approached you after your terrific panel at Consensus 2022, soon after Senators Lummis and Gillibrand had unveiled their Responsible Financial Innovation Act. “What’s the most effective way to get Senators to support this new crypto bill?” I asked.

“Write letters,” you responded immediately.

You explained that when you include your address – so that Senators know you are a voter in their state – they will listen.

You had one additional piece of advice. “What doesn’t work is tweeting insults at them.”

Since then, I’ve followed your advice (and shared it with the thousands of crypto investors who read our newsletter). In fact, I’m following it now: no angry tweets at the House, just a heartfelt letter to you.

Letters work.

To that end, I’m also asking the U.S. subscribers of our newsletter to send a similar letter to their state representatives (note to readers: click here to find your state rep), by copying and pasting the following template:

— copy, paste, and email —

Dear Representative [NAME]:

I would like to cast my vote for Rep. Patrick McHenry to be permanently installed as Speaker of the U.S. House of Representatives. The work of government needs to get done, and Rep. McHenry has proven himself to be a man of conscience, and of action.

The infighting within the Republican Party needs to stop, and the work of government needs to get done. This is why you turned to Rep. McHenry to serve as interim House Speaker, and why he is the right person to be awarded the permanent role.

I ask you to do everything in your power to pull together a powerful bipartisan coalition of representatives who can restore unity, sanity, and democracy back to our government, with Rep. McHenry serving as permanent Speaker of the House.

Sincerely,
[YOUR NAME]

[YOUR ADDRESS]

— copy, paste, and email —

Yes, Rep. McHenry, it’s a letter within a letter. Very meta. Now if someone passes this entire web page to a friend, then it’s a letter within a letter within a letter. Three levels deep: that’s full-on Inception. We’ll have to spin the top to see if we’re dreaming.

Rep. McHenry, once you get the Speaker position, I don’t expect all our crypto regulatory problems to be solved overnight. But I do expect that you’ll be able to make meaningful progress. And progress is definitely what we need.

I won’t say you’re our industry’s only hope. But you are our best hope, and we’ll do what we can to help you succeed.

Speak it,
John Hargrave
[ADDRESS]

Over 50,000 investors get this column every Friday. Click to subscribe and join the tribe.

The post An Open Letter to Rep. Patrick McHenry appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/winter-leads-to-spring/

I am astonished by AI.

I currently use ChatGPT for everything: business ideas, dinner recipes, grammar tips, do-it-yourself projects, philosophical questions, medical research, math problems, coding help, and self-improvement.

It has become a running joke in my family that I answer every question with “Why don’t you ask ChatGPT?”

They’re like, “Why don’t you ask ChatGPT, since it’s your boyfriend?”

I use ChatGPT for help in researching these columns. (But not in writing them – this is all me, baby.)

To those of us not in the AI field, it can seem like ChatGPT sprung up overnight. In fact, it attracted an estimated 100 million users just two months after launch – which may be the fastest growth of an Internet application in history.

Since then, however, it appears that growth has tapered off, which the Washington Post declared is “shaking faith in the AI revolution.” Governments are rushing to regulate the technology. An estimated 75% of companies are looking to ban AI.

First they love you, then they hate you. But to the AI OGs, this is nothing new.

For those who feel that we’re in the middle of another crypto winter, with bitcoin stuck at the $25,000 mark, and nothing moving forward except the FTX court case, it’s helpful to look at the history of AI.

Did you know that there have been AI winters?

AI Winters > Crypto Winters

In fact, there have been more AI winters than crypto winters, simply because the technology has been around longer.

While there was a good deal of foundational research around “thinking machines” in the 1940s and 1950s, it was at a 1956 Dartmouth workshop that “artificial intelligence” became a formalized field of study.

This was an eight-week workshop where they got the big brains all together in one place: geniuses like Marvin Minsky (who later co-founded the MIT AI department), John McCarthy (who later co-founded the term “artificial intelligence”), and allegedly even John Nash (later played by Russell Crowe in A Beautiful Mind).

Today, they all have Wikipedia pages.

Legend has it they had the entire upper floor of the Dartmouth math department to screw around. Each day someone would present a paper or an idea, then they would discuss. As one participant described the atmosphere: “It was very interesting, very stimulating, very exciting.”

It was like summer camp for nerds. We can imagine that these beautiful minds all left that seminar thinking, AI is here. It has arrived.

Remember, this happened in 1956. Let me consult ChatGPT to calculate how long ago that was.

Waiting.

Sheesh. I should have used a calculator.

67 years ago. Could have done that in my head.

Sixty-seven years from the Dartmouth workshop to ChatGPT. And it was a hell of a rocky road along the way.

The First AI Winter: “The Vodka is Good, But the Meat is Rotten”

Surprisingly, the first AI breakthrough happened quickly, when early computers showed promise in language translation. The media hyped these developments: translation machines are just around the corner!

The U.S. government saw the opportunity to quickly decode messages from Russian to English, a powerful weapon in the Cold War with the Soviet Union, and the AI research money began pouring in.

Of course, language translation was harder than it seemed, and everyone underestimated the difficulty of getting computers to understand “common sense.” The famous example was asking the machine to translate the phrase “The spirit is willing, but the flesh is weak,” which became, “The vodka is good, but the meat is rotten.”

This disappointment in the progress of early AI research projects led to another government research project, which found that AI translation was slower and more expensive than human translation. Funding dried up, and the first AI winter set in.

The Second AI Winter: “Neural Networks Are a No-Go”

But builders kept building.

In the 1960s, the hot topic was neural networks, which began rekindling interest in the AI field. Joseph Weizenbaum at MIT developed ELIZA, which was like a primitive version of ChatGPT (try it here). A new AI programming language, Prolog, was developed in France by Alain Colmerauer.

Money began to pour in again.

This time, the hype was even higher. AI researchers began getting caught up in a “web of increasing exaggeration,” according to AI researcher Hans Moravec. They would make ridiculous claims about what AI could achieve to win the big government grant. Then when they failed to deliver, they would make even more ridiculous claims to win the next grant.

So when the British government asked the mathematician Sir James Lighthill to produce a report on the state of AI a few years later, he blasted the technology, citing its utter failure to achieve its “grandiose objectives.” The report, amplified by the media, led the UK government to shut down all AI funding in the UK, except for a handful of research universities.

The Lighthill report was a blizzard of bad publicity. And the second AI winter froze over.

The Third AI Winter: “Companies Won’t Use Them”

But builders kept building.

The third resurgence of AI, during the early 1980s, was driven by corporations that saw a huge competitive advantage in using AI technology. These “expert systems” had been prototyped at Carnegie Mellon for DEC, saving the computer company an estimated $40 million.

This time, the hype cycle was further fueled by Japan’s ambitious Fifth Generation Computer Systems project, which aimed to produce a new kind of computer for AI. Suddenly every big business wanted an “expert system.”

It was in 1984 that Marvin Minsky and Roger Schank, two of the OG AI researchers, coined the term “AI winter” at an industry conference, arguing that the expectations for AI were so high that disappointment was sure to follow.

Sure enough, the hype of expectations soon collided with the disappointing reality that these “expert systems” were difficult and expensive to maintain, while the Fifth Generation project ended in tears. General-purpose AI seemed as distant as ever.

Once again, crypto winter set in. Minsky and Schank were correct in their predictions; then again, they had seen this movie before.

The Trough of Disillusionment

The research firm Gartner created this hype cycle chart to describe how new technologies typically take hold: there’s an initial boom of euphoria where everyone gets excited about what the new technology can do: a phone in your pocket! Digital money! Self-driving cars!

But technology takes time.

People get impatient, and public interest fades away. Experts sour on the new technology for failing to live up to its promises. This is called the “Trough of Disillusionment,” also known as “winter.”

But the builders keep building. They toil away in little-known labs and garages, and gradually achieve breakthroughs, one after the other, that slowly accumulate into the vision that was promised – often, a far more expansive vision as well.

This “Slope of Enlightenment” happens quietly and gradually, while the rest of the world has given up on the technology, as it did with AI. During the 1990s, AI was so unfashionable that some researchers gave their work different names (like “machine learning” or “computational intelligence”).

It would be more accurate, however, to show the Gartner hype cycle as a series of hype cycles, one after the other, each leading to progressively higher plateaus, as in Ray Dalio’s “Principles”:

Which stack on each other, in a cycle of continuous improvement:

Which eventually culminate in a supernova singularity like this year’s launch of ChatGPT. It happened bit by bit, over 67 years, then it happened all it once.

Winter Leads to Spring

Although crypto has only been around since 2008, the similarities are profound.

This market has also seen rollercoaster hype cycles: the first crypto winter of 2015 led to the ICO boom of 2017, followed by the crypto winter of 2018-2019, the “DeFi Summer” of 2020, then the collapse of Terra/FTX/banking system, and the winter that followed.

Each time, inflated expectations collide with hard reality, and we fall into the trough of disillusionment.

Like AI, serious researchers and companies now hide their crypto work behind euphemisms like “digital assets” or “digital ledger technology.”

And the news media feeds this industry pessimism, as they cover each move in the FTX trial, each SEC lawsuit, with an implicit I told you so.

Meanwhile, builders keep building.

And investors keep investing.

Today I’ll remind you that winter always leads to spring. It’s happened so many times with AI, just as it will happen again with crypto.

When the next big thing pops – whether that’s a regulatory breakthrough, a new K-pop single released as an NFT, or a new head of the SEC – we don’t ride the hype cycle, we just continue to patiently invest, month after month, in our Blockchain Believers Portfolio.

Seasons change. But our investing strategy remains the same.

Bundle up, but dress in layers. Because sooner or later, it’s getting hot again.

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https://www.bitcoinmarketjournal.com/technology-takes-time/

Phil Zimmermann was a radical.

An anti-nuclear activist, Zimmermann saw that the U.S. and Soviet Union had enough nuclear weapons to each destroy the other. This idea of Mutually Assured Destruction (MAD) was indeed mad. It meant the world was constantly on the brink of a nuclear catastrophe.

Zimmermann was also a computer programmer. If the grassroots peace movement had a method for secure communication, he reasoned, citizens would be better equipped to organize and protest, without interference or surveillance from the government.

He developed a piece of software that would give ordinary citizens military-grade privacy. They could encrypt emails, spreadsheets, and documents with software that would take a supercomputer billions of years to crack.

He called it “Pretty Good Privacy.”

There were many similarities between PGP and today’s cryptocurrencies: they both use public and private keys. They both let users trust each other without a centralized authority. And they both have terrible user interfaces.

Zimmermann sent his first release of PGP to a friend, who uploaded it to an early message board called Peacenet, which helped organize peace activists around the world. Other friends began releasing it on Usenet, the precursor to the Web, where the software quickly found a following, especially in countries with oppressive regimes.

Before long, the U.S. government came calling.

Cryptography is a Weapon

Ironically for a peace activist, Zimmermann had accidentally created a weapon.

The government began investigating him for “munitions export without a license.” Cryptography systems with less than 40 bits (i.e., easier to crack) could be exported outside the U.S., but PGP used 128 bits or more. In U.S. export law, PGP was considered a weapon.

Zimmermann was one step ahead of the government, though. He published the entire source code of PGP in a hardback book, published by MIT Press, which made his invention available to anyone who wanted to scan every page, or type it in by hand, then compile it.

Cryptography might be illegal to export, but books were not.

Fortunately for Zimmermann, the battle over cryptography was heating up on other fronts. The U.S. tech industry wanted to include industrial-strength encryption into many products: phones, fax machines, operating systems, databases. Forget the citizens; businesses required it.

The same export law that the government brought against Zimmermann would hobble U.S. companies trying to export crypto products around the world. As the tech industry’s cries grew louder, the U.S. finally proposed a solution: the Clipper chip.

The Clipper Chip Debacle

Introduced during the Clinton administration, the Clipper chip was the government’s idea of a compromise. It was a computer chip with extremely strong cryptography, with a “back door” that could allow the government to break in, if needed.

When each Clipper chip was issued at the factory, it came with a companion key that the government would hold in escrow. If the government needed to eavesdrop on a suspected terrorist, it could get a court order to retrieve the keys, then break into the terrorist’s secure phone.

There was strong pushback against the Clipper chip, especially among libertarians and privacy activists who later became some of the biggest proponents of bitcoin. It required absolute trust in the government—and the government’s ability to not accidentally leak all those keys.

The Clipper chip was a disaster: the only organization that bought a substantial amount was the Department of Justice. But it laid bare the tension between citizens who wanted privacy, and a government that wanted the ability to break that privacy, just in case.

Today, PGP has diversified into a wide variety of encryption applications that can protect file systems, servers, networks, and much more. And it paved the way for encryption products that we use all the time, such as the https: in your browser that allows you to securely buy stuff from Amazon, or send funds via Venmo.

At the time, it was all wildly controversial. Today, it’s hard to understand what the fuss was about.

The lesson is that new technology takes time.

Especially when it bumps up against the powers of government.

Crypto Threatens Governments

In the same way that PGP threatened the ability of governments to watch the communication of suspected criminals, cryptocurrencies threaten the ability of governments to watch the money flow of suspected criminals.

We all know that bitcoin is a terrible choice for criminals, because every transaction is public, for the world to see. But crypto mixers like Tornado Cash are being banned by the U.S. government, because they can securely hide the origins of crypto transactions.

According to the government, this can allow “bad guys” to move money and hide their tracks.

But remember, Zimmermann wasn’t a bad guy: he was a peace activist. And his concerns were that anti-nuclear demonstrators could also be targeted by governments, because they were threatening the power of the state.

No one wants terrorists to run free … but we all want the freedom to protest. It’s this pull between the power of governments and the rights of citizens that gave birth to PGP, and years later, to bitcoin.

Cryptocurrencies are threatening to governments in another way: the more people who invest in them, the more entwined DeFi becomes with TradFi, the more crypto threatens national economies (and, by extension, the global economy).

(Indeed, that’s the TLDR summary of the warning from global bankers that I wrote about just last week.)

This makes crypto investors feel like criminals, even if what we’re doing – buying and holding bitcoin, plus a small number of high-quality digital assets, for the long term – is perfectly legal.

Whenever you feel stigma for mentioning the word “crypto,” whenever people look at you sideways because you’ve invested in bitcoin, remember the PGP drama. It’s really helpful for putting it all in context.

The takeaway: technology takes time.

Especially when it threatens governments.

One Day, It’s All Just Common Sense

Today, no one thinks about entering your credit card into a browser as “exporting weapons.”

Great and disruptive technologies take time to catch on. They upend the way that things are done. If they’re radical enough, first the government has to get used to it (and nothing happens quickly in government).

Then, once the way is clear, companies have to follow. With crypto, we’re talking about banks and financial institutions, and they don’t move much faster than government.

But over time, these technologies move from being a novelty to “the way things are done.” They become common sense.

In the beginning, strong encryption seemed like nonsense. But as it caught on, it just became common sense.

Today, encryption is invisible, woven into products you use every day. You don’t even think about it, you just know that criminals aren’t going to intercept your PayPal transaction. Zimmermann and many others blazed the trail, but today we all take it for granted.

In the depths of a crypto bear market, it can feel like this industry is spinning its wheels. Just remember that this is the usual playbook for groundbreaking technologies, especially when cryptography is involved.

Be patient, crypto investors. Technology takes time.

But when it finally gets there, it’s everywhere.

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https://www.bitcoinmarketjournal.com/crypto-could-topple-the-global-economy/

The world’s top financial watchdogs have issued a stern warning to governments: crypto could topple the global economy.

That’s the clear message issued by the International Money Fund (IMF) and the Financial Stability Board (FSB) in a paper released yesterday.

This is a big deal.

The IMF is like the world’s financial therapist. It provides economic advice and financial support to help countries navigate economic challenges, trying to keep global financial stability.

The FSB is like a lookout tower, constantly scanning the horizon for approaching economic storms, as it tries to help prevent global financial meltdowns.

Their opinion matters. Governments listen to them. And now they’ve said crypto could take down the global financial system.

I think they’re right.

But their recommendations are ultimately good news for crypto investors. Here’s why.

Crypto is a Roller Coaster

The paper spends a lot of time talking about the volatility of crypto assets, but we long-term investors already know this. Crypto is a roller coaster.

The more people who buy crypto, they explain, the more of a danger this becomes. Especially in emerging countries, where the financial system may already be shaky, if the majority of your citizens move their money into crypto, your economy is now on the crypto roller coaster.

Things get even worse if you decide to adopt bitcoin as a national currency (as El Salvador has done). It’s hard for businesses to accept payment in a currency that can drop by 50% in a few weeks. (Most citizens don’t like seeing their wealth wiped out overnight, either.)

Most cryptocurrencies are not currencies: you can’t buy most things with bitcoin.

No one wants money that can rapidly depreciate. (Though most people appreciate money that rapidly appreciates.) We’ll wait to see how the El Salvador experiment plays out, but I’m not holding my breath.

As a long-term investment? I’m a bitcoin believer. As money? Not so much.

Bitcoin, they argue, is too unstable to use as money, and I agree. But what about stablecoins?

The Stablecoin Situation

According to the paper, the situation with stablecoins is even more dire. A country that finds itself in a financial pickle could see investors pouring their money into stablecoins, especially as it becomes easier and cheaper to move from fiat to crypto.

This means money would pour out of the country, making it even harder for distressed governments to manage their exchange rate and maintain financial order.

These problems are particularly acute in EMDEs (Emerging Markets and Developing Economies): countries like Brazil and India that are rapidly growing from low-income to high-income industrialized economies. They need money to grow.

These countries also have weaker monetary frameworks and higher inflation rates, which means their currencies are sometimes unable to provide the main functions of money: as a store of value, medium of exchange, and unit of account.

When your economy is growing rapidly, but your currency is still fragile, you’re susceptible to “bank runs” in the form of massive outflows to stablecoins. And because humans move in herds, once a financial panic starts, it can rapidly spread around the world.

Why? Because we live in a global economy.

We’re All Connected

The paper goes to great lengths to explain that risks are “mutually interactive and reinforcing,” meaning what affects one economy potentially affects all economies.

No country operates in a bubble. In a global economy, we’re all connected.

We saw this quite clearly with the collapse of Terra/LUNA, which was followed by the collapse of FTX, followed by the collapse of several U.S. banks: a domino chain that was stopped (we hope) with the bailout of Credit Suisse.

This paper is a wake-up call for world leaders to get on the same page about crypto, and to finally regulate the damn things, once and for all.

And that is good news for investors.

Regulation = Adoption

To summarize their advice in three words: regulation, regulation, regulation.

Their recommendations are common sense: regulate crypto assets like other financial assets. Enforce KYC/AML. Be clear about legal and tax issues. Turn the “grey areas” of crypto into black and white.

I see this as a Very Good Thing.

If governments around the world can agree on sensible regulation for crypto assets (as the European Union is doing), then crypto finally becomes mainstream.

Right now, most banks and most businesses won’t touch it. Most investors still think bitcoin is bogus. But once it fits into the framework, everyone’s opinion will change.

Bitcoin will become boring.

It will be just another financial asset — like stocks and bonds — that you can buy through your broker or your bank. In a couple of decades, no one will understand what all the fuss was about. We’ll have to remind people how controversial it was.

(This assumes, of course, that governments don’t regulate bitcoin out of existence — but if you look at which way the winds are blowing in the EU and Congress, that seems unlikely.)

So while the tone of the IMF/FSB paper is pretty alarmist, if it gets governments to get off their asses and regulate crypto assets, I see that as good news for investors.

As the first major regulations get put in place, I predict, the market will applaud. With regulatory certainty will come a huge price increase. (Which will wear off over time – prices won’t keep climbing forever.)

Bitcoin and Ethereum will be the big beneficiaries of regulation, but I think the entire crypto market will go up, since it all tends to follow the price of bitcoin.

When will all this happen? Barring any unforeseen difficulties, probably in the next couple of years.

You heard it here first.

Investor Takeaway

We’re staying the course.

We’re steady-drip investing a small amount each month into BTC and ETH, as we wait for regulation to arrive. (Read our investing approach here.)

The TLDR is that crypto could topple the global economy … but regulation will prevent it.

That means regulation is coming. And this new paper will help it come even faster.

Get your bags ready.

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https://www.bitcoinmarketjournal.com/crypto-is-coming-to-swift/

The Swift network is anything but.

Back in the 1970s, when the Swift global payments system was first launched, it was probably quite speedy when compared to the other ways of sending money. But Swift hasn’t evolved much since then, and today international payments still take between one to four days to clear.

Not exactly “swift.”

All that is about to change, though, because Swift is getting ready for crypto.

Swift has partnered with the blockchain oracle network Chainlink (LINK) to do an “experiment” to transfer “tokenized assets” across dozens of financial institutions and multiple blockchains.

Everyone talks in code, lest they scare off the bankers. So I will translate for you: Swift is getting ready for crypto.

“Our view,” says Swift in their report, “is that a common connectivity layer is critical to eliminating friction and enabling interoperability between the existing financial system and

blockchains to create a unified global market.”

Translation: Crypto is coming, and we want to support it.

This is a big, hairy deal. Today crypto is kind of a niche asset class, available only to the freaks and geeks. Swift is preparing for a near-term future where every bank supports crypto.

Indeed, the experiment involved over a dozen major financial institutions, including

BNY Mellon, Citi, and DTCC (Depository Trust & Clearing Corporation), the largest clearinghouse in the world.

Swift is like the “universal adapter” for the global banking system. (SWIFT: “Society for Worldwide Interbank Financial Telecommunication.”) It allows banks around the world to send and receive payments and communicate with each other, no matter the country or currency.

Whenever you wire money to someone internationally, you use their 8-digit BIC code, which is actually their Swift ID. (In crypto terms, the bank’s wallet address.)

Critically, Swift does not interact with blockchains. (Remember, it was invented in the 1970s.) This is where Chainlink comes into the story … and our investing opportunity begins.

Chainlink: The Missing LINK

Chainlink is like a universal adapter for blockchain. It can pull in data from any blockchain, standardize the data, and securely transmit data between chains.

Given the incredible complexity of blockchain technology, this is a little like a universal translator for human languages. (The crypto equivalent of the Babel fish.)

Chainlink is this, for blockchain.

Swift can’t create a blockchain messaging protocol on its own (I may have mentioned it was invented in the 1970s), so Swift collaborated with Chainlink for this experiment. Here’s the technical diagram:

The simple way to think about it: Swift coordinates between banks, and Chainlink coordinates between blockchains.

Our investing thesis is that buying the underlying token behind a crypto project is like investing in the “stock” of the “company” itself. So, if this experiment between Swift and Chainlink gains momentum, LINK could become an incredibly valuable investment.

(Full disclosure: I’m an investor in LINK.)

If Chainlink was a traditional company, we’d say it has a valuable service (blockchain oracle services), a sustainable competitive advantage (it was first to market, and is the leader by far), and a good management team (led by Sergey Nazarov).

And now, Chainlink is starting to help banks connect to crypto. That would make it a major player in the global financial system.

(For a deeper dive, Premium members can download our LINK Investor Scorecard here.)

The simple way to think about it: Swift coordinates between banks, and Chainlink coordinates between blockchains.

Our investing thesis is that buying the underlying token behind a crypto project is like investing in the “stock” of the “company” itself. So, if this experiment between Swift and Chainlink gains momentum, LINK could become an incredibly valuable investment.

(Full disclosure: I’m an investor in LINK.)

If Chainlink was a traditional company, we’d say it has a valuable service (blockchain oracle services), a sustainable competitive advantage (it was first to market, and is the leader by far), and a good management team (led by Sergey Nazarov).

And now, Chainlink is starting to help banks connect to crypto. That would make it a major player in the global financial system.

(For a deeper dive, Premium members can download our LINK Investor Scorecard here.)

Here’s What the Future Looks Like

The implications of this experiment are enormous, because they shatter the common idea about the future of crypto. (It’s not just for crypto bros anymore.) The experiment implies that:

• Banks will soon hold your crypto, just as they hold all your cash today.
• Banks will use existing payment systems like Swift to transfer crypto to each other, as well as across blockchains.
• Oracle services (like Chainlink) will provide a critical “bridge” between TradFi and DeFi, making them particularly valuable.

As Swift said in its report: “Institutions prefer to leverage existing infrastructure and investments wherever possible.” In other words, banks don’t want to reinvent the wheel. They know Swift. They trust Swift. They use Swift, even if it’s not exactly, well, swift.

If Swift can connect to crypto, banks will use it. It looks like that’s the shape of things to come. And heads up, crypto investors: it looks like Chainlink (LINK) will play a part.

Swift is about to get a lot more swiftier.

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The post Crypto is Coming to Swift appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/the-study-every-crypto-investor-should-read/

I recently read an academic study called Network Effects and Store-of-Value Features in the Cryptocurrency Market, and I literally pumped my fist in the air.

That’s because it is scientific proof of the investment strategy we’ve been telling you about for years.

I recommend you read the article – or at least the summary – but I’ll pull out the juicy bits for you below.

Active Wallet Addresses Make a Crypto More Valuable

The authors studied the top 100 crypto investments over a long period of time (2010-2023), making it one of the most comprehensive studies to date on what drives long-term crypto prices.

The primary finding is that the number of active wallet addresses drove up the price in all but six of the crypto investments they studied.

To simplify, as users go up, so does the price.

Which is what we’ve been saying for years.

To some degree, it’s common sense: money becomes more valuable as more people use it. (Which reinforces the idea that a one-world money would be the most valuable of all – see my TED talk.)

This is not how most crypto investors think, of course.

Active Wallet Addresses is not even a metric that’s listed on top crypto listing sites like CoinMarketCap. You’ve got to really dig to find this number – but in our view, the number of users should be the first number that we see.

Active Wallet Addresses – which is similar to Daily Active Addresses (DAA) or Monthly Active Addresses (MAA) – basically tells you how many people are actually using it. If cryptos are businesses, then this number is their customers.

Cryptos become more valuable as more people use them. Now we have the proof.

Number of Transactions is a Booster

In about half of the crypto investments they studied, a higher number of transactions was correlated with a higher price. In other words, if the token was being used more often, it was more likely to appreciate in value.

Again, this makes logical sense, but it’s a less reliable indicator than number of users, because while you can fake both numbers, it’s even easier to fake the number of transactions (for example, wash trading).

It helps to think of crypto networks like social media networks. If you had a social media network with plenty of active users, it would be very likely to snowball in size and scale, because of network effects: more users lead to even more users.

But if you had a social network with a limited number of users who happen to post a lot, you have, well, Friend.tech. It’s a lot of “sound and fury, signifying nothing.”

In other words, the number of transactions matters, but it matters even more when the number of users is growing. (If you found a crypto with a growing number of users, consider number of transactions a “+1” on your score.)

Again, this is not a number that most crypto investors monitor, because it’s so hard to find. Most crypto sites instead report on trading volume, which is not at all the same thing as number of transactions.

Which would you rather own: a currency that is used only by a few very rich people (giving the illusion of a lot of money moving around), or a currency that’s used by everyone? That’s the difference between trading volume and number of transactions.

Limited Supply is Another Booster

Much has been made of bitcoin’s limited supply: there will only be 21 million ever created. By contrast, most crypto projects can mint new tokens infinitely, diluting your value over time.

The study found that crypto investments with a limited supply could make the token more scarce, and thus more valuable. But limited supply alone is not enough to predict a good investment.

Again, this makes logical sense: a bitcoin clone that no one uses would be, well, Bitcoin Cash.

Think of limited supply as a potential “accelerant” for an investment that has lots of active users.

To sum up:

• Look for investments with lots of active users (ideally this number is growing over time).
• Of these investments, if they also have lots of transactions, that’s a +1.
• If they have a limited supply, that’s also a +1.

Of course, these are not the only factors that should be considered. The team and the technology are important (see our Investor Scorecards). The regulatory risk and potential problems also matter (see our Risk Scorecards).

But if our investments pass these other criteria, these three metrics – active users, transactions, and supply — are powerful signals for which investments are likely to grow over time.

This Knowledge is Gold

Sometimes, you find these nuggets of information gold – but they’re buried in so much academic formalese that it’s hard to see their value. This report is gold.

Here’s how to use it to find crypto investing gold:

• Use our Investor Scorecards and Risk Scorecards to find potential winners
• Then look at their active wallet addresses (or daily active users) as a powerful accelerant
• Consider number of transactions and limited supply as further boosters

One final note: the study also found that mature crypto investments (like bitcoin and Ethereum) demonstrate a strong correlation with gold. So finding these winners is literally like investing in digital gold.

That’s worth a fist-pump, for sure.

Thanks to Steve Gordon of Babson College for passing this study on to me.

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The post The Study Every Crypto Investor Should Read appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/regulatory-clarity/

If Gary Gensler ever writes an autobiography, he should call it Regulatory Clarity.

It would be a guaranteed bestseller, because the crypto industry would get so up in arms about the title that they would tweet about it nonstop. We’re talking a million copies, easy.

Regulatory clarity, of course, is the shared dream of everyone in the crypto industry. If we just knew whether crypto was or was not a stock, the thinking goes, then things would really take off.

Good news: Regulatory clarity may be coming soon. For real, this time. (Part 12)

My question is, when we get regulatory clarity, what next?

I believe smart investors should be planning for this now. Rather than complaining that the laws aren’t fair, we should be positioning ourselves for new laws. Because things are happening.

PYUSD Changes Everything

PayPal recently launched its own stablecoin, PYUSD, which some experts are saying may accelerate regulatory clarity – that is, to get crypto-specific laws passed more quickly in Congress. Here’s John Rizzo, formerly of the U.S. Treasury Department:

“The prospect of hundreds of millions of users soon having easy access to a stablecoin on a platform they already use … creates a new urgency for lawmakers in D.C. to reach a compromise on a regulatory framework for stablecoins.”

Now that PayPal’s involved, in other words, crypto’s got a lot more cred.

The crypto economy is increasingly intertwined with the traditional economy. It’s not hard to draw a line between the collapse of Terra/LUNA, to the collapse of FTX, to the failure of several well-known banks, ending (we hope) with the bailout of Credit Suisse.

The global economy is complex, so we want to avoid oversimplification, but there’s no doubt that what happens in crypto now affects the whole world, so lawmakers cannot afford to let crypto be the Wild West much longer.

So when the sheriff comes to town, what then?

History Repeats Itself

I highly recommend a book called Technological Revolutions and Financial Capital by Carlota Perez, in which she lays out five technological revolutions, from the Industrial Revolution (1771) to the Information Revolution (1971), each lasting about 40-60 years.

(The implication is that we may be in the middle of a new “Blockchain Revolution,” starting with the Satoshi whitepaper in 2008.)

Each of these revolutions, Perez argues, has two distinct phases:

The installation phase, which is full of financial speculation, bubbles, and crashes. Thus, Railway Mania during the Railway Age, and the dot-com bubble during the Information Age. These are the boom-and-bust times that fuel the growth of the new technology.

The deployment phase, which is the “golden age” that follows. The technology becomes widely adopted, leading to growth, stability, and great benefits to society. Now the new technology is just “common sense,” the way things are done, which lasts until the next great revolution.

Perez does a nice job outlining the financial, societal, and governmental changes that typically occur during these revolutions – as well as how to manage them well. Her historical examples are valuable, because they illustrate we’ve seen this movie many times before.

She describes the onset of a new technological revolution as a “Frenzy,” where early speculators rush in to make a quick buck. She calls it a “casino” period, in which financiers are “setting their own lax rules and being highly successful with them.” (Think of the ICOs of 2017.

Eventually, the bubble pops, and the government enters the picture, creating new technological regulation, which (if done well) can usher in a new golden age in which the technology becomes part of everyday life, making the world better.

To sum up: the technological revolution (blockchain) typically leads to irrational exuberance (2017-2022), which leads to euphoric bubbles (ICOs, DeFi, NFTs), which eventually crash (Terra/LUNA and the aftermath), which brings about calls for more government regulation.

And that, I believe, is where we are now.

So, what typically happens next?

Perez discusses how, once the appropriate government regulations are in place, the “arrogant self-complacency” is replaced by “confident optimism” in business growth. (Translation: crypto bros will be replaced by company execs.)

In contrast to the Wild West that came before, Perez describes this period as a time of “orderly and ordered behavior.” (Once stablecoins get regulated, you can see every bank rushing to support them – but in a neat, orderly line.)

She calls it an era of “good feeling,” in which the new technological revolution creates greater and greater benefits for society, as did the railways, the telephones, and the Internet. Gradually, the new technology becomes a part of everyday life, “the way things are done.”

Along the way, the new technology opens the doors for many complementary technologies and businesses: the infrastructure that supports it. And that is where smart investors can really shine.

New Areas of Investment Opportunity

This is the chart from the book that really stuck with me, which I snapped on my phone and kept on my computer desktop for years:

This is the answer to the question, “After regulatory clarity, what next?”

When regulation comes (not if, but when), these are the types of companies – and subsequent investment opportunities – that we should watch for.

Money providers for new products and services: Look to invest in banks, funds, and VC firms making a big push into Web3. Adventurous investors can also consider joining specialized angel groups like Chain Reaction (where I’m a member) to invest in early-stage startups.

Innovations to help growth or expansion: Get ready for Web3 IPOs (not ICOs, but legit IPOs). Also, companies will begin offering their own shares as securitized tokens. Bonds – including junk bonds – will also be offered as tokens, to fuel Web3 growth.

Modernization of financial services: Look for any company that’s helping banks take their first creaky steps into Web3. Companies like Coinbase, Circle and ConsenSys are ideally positioned, but many others will flourish, including Web3 payment processors and fintechs.

Innovations to spread investment and risk: We’ve been talking about blockchain bonds for years. But also look for the explosion of Web3 derivatives on platforms like Synthetix and dYdX, as well as decentralized insurance platforms like Nexus Mutual.

Refinancing debts or mobilizing assets: Look for tokenization of any real-world assets: real estate, commodities, sports teams, music royalties, etc. (Expect NFTs to have a new golden age, too.) As the industry matures, expect plenty of mergers, acquisitions, and takeovers.

Questionable innovations: Finally, beware of continued bad behavior, now in the form of insider trading, legal loopholes, off-the-record deals, and so on. (We’ll graduate from Sam Bankman-Fried to Bernie Madoff.)

In summary, as we get regulatory clarity, we will have investment opportunities galore

– as well as new risks. Great investors will do well to prepare for both.

Investor Takeaway

“You were right. It’s not a passing fad.”

This line made my week, as it was written by New York Times financial columnist Ron Lieber. In his recent Letter to a Young Crypto Enthusiast, he admits that crypto is here to stay, and suggests a common-sense approach for investing in it.

If you, too, believe that crypto is here to stay, then it must evolve. And it is likely to evolve along the lines of previous technology revolutions: we’ll soon get regulatory clarity that will usher in a new golden age.

That presents exciting opportunities for investors like you and me.

As we get this regulatory clarity, think to yourself, which companies will be providing the infrastructure for this financial and technological revolution? Which companies will be bringing in the new golden age?

PayPal, Coinbase, and Circle are my top three. Who are yours?

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The post After Regulatory Clarity, What Next? appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/paypal-stablecoin/

This week, PayPal launched its own stablecoin, called PYUSD.

Should you invest?

The short answer is you can’t “invest” in any stablecoin, because they’re designed to hold their value against the U.S. dollar. (You may as well just hold dollars.)

Also, PayPal doesn’t pay interest. So, avoid keeping any significant amount of money on their platform long-term – you’re better off in a high-interest savings account, or earning stablecoin yield.

However, investing in $PYPL – PayPal stock – may be a very good idea. Here’s why.

The Shape of Things to Come

PayPal’s stablecoin is the shape of things to come.

First, it shows that major financial companies cannot afford to sit out the crypto revolution much longer. By launching its own stablecoin, PayPal now has its own on- and off-ramps to crypto, allowing its 400+ million users to easily invest in digital assets.

It’s not just investing: PayPal users will also be able to pay for things with PYUSD, and even send and receive PYUSD to other PayPal users, without fees. (Considering that PYUSD is built on top of Ethereum, which is usually notorious for fees, this is a big deal.)

Second, it’s a PayPal-branded stablecoin. The company didn’t go with an established product like Tether or USDC, but launched its own.

Why? Because PayPal earns interest on your deposits.

Backing up its stablecoins are short-term U.S. Treasuries, which are currently paying 5% yield. That money flows directly back to PayPal.

PayPal has terrific consumer products, with easy-to-use apps and simple connections to traditional financial rails. This means more consumers may end up using PayPal as their default gateway to crypto, holding more of their wealth in PYUSD instead of holding USDT in a clunky Web3 wallet … and PayPal gets to pocket all the interest.

This points to a future where more financial institutions (and countries!) launch their own branded stablecoins, much like I predicted back in February 2020. That prediction is starting to come true. The “stablecoin wars” are just beginning.

Finally, PYUSD is built on Ethereum. As huge believers in Ethereum, PYUSD could become a significant driver of growth for the Ethereum network. It strengthens our conviction on investing in ETH directly – which was already very strong.

Great Risk vs. Great Reward

All this sounds like gravy for PayPal investors – and indeed, PYPL stock jumped on the news.

From an investor standpoint, PayPal is building next-generation blockchain tech well before its rivals. It stands to reap the rewards (i.e., interest) of its users holding their dollars in PYUSD. And it could control a significant market share of dollars flowing into and out of crypto.

But with these potential rewards come risk. The biggest risk, of course, is the U.S. government, which has yet to define a clear framework for how stablecoins will be regulated.

For the crypto industry, the PayPal stablecoin is welcome news, as it will encourage lawmakers to get new regulations passed, which will allow the industry to breathe a little easier.

However, it’s not a done deal. Congresswoman Maxine Waters (D-CA) said she was “deeply concerned” about the PayPal stablecoin, while Patrick McHenry (R-NC) had the opposite reaction, proclaiming it “holds promise as a pillar of the 21st century financial system.”

Considering they’re both on the House Financial Services Committee working on new stablecoin legislation, you can see we’re still working out some differences of opinion.

Then there’s the fact that PayPal’s stablecoin is being managed by Paxos, which was recently sued by the SEC for offering a Binance-branded stablecoin.

So the risks of PayPal running into trouble with the SEC, or the U.S. government, are high. But so is the risk of sitting on the sidelines and doing nothing—especially as more of their consumers turn to crypto. If PayPal pulls it off, stablecoins could be a mighty moat.

Should You Invest in PYPL?

Again, smart investors should not hold any significant cash in PayPal’s stablecoin (or in any stablecoin, unless you’re earning yield).

However, this is an exciting opportunity to invest in a financial services company that’s making a bold move into crypto – by simply buying and holding PYPL stock.

As an investor, you have a powerful insight if you actually use the company’s products. In my family, we’ve been using PayPal for a couple of decades, and Venmo for a couple of years. Both are terrific products, and far more user-friendly than any bank or crypto app we’ve tried.

PayPal’s financials look good, with quarterly revenue growing from $6.8 billion to $7.3 billion year over year:

Payment volume is up:

Transactions per account are up, too (yellow line):

However, PayPal’s active accounts (blue bar, above) is worryingly flat, since we place such a premium on user growth here at Bitcoin Market Journal. Perhaps the stablecoin launch may help user growth, attracting a new generation of DeFi users to transact using PayPal.

Cross-border trade has also remained relatively flat. Again, PYUSD could potentially help kickstart international payments, especially between PayPal users (remember: zero fees).

On the leadership front, PayPal is run by Dan Schulman, who had huge wins at AT&T, American Express, and Virgin Mobile before taking the CEO position at PayPal. He’s held that position since 2014, taking the company from $8 billion to $28 billion in revenue. However, he’s announced that he’ll be stepping down as CEO at the end of 2023, which is a risk factor.

In summary: a very good company, but not without risk.

Investor Takeaway

PayPal’s launch of its own stablecoin feels like one of those transformative moments when crypto goes from being an interesting sideshow to becoming a pillar of the financial system.

If you think crypto is the future of finance, then PayPal is positioning itself for that future. Importantly, PYPL is not a crypto token, it’s a fully-regulated, publicly-traded stock. You can buy it on E*Trade, Fidelity, or anywhere stocks are sold.

As a blockchain believer, I believe that PYUSD now makes PYPL an even better buy.

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The post The New PayPal Stablecoin: Should You Invest? appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/all-about-coinbase/

If you believe in Coinbase, this could be a great time to buy COIN stock. Because on August 9, Coinbase will officially launch their Layer-2 solution Base.

This is significant.

Before I explain why, let me confess that I bought COIN at the IPO price, at about $405. (As I write this, it’s trading at about $90.) I failed to heed my own warning that “IPO” stands for “It’s Probably Overpriced.”

Still, I remain a huge believer in Coinbase, because I am a huge believer in crypto, and I believe that Coinbase is perhaps the single best-positioned company in the world to capture the potential growth of crypto.

However, investing in Coinbase comes with some big risks. Here’s my investing thesis on COIN; I would love to hear your thoughts as well.

Coinbase has World-Class Products

Coinbase has a history of creating crypto products that are actually easy to use.

Most crypto applications look like they were designed by engineers locked in a sensory deprivation tank. You need a Ph.D. in economics to understand them. (*Cough cough Curve*)

Coinbase was founded on the idea that people needed an easy way to buy bitcoin. So they built an app that is simple and elegant: to me, it’s the easiest crypto on-ramp in the world. Anyone can use it.

I don’t understand why more crypto companies don’t place a priority on usability. Coinbase gets it. Crypto is always a little clunky, but for the most part, their products just work.

I’m a huge fan of tech products that just work. (It’s why I’m also an investor in Zoom.) Companies that make a seamless user experience generally have deep expertise along the entire tech stack, which means they can generally execute well on new products.

For example, Coinbase’s liquid staking derivative cbETH was launched just last year, and even given this late start, it’s already the #2 Ethereum LSD, behind Lido:

Again, anyone with a Coinbase account can easily opt in to these new Coinbase products, which is a huge competitive advantage. Good products lead to easier adoption of new products.

Which leads us to Base.

Coinbase is Launching Base

Base is a new Ethereum Layer-2, to improve Ethereum’s speed and scalability. Importantly, other developers can build apps on top of Base – and leverage Coinbase’s userbase to kickstart their own users.

(As an analogy, think of Apple launching the iPhone platform, then opening an app store on top of it. Anyone with an iPhone is a potential user.)

At Bitcoin Market Journal, user traction is our most important metric for valuing crypto investments, so this built-in user traction is a huge competitive advantage for Base over other L2s.

Importantly, Coinbase will also take a cut of transaction revenue for all the applications built on Base.

Historically, Coinbase’s revenue has come largely from trading fees. This revenue model is great when crypto is hot, but terrible when it’s not. Coinbase has been working diligently to build new revenue streams, like custody and staking.

Base is another step in that direction. While Base revenues will certainly surge during crypto booms, they are not directly related to trading fees, providing further diversification.

Coinbase’s Financials are Improving

In addition to diversifying revenue, Coinbase has aggressively cut costs over the last year, including laying off about 30% of its staff.

This means that Coinbase is still losing money (which is common in technology growth stocks), but not nearly as much. In the second quarter of 2022, the company lost $1 billion, but narrowed that loss to $97 million in the most recent quarter.

Coinbase has got $5 billion cash on hand, and currently holds $124 billion in customer crypto assets, up from $75 billion just six months ago.

In my view, the company is doing the right things to weather the crypto winter: diversifying revenue streams, keeping costs down, and investing for the future.

However, there are still major risks.

Coinbase Comes With Risks

The biggest risk, of course, is the SEC’s lawsuit against Coinbase. While this will likely take several years to play out, an SEC victory would deal a mighty blow to Coinbase—as well as the entire crypto industry, and potentially the global financial system (think FTX times ten).

The best-case scenario for Coinbase is that Congress passes new legislation to better define crypto assets—ideally, in a way that benefits the company. This appears to be the company’s strategy: lobby to get better crypto laws passed, before the SEC suit gets settled.

This is a risky strategy, as U.S. lawmakers are not known for their speediness.

However, it does appear likely that some legislation will get passed in the next year or two. It’s also likely that such legislation would benefit Coinbase overall, as the leading U.S. crypto exchange. (If Coinbase can’t comply, what hope does anyone else have?)

But perhaps the most important investing factor is the Coinbase story.

Coinbase Has a Sticky Story

As you may remember from my summary of the classic investing book A Random Walk Down Wall Street, the legendary Burton Malkiel recommends:

1) Invest in companies with prospects of high growth for five or more years. Investing in Coinbase is a big bet on crypto. If you believe it’s here to stay, then Coinbase is positioned for outstanding growth.

2) Never pay more for a stock than its “firm foundation of value,” i.e., what it’s worth. I thought COIN was a deal at $405, and I think it’s a better deal at $90. The market is spooked by the SEC suit, and that means bargain-basement prices.

3) Look for growth stories that sound like “castles in the air.” Malkiel suggests stocks that capture the fancy and dreams of the crowd (particularly institutional investors). In other words, stocks with a sticky story.

To me, Coinbase has that story: it is the leading crypto on-ramp, and also a legitimate public company. Importantly, it’s headquartered in the United States, unlike its bigger rival Binance (which is located who-knows-where).

In summary, if crypto continues to grow, then Coinbase is ideally positioned. To invest in COIN, you have to believe that crypto will continue to grow.

Invest for the Long Term

I don’t expect that COIN stock will pop on August 9, because I don’t think most traditional investors have any idea what an L2 solution is (indeed, most investors seem clueless about Coinbase’s growth prospects at all, judging from its price history).

But I believe that the launch of Base is likely to be a significant milestone in the company’s history. It bridges traditional markets with crypto markets – and Coinbase itself is that bridge.

For that reason, I’m continuing to hold my COIN. Are you?

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The post All About That (Coin)Base appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/our-scorecard-performance/

A few years ago, we developed our Blockchain Investor Scorecard, which was peer-reviewed and published, and has since been cited by dozens of researchers as an industry-leading framework for valuing crypto investments.

Then, we started to actually use it.

If you’re new, the scorecard is a set of 21 simple questions that we ask before investing in a crypto asset. Like investing in a company, we ask about the product, the team, the competitive advantage, and so on, rolling these up to a simple 1-5 star rating.

Like a Yelp review.

We followed up the Blockchain Investor Scorecard with a Blockchain Risk Scorecard (for evaluating crypto risk, not just the reward) and an NFT Investor Scorecard (for evaluating NFTs).

Our analysts have now spent several years producing these scorecards, which are all available for Premium Members.

Now for the $1 trillion question: are our scorecards useful for investors?

In other words, is a higher-rated crypto investment more likely to make money?

(On our Risk Scorecard, it’s the opposite: is a higher-rated (i.e., riskier) crypto investment more likely to lose money?)

Here are the correlations between our ratings and future performance:

Perfectly correlated = 1, perfectly uncorrelated = 0, perfectly negatively correlated = -1

In short:

• Investor Scorecards have been somewhat correlated with good investments,
• Risk Scorecards have been somewhat correlated with bad investments,
• NFT scorecards have not been helpful to investors so far (but they’re also brand new).

We were moderately pleased with these results, since the vast majority of our scorecards have proved useful for predicting future price movements. We’re not happy with our NFT scorecards, but we have some ideas there.

Important note: Our analysis measured the price when the scorecard was published, until today. Some were published years ago, some were published last month. Since we recommend holding crypto assets for at least 5 years, think of this as a “check-in.”

In other words, future performance of our top-rated investments may look different – even better, we hope. But so far, Investor Scorecards can be a useful tool in building wealth. Here’s why.

Investor Scorecards: Positively Correlated

Our analysis showed there is a small positive correlation (0.25) between our scores and performance, suggesting that higher-ranked investments tend to perform slightly better.

While you should do your own research, our scorecards are an excellent starting point, because we’ve done much of the research for you. Also, we present the research in an easy-to-read format – just two pages – and give you important categories to consider.

As an example, Ethereum (ETH), our highest-rated asset, has increased by a whopping +881% since we published the scorecard in 2020. Binance Coin (BNB), another of our top picks, has increased by an astonishing +1,366%.

Conversely, our lowest-rated assets tend to lose money. Compound (COMP), our lowest-rated pick, has plunged by -84%. Terra/LUNA, our second lowest-rated pick, spectacularly crashed and burned last year.

I’m picking the best examples, so there are plenty of high-ranked investments that have lost money as well. But again, it’s still early, and we’re in a bear market. Directionally, we’re pleased with these results, as we feel they’re adding real value to investors.

Risk Scorecards: Negatively Correlated

Our Risk Scorecards take the opposite approach, warning you about which crypto investments we find most risky. So here, the scores are in reverse: a higher score means a riskier investment.

Indeed, we found that the assets we rated riskier have tended to lose money. Again, we were pleased by this finding.

Investor Scorecards and Risk Scorecards are meant to go hand in hand: one measures potential reward, one measures potential risk. Ideally, before putting in your hard-earned money, you consult both.

Most of our Risk Scorecards have been published within the last six months, but even in that time, our lowest-rated (i.e., “safest”) asset, Ethereum (ETH), has grown by +50%.

Our second-highest-rated (i.e., second-riskiest) asset, Algorand (ALGO), is down -25%. (It has since been labeled a security by the SEC, adding greatly to its risk factor.)

Our riskiest asset, Ripple (XRP), shot up in price due to the recent court ruling (which I warned you is a mixed bag, at best). Time will tell the long-term performance of XRP, but I heartily stand by our rating: XRP is still very risky.

The bottom line is that our Risk Scorecards are a second useful tool for investors, as they give you an additional data point to consult before investing.

NFT Scorecards: Not Correlated

As excited as we are about the overall performance of our scorecards, the performance of our new NFT Scorecards has been disappointing.

Here, ratings were negatively correlated with returns – meaning our higher-rated NFTs actually went down in price, and vice-versa.

We think there are a number of reasons. First, this is our newest line of scorecards, so they really haven’t had time to prove themselves. Also, the NFT market has cratered in 2023, sending prices in all directions.

The bigger problem is likely that NFT value is harder to analyze. Whereas we can evaluate cryptos like companies, NFTs are more like art – and how do you value art?

Moreover, not all NFTs are pixelated art. We also have virtual real estate, tokenized assets, and so on … and we’ve quickly learned that trying to use one scorecard to rate them all is a crude and imperfect tool.

TLDR: we may need to go back to the drawing board on valuing NFTs.

A Valuable Tool in the Investor’s Toolkit

While you still want to do your own research, our scorecards are super-valuable tools to help you do that research more quickly – and give you an experienced opinion from the team that’s evaluated many, many investments.

In short:

• Crypto investments with high Investor Scorecard ratings have had a tendency to make money.
• Risky investments with high Risk Scorecard ratings have had a tendency to lose money.
• And NFT Scorecard ratings, so far, have not proved predictive.

The usual disclaimers apply: past performance does not guarantee future results. Remember that it’s still early (we recommend holding for a minimum of five years), and we hope these correlations will become even stronger over time.

Just as we open-sourced our original Investor Scorecard for the entire world to use, we want to be open about our results to date.We want to prove the value we’re providing for our Premium members, who support our continued research—and benefit from it.

We’re working to build a rigorous industry standard for valuing crypto investments, at a time when most people don’t even think of crypto as investments. So far, so good.

With your support, we’ll keep the good work coming. Consider joining as a Premium member, and get access to our entire library of scorecards.

Big thanks to Steve Walters and Mauricio Nogueira Silverio, who helped do the data analysis for this project – and to our team of analysts who have made the scorecards possible.

The post Our Scorecard Performance appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/are-we-there-yet/

Last night was our Boston Blockchain Association summer social, held at Fidelity Investments. It was an incredible event, and I found myself speaking with one of the OGs of crypto. I won’t name names, but you would know her name.

“You’re one of the OGs of crypto,” I said to her over bites of Fidelity flatbread, “so what do you think of where the crypto industry is today?”

She chewed thoughtfully. “I’m just trying to figure out if there’s a ‘there,’ there.”

“What do you mean?”

“Well, we’ve had a decade to create real, meaningful progress with crypto … but then ChatGPT comes along and instantly sets the world on fire. Why hasn’t crypto done that yet? Where are we going? Is there a ‘there,’ there?”

At this point, someone jumped in to share his opinion on SDRs, but I wasn’t really listening, because I was thinking of an answer to this question.

Are we there yet? And where is “there,” anyway?

Truth be told, I think about this question all the time.

Crypto Years are Dog Years

Among longtime investors, it’s often said that crypto years are like dog years. The dizzying pace of change, and the stomach-churning ups and downs, make time feel warped and stretched.

For those of you who have been with us since the beginning of Bitcoin Market Journal, this means the last 5 years have actually been 36 years (according to my human-to-dog calculator).

Given this Interstellar-like sense of time dilation, I think the first mistake we all made was anticipating the timing.

Many times we equated the crypto revolution to the Internet revolution, saying things like “This is like the Web in 1995,” meaning that in 1995, the first web browsers were just taking hold, but mass adoption was still about five years away.

We’re five years in from when we all made those predictions, and clearly mass adoption of crypto is not here yet.

So maybe the invention of bitcoin was more like the invention of ARPANET, the precursor to the Internet, launched in the late 1960s. It took twenty years to invent the Web, then another twenty years to really take hold.

Point is, big technology shifts take time. It may seem like ChatGPT exploded overnight, but AI research started in the freaking 1950s. This blows my mind: when people were just getting television and listening to Elvis, smart people were already researching AI.

Like AI, crypto is an incredibly complex technical, financial, and political phenomenon. Like the Internet, these things take time – more than five or ten years. Patience, young Padawan.

Does It Just Go Away?

For the non-believers, here’s the question to ask: “So what happens to crypto? Does it all just go away?”

This seems very unlikely to me, that we all collectively decide that crypto was a weird dream. This seems especially unlikely with the younger generation, who just accept crypto as a fact of life.

Crypto is already being woven into the fabric of reality. It’s tied into every financial website. It’s coming to the banks. It’s the source of endless fascination, speculation, and conversation.

As bills are being slowly worked through the halls of Congress, and other countries have already released their own frameworks for crypto, code is (literally) becoming law. And law changes the fabric of reality, our entire social construct.

We may not know where crypto is ultimately going, but it’s becoming too big to ignore.

It’s Intellectually Interesting

One of the great benefits of crypto is that it has created a profound cultural re-evaluation of money.

Once taken for granted, many of us have found ourselves rethinking money from first principles. What makes something valuable? What is trust? With last week’s XRP ruling, everyone started asking, What makes a security a security?

Those first few years of crypto were built on the euphoric idea that we can do money differently! We can build a new financial system from the ground up! But then we collided with the hard truth that financial systems are difficult and messy.

Worse, the new financial system still needs to integrate with the old financial system. (We still need banks.)

It’s working out these details – and the grindingly slow process of working them out in Congress – that have thrown cold water on the party. But it’s a necessary part of the journey. Embrace the grind.

We’re Not Alone

Not being alone is a good thing. I am continually encouraged by the number of smart people who continue building and investing in this space.

For example, a16z crypto — which has been investing in crypto startups since 2013! – have not wavered in creating valuable, thought-leading content. (And don’t forget the track record of a16z’s founders.)

Cathie Wood’s ARK Invest is continually investing in crypto and crypto-adjacent industries, and despite cooling off this year, it remains one of the most interesting ETFs on the market.

We can even learn from the crypto skeptics. The legendary investor Ray Dalio has been lukewarm on bitcoin, but acknowledges that crypto may have a promising future, saying, “Money as we know it is in jeopardy.”

It’s easy to get lost in the noise of crypto Twitter and clickbait of crypto YouTube. Listening to smart, thoughtful people is far more valuable for investors – especially those with real-world crypto experience. You realize, we’re not alone.

Belief in Yourself

For serious investors, one of the most important success factors is an unshakable belief in yourself.

This does not mean that we keep throwing money at bad investments, or that we never change our mind. Rather, it’s a core belief that in the long run, we will succeed.

We will have ups and downs, like anyone else, but if we keep doing the right things, day after day, we will succeed.

We must live with the possibility, however small, that there is no “there,” there. (Crypto may be outlawed.) While acknowledging the risk, we must develop the central belief that in the long run, we will be successful anyway.

In this sense, we are like athletes. We will have wins and losses, but we must constantly kindle the desire, the drive, the determination to achieve excellence. To be the greatest crypto investors (or builders, or researchers) that we can be.

(Plus, what else are we going to do? Go get a job at a hedge fund? Borrrring.)

After the event last night, I booted up our Blockchain for Everyone Spotify playlist, packed with curated songs to help develop this self-belief.

You can bet on me
Like when bitcoin was a penny
Double down on me
If you haven’t bid already
I’m a certainty
You can’t get these odds in Vegas
Baby, bet, bet, bet, bet on me

It might not come easy
But who said it would?
It won’t happen overnight
But you know it could…

– “Bet on Me,” Walk Off the Earth (listen here)

Investor Takeaway

There’s a “there,” there … even if we don’t know exactly where “there” is.

The creators of ARPANET could not have imagined TikTok, any more than those early AI pioneers could have imagined Midjourney.

We don’t ultimately know where crypto is going. But what we can do as investors, as builders, as researchers, is help guide and influence it in the right direction. And that’s worth working for.

We’re not there yet. But we’re getting there.

The post Are We There Yet? appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/ripple-vs-sec/

Investor Takeaway: The recent ruling in the SEC’s lawsuit against Ripple is a mixed blessing (read more here). Even though XRP is soaring, don’t invest unless you feel it’s a great long-term investment (5+ years), because Ripple’s not out of the woods yet.

It’s been interesting to read the response to yesterday’s ruling in the SEC’s lawsuit against Ripple. If you follow the crypto news sites, you would think this was the second coming of Satoshi.

The truth: for crypto investors, it’s a mixed bag.

The question hinges around whether Ripple’s XRP token is a security (e.g., a company stock). If it is a stock, Ripple should have registered it with the SEC (along with every other crypto company out there). If it’s not a stock, then that would broadly benefit the entire crypto industry, because we’d all be free to create new tokens.

The judge ruled that XRP is not a stock when sold on exchanges, but is a stock when sold to big investors at launch.

If we were all hoping for regulatory clarity, this isn’t it.

My hot take is that we’re pretty much where we started, except that the judge did say that tokens are not necessarily stocks, which undercuts the recent SEC lawsuits against all the top crypto players.

And, perhaps more importantly, it gives investors renewed confidence that just because you’re sued by the SEC, it doesn’t necessarily mean the SEC is going to win.

Should You Invest in Ripple Now?

Three years ago I explained the SEC case against Ripple, so smash that link if you need a refresher. I also explained our reasoning for dropping XRP from our Blockchain Believers Portfolio.

We believe in Ripple. It promised to be the first global remittance platform that would use blockchain technology to make cross-border payments instant and free (or nearly so). Our first analyst report, in fact, was on Ripple’s token, XRP.

But when the SEC launched its lawsuit against Ripple in 2020, we could no longer say in good conscience, “Hey, new investors, we’re investing in XRP.”

Turns out, our Blockchain Believers Portfolio performed spectacularly without XRP:

The question everyone’s asking is, “With XRP rocketing to the moon, should I buy?”

Here’s our take.

There are Still Ripples to Come

The recent ruling will have ripple effects (so to speak) for some time to come.

First, the SEC can appeal the ruling, which can still be overturned. (Of course, Ripple could appeal parts of the ruling they don’t like, as well.) So this will likely drag on for some time.

Second, the judge ruled that Ripple is guilty of selling an unregistered security to institutional investors. This point is getting lost in the euphoria.

Third, the key question in crypto investing is not whether the price is going up. That’s the worst way to invest.

Instead, we use judgment and analysis to see whether Ripple is a good company, well-run by competent managers, with a large and growing customer base.

(Premium members can download our XRP Investor Scorecard here to get our rating on Ripple’s growth prospects, and our XRP Risk Scorecard to see potential risks.)

I get it: after months of bad news from the SEC, this small and partial victory feels like a reprieve, so everyone is going nuts. But it’s just another lap around the track on the crypto roller coaster.

Avoid investing on FOMO, and there’s plenty of that going around right now. Instead, invest in quality crypto projects, as a small part of a balanced portfolio. Most of all, think long-term: 5 or more years.

The Ripple ruling is just a drop in the pond: we’ve still got a long way to go. But for today, I admit it does feel good to get even a small win.

The post Ripple vs. SEC: Investor Takeaway appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/crypto-investing-principles/

Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.

In the five years we’ve been publishing Bitcoin Market Journal, we’ve developed an entirely new way of investing.

The genius of our approach is that it combines old-fashioned financial investing principles with the new-fashioned world of crypto.

This lets everyday investors manage the risk of crypto, while sharing in the reward.

Today it’s hard to find anyone that preaches these principles. Most investors are either all-in on crypto, or shun it altogether – but in the future, we believe this “middle ground” will just be common sense.

What’s rewarding is that this approach has worked. Our results speak for themselves:

Blockchain Believers have far outperformed the non-believers.

Over the long term, we’re making much more money than the “Traditionalists” who stay away from crypto. And we’re blowing away the results of most “Crypto Bros,” who generally don’t report their long-term profits (because they don’t have any).

The strategy itself is simple:

• make monthly investments
• into a well-diversified portfolio of stocks, bonds, and up to 10% quality crypto assets
• hold on to them for 5+ years.

We know that it works. And we’ve had five years to develop the principles that explain why it works. Rather than reading the thousands of articles, research reports, and investor scorecards that we’ve published, here’s a guide to learning the core investing principles.

Call it the crypto investor curriculum.

The Case for Crypto

Investing puts your money to work. Intelligent investors put their money where it can be most useful, by funding great companies (and other investments) that bring real value to the world. Rather than sitting in a low-interest bank account, intelligent investing uses our money for a higher purpose.

Money is going digital. Separately, money itself is changing. Just as we went from paper letters to email, from paper tax returns to e-filing, we’re in the midst of money going from paper to digital. In many ways, it already is (most of us use less cash and more Venmo), and this trend is accelerating.

Money is going global. At the same time, our global economy means that the arbitrary rules we put around “dollars” and “euros” and “yuan” are increasingly irrelevant. All national economies are connected, and what affects one affects all (which we see most clearly during banking crises).

A global digital currency is inevitable. Thus, the dollar will eventually be replaced by digital money that will not be owned by any one nation, but a global central bank (like the IMF). This won’t be bitcoin, which behaves more like a high-flying tech stock than a currency, but bitcoin provides the template.

Investing in this money movement is like investing in the Internet. These twin forces of digitalization and globalization, combined with the invention of crypto, means that we can invest in “future winners” of crypto, which is akin to investing in the early winners of the Internet.

Principles of Value Investing

Find great companies that provide real value. When picking winning stocks (we’ll get to crypto in a moment), intelligent investors look for companies with excellent financials and excellent managers, with room to grow, that are providing some valuable product or service to the world.

Investing in companies is literally buying the company. Before buying a stock, intelligent investors ask themselves, “Would I be willing to buy the entire company?” This helps us say “no” to a great number of companies, and “yes” to a precious few.

Intelligent investing requires both quantitative and qualitative analysis. Quantitative analysis looks at the financials of the business; qualitative analysis uses our judgment about the business. The numbers may look great, but the team is sketchy: pass. Or the business may look great on paper, but the financials are a mess: pass. You need both.

Buy companies when they’re “on sale.” It’s not enough to find a great company; we ideally want to invest in it when the stock is undervalued, not overvalued. Like investing in real estate, we should look at “comps,” or comparable valuations among similar companies, before investing.

Hold for the long term (5+ years). The point is not to “get rich quick,” but to “get rich and make it stick.” We can’t predict what the market will do next year, but the U.S. stock market has grown by 10% a year over the long haul. Good companies should do at least that well, especially if we’ve bought them cheaply.

Valuing Crypto

Cryptos are like companies. Now on to crypto, where the same investing principles apply. Although crypto tokens are in many ways different from traditional companies, it is most helpful to think of them like companies. Then we can apply the principles of value investing, with a few tweaks.

We can analyze crypto like companies. As covered above, we can use qualitative analysis (our judgment about a crypto project) as well as quantitative analysis (the real-time numbers). In fact, crypto is far superior to stocks in this respect, since the numbers are transparent and real-time. (Nowhere to hide.)

We can use tools for both. For qualitative analysis, Bitcoin Market Journal has created the industry-standard tools, including our Blockchain Investor Scorecard, Blockchain Risk Scorecard, and NFT Investor Scorecard. For quantitative tools, see our guide on How to Read Crypto Financial Statements.

User traction is by far the most important metric. Because all blockchains have network effects, the easy question to ask is whether their long-term users are growing, and how quickly. This can help you eliminate the vast majority of crypto tokens right away. Real users = real value.

Tokenomics can build (or destroy) value. There are no rules for creating crypto tokens, so a company that continually creates new tokens dilutes your value (see our analogy of the Magic Pie). Bad tokenomics are inflationary; good tokenomics are deflationary, or at least manage inflation well.

Managing Crypto Risk

Crypto is a rollercoaster. These markets are new and immature; so are most crypto investors. Thus the price of bitcoin, and the entire crypto market, fluctuate between breathless highs and depressive lows, between FOMO and FUD. This volatility is what scares off most traditional investors.

We keep crypto between 2 and 10%. The solution, of course, is to simply invest a small portion of our overall holdings in crypto. Our strategy invests no more than 10%: enough to make a difference, but not so much that a crash will wipe you out.

We steady-drip invest. Because our greatest enemy is our own minds, we need a strategy to deal with the hype cycles of crypto. The solution is steady-drip investing (also called dollar-cost averaging), investing the same amount each month. The goal is to “set it and forget it.”

We invest with monthly withdrawals. Like a 401(K) investment that’s automatically deducted from your paycheck, we can set up automatic withdrawals through services like Coinbase (for monthly crypto investments) and Betterment (for monthly investments in stocks and bonds).

Buying and holding saves on taxes and fees. Although crypto was supposed to free us from fees, the opposite is true: fees are the silent killer of wealth, which is why frequent trading is a bad idea. Because every transaction is taxable, buying and holding also lets your investments grow tax-free.

The Three Most Important Words

Diversify, diversify, diversify. Don’t keep all your eggs in one basket. Putting everything into crypto is a terrible idea; spreading out the risk among many hundreds of stocks, bonds, and a few promising crypto investments is a much better strategy (see our results).

Buy the entire stock market. Rather than picking individual stocks (which even fund managers can’t do well), you can simply buy the entire stock market. An index fund like Vanguard’s VTSMX will give you the average growth of the entire stock market (which has averaged about 10% per year, over the last 100 years).

Buy the entire bond market. When stocks go up, bonds tend to go down, and vice versa. So this will help you diversify further, keeping about a quarter of your holdings in an all-bond index fund (like Vanguard’s VBMFX).

Diversify further using crypto. Keeping up to 10% in quality crypto companies can give us still further diversification, since many investors flood into crypto when traditional markets get wobbly.

Diversify even further if possible. Ideally we want “non-correlated assets,” or investments that each move to their own groove. You can further diversify by investing in assets like real estate, your own business, or your own education (more on this below).

Which Cryptos Do I Buy?

Bitcoin (BTC) is the most established. Bitcoin has the most users, the longest history, the highest market cap, and the biggest brand. While it has not lived up to its promise as a global digital currency (we don’s use it to buy stuff), it can provide a hedge from traditional markets (like “digital gold”).

Ethereum (ETH) is the largest smart contract network. Quite simply, Ethereum is the operating system for crypto. It’s the platform on which most crypto projects are built, which means it has the most users, the most developers, and the most transactions. This is a powerful competitive moat.

Binance (BNB) is the largest exchange. Our thesis is that buying the company’s native token, BNB Chain, is like buying stock in Binance. While there is regulatory uncertainty about all centralized exchanges, Binance has an incredible product, and is has successfully navigated the tricky regulatory waters of crypto for years.

Uniswap (UNI) is the largest decentralized exchange. Exchanging crypto for crypto is one of the proven use cases of crypto. Uniswap has pioneered the decentralized model of crypto exchange, and continues to innovate as the DEX industry standard. (Think of UNI as a hedge against the shutdown of BNB.)

Other category leaders are good long-term bets. Beyond these four, the intelligent investor can identify the categories (or sectors) of crypto that are likely to thrive over the long term, and identify the one or two leading tokens in those sectors now. Our Guide to Sector Investing can help.

Which Cryptos Do I Avoid?

Meme coins are fool’s gold. Even professionals can be tempted to buy meme coins, especially when they seem cute and harmless. Because they add little fundamental value, they’re like gambling, and gambling is harmful to your long-term wealth.

Avoid teams without integrity. The best investments have a combination of strong centralized leadership and a decentralized community of investors and developers. Find projects run by good managers, using our Investor Scorecard. Anonymous teams aren’t accountable; run away from them as fast as you can.

Avoid new token offerings. Investing in a brand-new crypto project is like investing in a startup: the odds of success are long, so it’s better left to people with money to burn. It’s much easier to stick with the investing principles in the section above.

Avoid new market segments. Maybe decentralized file storage will one day be a thing, but today most people are pretty happy with centralized solutions. Likewise with decentralized social, crypto gaming, Layer-2 solutions, cross-chain bridges, and so on. Stick with proven crypto projects that are growing.

Avoid NFTs. Our view is that the technology behind NFTs is important, but today’s NFTs are just collectibles like classic cars or Pokemon cards. If you must invest in NFTs, keep it to no more than 1% of your overall portfolio. Ask yourself what value today’s NFTs are really bringing to the world.

The Long View

Health, wealth, and happiness. Our tagline is our philosophy. Define what happiness is to you, and let money serve that goal – not the other way around. For most people, meaningful work and meaningful relationships are a good starting point for long-term happiness.

Get rid of high-interest debt. If you’re carrying credit card or student loan debt, get rid of that first before you start investing. (Or at least prioritize the payoff, because it’s eating up any profits you make from investing.)

Live within your means. There are two ways to do this. 1) Control your expenses by making a monthly budget, then sticking to it. 2) Increase your income by getting a better job, asking for a raise, or taking on additional work. Ideally you can increase income, decrease expense, and invest the rest.

Knowledge pays the best interest. Ben Franklin said it first, and we put him on the hundred dollar bill. An investment in your own learning — like the kind you’re doing here — is an investment that will stand the test of time.

The best investment is in yourself. Most investments are beyond our control. But investing in yourself – whether through improving your education, starting a business, or taking a leap into a new career – is within our control. This makes you the best investment of all.

50,000 crypto investors get this column every Friday. Click here to subscribe and join the tribe.

The post Crypto Investing Principles appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/understanding-the-state-of-crypto-index/

Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.

Here’s a tool that will give you new reasons to invest in crypto.

And it’s not based on price, it’s based on real-life users.

It’s the new State of Crypto Index, by the storied venture capital firm Andreessen Horowitz (also called “a16z”), which has invested billions into crypto startups since 2013.

Below I’ll explain how this tool works. But first, here’s why it’s so important for crypto investors.

Users are the “Demand”

Crypto must be used to be useful.

You can measure the price of bitcoin all day long, but measuring the users of bitcoin is a much more valuable metric. (Hint: bitcoin users have stayed about the same since 2020.)

After all, crypto companies are meant to connect people, to help them transact with new forms of value. If the price is going up but the number of users is going down, that doesn’t say much about its usefulness.

(To the contrary, if the price is going down but the number of users is going up, that could signal a great bargain.)

It seems so obvious that we shouldn’t have to say it: crypto must be used to be useful. But almost nobody invests this way. Everyone gets excited about price growth; rarely do people get excited about user growth.

User growth is one of our core investing principles: we measure it every Thursday in our Top 10 Fundamentals newsletter for Premium members. If long-term users are growing, then long-term prices will usually grow like a weed.

Measuring Users with the State of Crypto Index

Like any index, the State of Crypto Index is meant to give us a high-level snapshot of the industry over time: is it growing or shrinking?

In a16z lingo, users are what they call “demand.” (The more crypto users, the more demand for crypto products.)

They roll up a bunch of user metrics into a single chart on the bottom right:

To the right of the chart, you can see the metrics that go into this chart (like ingredients that go into a recipe):

• Active addresses: the number of unique users across top blockchains
• Transaction: the number of unique transactions across top blockchains
• Transaction fees: the amount that people are paying to use top blockchains (e.g., gas fees on Ethereum)
• Mobile wallet users: the number of unique users on top crypto mobile wallets
• DEX volume: the value of tokens exchanged across top decentralized exchanges (e.g., Uniswap)
• NFT buyers: the number of unique users buying NFTs
• Stablecoin volume: The value of stablecoins transferred across top blockchains

What I love about this index is that you can change the weighting of the ingredients to adjust the recipe. For example, I would weight active addresses much more heavily, while I would de-emphasize transaction fees (because they are dependent on price):

Producing a chart that looks more like this:

The important thing is not the weighting, but the overall shape of the chart as you play with the weightings. Is it still moving in the direction of growth? If so, the industry is very likely growing.

But the index does more than measure user growth across the industry. It also measures developer growth.

Developers are the “Supply”

If users provide the demand for crypto products, developers provide the supply. (With price attracting both.)

Take bitcoin: as more people started to buy it, that drove up the price, which got more developers interested in building crypto tokens and projects. This drove higher prices, more users, and so on. Virtuous circle.

Of course, this never happens in a linear fashion, but in waves. Take this excellent slide that shows when famous tech firms started vs. the overall stock market:

The long-term trajectory is one of upward growth, with many of today’s most powerful companies started during market downturns.

The question mark at the far right of the slide means, What world-changing crypto company is being built right now?

Developers and users. Supply and demand. It’s like the old question about the chicken and the egg: which came first?

As investors, it doesn’t really matter, as long as we’re measuring both.

Measuring Developers with the State of Crypto Index

To measure developers (or the supply side), the ingredients are:

• Active developers: the number of developers building crypto projects (e.g., through Github)
• Interested developers: the number of developers playing around with it
• Contract deployers: The number of devs deploying new code on public blockchains
• Verified smart contracts: The number of new applications launched
• Developer library downloads: The number of downloads of apps to help developers
• Academic publications: The number of published research papers around crypto topics
• Job search interest: The number of searches on blockchain- and crypto-related jobs

Just as I see active users as the primary metric for crypto adoption, active developers is the primary metric on crypto development. So my recipe would place way more emphasis on active developers, something like this:

Creating a chart that is still similar to the defaults provided by a16z:

With my improved recipe, the overall index looks even better than a16z’s outlook:

It is a picture of astounding long-term growth. As a point of reference, if you invested $1 that grew into $1727 in three years, you would be considered an investing genius. That’s what investing in this overall industry has been like.

And the long-term results have been even better.

(Still, be cautious of the roller-coaster ups and downs of the crypto market. Our Blockchain Believers Portfolio will keep you well-diversified.)

Why Not Just Measure Price?

No matter how you tweak this index, chances are you’ll still get something that looks a lot like the price of the crypto market. Or to put it even more crudely, a chart that looks like the price of bitcoin:

Again, price can be deceptive. It’s one data point, and it’s fueled by fear and greed. This index is a powerful tool because it incorporates many data points that show the growth of the underlying infrastructure – both supply and demand.

Investor Takeaway: Apply This to Individual Tokens

As investors, we’re after the hidden gems, the undervalued crypto tokens. We can use this same methodology to drill into individual crypto projects, to look at their overall demand (users) and supply (developers).

To do this, we have a great tutorial on How to Read Crypto Financial Statements. Using companion reports from Token Terminal, we’ll show you how to find both active developers and active users (supply and demand) for all the leading crypto tokens.

Think of a16z’s State of Crypto Index as rolling all this info into one helpful chart, to show us how the industry is growing as a whole.

Remember: it’s never a straight shot. That’s not how growth happens. Instead, it’s a rolling series of ups and downs, that gradually lead us to more users, more developers, and more long-term wealth.

Investing in that long-term future is what we’re here to do. Now, with the State of Crypto Index, we have a new way to measure our progress.

The post Understanding the “State of Crypto Index” appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/the-power-of-financial-affirmations/

Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.

Money guru Suze Orman tells a story of taking a job as a Merrill Lynch financial advisor in the 1980s. In that male-dominated industry, complete with power suits and BMWs, she felt terrified and unqualified.

She didn’t have the right clothes, or the money to buy them, so she charged $3000 to her Macy’s credit card for a new wardrobe. She hid her 1967 Volvo station wagon on the street, out of sight, constantly feeding the meter and racking up parking tickets.

In the midst of her doubt and insecurity, she came up with a new positive thought for herself:

“I am young, powerful and successful, producing at least $10,000 a month.”

She wasn’t young (almost 30), she wasn’t powerful (more like pitiful), and she wasn’t producing anything near $10,000 a month (that’s $38,000 today, or about $450,000 per year).

But she repeated the affirmation 25 times a day — sometimes silently, sometimes screaming — looking at herself in the mirror as she repeated it.

Day in, day out, 25 times a day.

After six months of this practice, she said, things started to click. And soon she began to develop a media persona that was young, powerful, and successful, earning far more than $10,000 a month. She wrote ten consecutive New York Times bestsellers, with her hit The Suze Orman Show running on CNBC for over a decade. Today, estimates place her net worth between $25 million and $75 million.

I’ve simplified her long and winding career into a paragraph, but it’s clear that the affirmation was the accelerator.

Many other celebrities have successfully used positive affirmations to help them accelerate a winning mindset:

“I am the creator of my reality.” – Jim Carrey

“I am capable of accomplishing anything I set my mind to.” – Beyonce

“Everything is always working out for me.” – Oprah Winfrey

“I am intelligent, strong, and capable.” – Jennifer Aniston

“Success isn’t always about greatness, it’s about consistency. Consistent hard work gains success. Greatness will come.” – Dwayne Johnson

Clearly each of these celebrities had tons of talent, and a world-moving work ethic. They didn’t just lay in bed and think positive thoughts. But in each case, affirmations ignited that talent and exploded the work forward. Affirmations were the accelerator.

Affirmations are Accelerators

Some believe that affirmations help “manifest” your dreams, but I think about it less magically and more logically: affirmations prime your mind for success.

Anything we repeat to ourselves over a long period of time, good or bad, becomes a part of our belief system.

Mental repetition carves new “grooves” into our brain, like digging rows in a garden to plant new seeds. Those seeds — the positive thoughts we want to cultivate – will eventually take root and bear fruit.

Affirmations Help Us Overcome Obstacles

You’ve heard the saying that you “make your own luck,” but researchers are showing that’s literally the case. Dr. Christian Busch has studied those with a “serendipity mindset,” which simply means you find meaning in life’s everyday twists and turns.

Busch talks about “connecting the dots” between seemingly random events: that chance introduction to a recruiter is something you take seriously, which leads to a great career opportunity. Or losing money on an investment causes you to rework your investing strategy, which leads to far greater gains down the road.

Affirmations prime this kind of thinking. They help you “connect the dots” between your setbacks and the goals you’re trying to achieve. They make you resilient in the face of hardship, as with Oprah’s affirmation. A serendipity mindset means seeing obstacles as opportunities.

Affirmations Help Us Spot New Opportunities

Affirmations also give you X-ray vision for new opportunities. We are swimming in opportunities every day, but it takes a special kind of outlook to see them. Affirmations help you “connect the dots” between seemingly random ideas – for example, noticing that parking is easier to find could lead to an investment in Zoom (ZM) – and that, too, is a serendipity mindset.

By helping us to both overcome obstacles and observe opportunities, affirmations are accelerators to our goals and dreams.

There’s also science behind it: a 2005 study shows that positive self-talk can reduce stress. And a skeptical 2009 study that questioned the validity of affirmations nevertheless found that people with higher self-esteem used positive affirmations more frequently: the more positive the self-esteem, the more helpful they found affirmations, suggesting a positive feedback loop.

Perhaps the most important finding from this study was that 97% of respondents already used regular affirmations, leading the authors to conclude, “The results confirm that positive self-statements are used commonly (by Westerners) and are widely believed to be effective.”

So, if you’re not already using affirmations, why not? And if you are, why not more frequently?

Top 5 Affirmation Techniques

While positive self-talk has been encouraged for millennia by spiritual traditions like Buddhism, Yoga, and Christianity, the modern form probably originated with the Stoics, around 300 BCE. The Roman Emperor Marcus Aurelius dropped this knowledge bomb which bloggers are still pondering today:

“The things you think about determine the quality of your mind. Your soul takes on the color of your thoughts.”

Then he recommended a daily discipline of affirmations:

“Say to yourself in the early morning: I shall meet today ungrateful, violent, treacherous, envious, uncharitable men. All of these things have come upon them through ignorance of real good and ill.”

The French psychologist Émile Coué was the first to popularize affirmations for a global audience, at the beginning of the 19th century. He became famous for this phrase, which is still used today by motivational and self-help gurus:

“Every day, in every way, I am getting better and better.”

Authors like Norman Vincent Peale (The Power of Positive Thinking), Napoleon Hill (Think and Grow Rich), Mary Baker Eddy (founder of Christian Science), Louise Hay (You Can Heal Your Life), and Shakti Gawain (Creative Visualization) took the ball and ran with it through the 20th century, writing extensively about the power of positive thinking, with affirmations playing a central role.

Gawain’s bestseller contains a library of affirmations from which you can pick and choose:

“I love doing my work, and I am richly rewarded, creatively and financially.”

“I communicate clearly and effectively.”

“I now have enough time, money, energy, and wisdom to accomplish all my desires.”

“I am always in the right place at the right time, successfully engaged in the right activities.”

“This is an abundant world, and there’s plenty for all of us.”

Many modern self-help speakers talk about the power of affirmations, including Jack Canfield, Wayne Dyer, and Tony Robbins. They vary in their technique, but here are the 5 major flavors:

Affirmations: This is the basic discipline, repeated daily (or more often), usually first thing in the morning or just before bed. You can use a habit tracker app to help you stick to it every day, and challenge yourself to a six-month “streak.”

Written affirmations: You can also write down the affirmation, anywhere from 1 to 25 times a day. I’m a big fan of this method, as the muscle movement and mental focus make it a more purposeful discipline than just saying it to yourself.

Visualizations: Some authors add in an imagination component, explaining that the more you can see yourself in the desired state (with the successful business, the healthy investment account, or the life partner), the better.

Emotions: Some recommend cultivating the feeling of achieving the goal. You feel yourself on a stage, inspiring thousands of people. You bask in the sunshine of success. You work up earth-moving desire to get there.

Vision boards: Finally, you can go artsy-craftsy and create a collage of all the things you would like to be, have, give, or do. If you’re skeptical, read the testimonials of those who have tried it and swear that it works.

These affirmation techniques can be stacked or swapped, and my suspicion is that it doesn’t really matter which ones you use. The most important thing is to do it consistently, for the long term (daily, for at least six months).

Affirmations for Investors

Most investors I talk to have no idea what they’re trying to achieve. They don’t have clear long-term goals, no dollar figures. So it’s little surprise that they never get there, because there is no “there” there.

For investors, affirmations help accelerate your goals. The discipline of doing daily affirmations is that it helps you get specific. It helps you set concrete goals on what you want to achieve, understanding those goals may evolve over time.

Here are a few more you may want to try:

“Every day I am growing more financially prosperous.”

“The more I have, the more I have to give. The more I give, the more I receive, and the happier I feel.”

“I have a net worth of $___, investing in projects and people I am passionate about.”

“I am relaxed and centered. I have plenty of time and money for everything.”

“I have a wonderful job with wonderful pay. I provide a wonderful service in a wonderful way.”

Treat affirmations like an experiment. It’s free to test them out on your own life; there’s really nothing to lose. And you may just have many incredible experiences to gain.

50,000 crypto investors get this column every Friday. Click here to subscribe and join the tribe.

The post The Power of Financial Affirmations appeared first on Bitcoin Market Journal.

https://www.bitcoinmarketjournal.com/how-investing-champions-think/

Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.

My friend and colleague Mike Wise pointed me to a book called How Champions Think by Dr. Bob Rotella, one of the top sports psychologists in the world. Rotella is known for his work with champion golfers, athletes, and businesspeople, and this book is the total of his teachings.

I absorbed it.

How Champions Think is packed with mental techniques that can help anyone trying to achieve something exceptional – including those of us who are long-term investors.

I read a crazy amount of books, but when I’m really into a book, here’s my process for deep learning:

• I’ll break out the Post-It Notes and start marking individual pages.
• When I’m finished, I’ll go back to all the marked passages and take notes.
• Then I’ll reread the notes weekly (I set aside Sunday nights for this), until the lessons are etched into my brain.

When I was finished with How Champions Think, it was mummified in Post-Its. It looked like a nearby Staples had exploded.

Here are some of the key takeaways for investors.

Visualizing the Results + Doing the Work

Rotella starts the book by discussing his work with LeBron James, who at the time was struggling with his 3-pointers.

Rotella advised him to edit together a movie of all his best 3-point shots, with his favorite songs as a soundtrack, and to watch this over and over again. This “3-point greatest hits” would help him visualize his goal of improving his 3-point shots, on his quest to become the world’s greatest basketball player.

He also advised James to actually do the work, setting a goal of making 200 3-point shots a day (!), and sticking with it.

Too often we hear about the power of visualization, without the all-important followup of doing the work. You need both.

The movie was James’s visualization aid, but the practice – that daily slog of making 200 shots before leaving the court – was the work.

In investing (especially this new world of crypto investing), you need both visualization and work:

• Visualize the results: Set long-term goals on where you want to be, with a specific dollar amount and timeframe, and see yourself achieving it. (Read more below.)
• Do the work: Don’t just dream, do. Invest regularly, intelligently, and courageously. (Re-read Our Approach.)

(Note: many crypto investors do too much work, trading too frequently, following the hype cycles, and eating up their profits in foolishness and fees.)

Each morning, I start the day with meditation, then I spend a few minutes visualizing where I want to go long-term with my business, my relationships, and my life. Then I shower, eat breakfast, and start doing the work.

I don’t sweat as much as LeBron James, but I’m on a similar mission of excellence. I encourage you to give this routine a try; it’s a great way to live.

Rise and Grind

Another concept is to love the daily grind.

The crypto industry is obsessively focused on quick riches, which is reinforced by media outlets and Crypto Twitter obsessively reporting on price, especially when a token suddenly shoots up in value. More fools rush in, which makes the problem worse.

Rotella talks a lot about developing patience, through good times and bad. The concept is to “stick with it until you get it, but don’t think it’s going to be a straight shot.”

Every professional athlete has times of winning and times of losing. Michael Jordan said, “I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

This is the “grind” of loving the work, regardless of whether we’re winning or losing today. As an investor, you have to love investing. If you don’t – if you’re just out to turn a couple of thousand into a million – you’re in the wrong place.

Investing, like sports, is not a straight shot. In fact, too much success early on can be a curse. Like the young basketball player who blows all his money immediately after signing, winning big early can lure you into thinking, “This is too easy.” Life will quickly teach you otherwise.

For investors, patience is critical in times like these, when we are confronted by those twin monsters, Doubt and Discouragement. They rear up on either side of us, and many shrink away, cashing out and moving to safer occupations.

Rotella advises us that champions tell themselves: “Be patient. It will come. I don’t know how long it will take, I just know it will.”

And when it does come, he says, it will be a joy. By enduring the losses, we will fully appreciate the win. The grind makes it greater.

Train It and Trust It

In sports, athletes can get so caught up in proper technique that they can’t get out of their own heads. The goal is to “train it and trust it,” or to learn the skill thoroughly, then put it completely out of your mind, allowing your subconscious to take over. This is the Holy Grail.

For investors and businesspeople, the same concept applies. I’ve seen people obsessively read management books, when they already know how to be an excellent manager. I’ve seen crypto investors fall down deep technical rabbit holes, never to find their way out.

One passage in the book, which I papered in Post-It Notes, illustrates this point well. It’s from the golfer Ben Hogan, considered to be one of the greats. I reread this quote so many times that I’ll paraphrase it from memory.

Hogan had been obsessively working on various aspects of his golf game: his drives, chip shots, putts, and so on. Then, “In 1946, I suddenly realized that all this overpreparation, this obsessive drive for perfection, was neither possible, nor desirable, nor even necessary. All you really needed to groove were the basic fundamentals of the game, and that weren’t that many of them. From that point forward, my shot-making began to take on a new and more stable consistency.”

Now, here’s Hogan’s actual quote:

“In 1946, my attitude suddenly changed. I began to feel I could play fairly well every time I went out, that there was no practical reason to feel I might lose it all. I guess what lay behind my newfound confidence was this: I had stopped trying to do a great many things perfectly because it had become clear that this ambitious over-thoroughness, my perfectionism, was neither possible, nor advisable, nor even necessary. All you need to groove were the fundamental movements, and there weren’t so many of them. My shot-making started to take on a new and more stable consistency.”

The fear that he “might lose it all” is common to many of us. For the businessperson, it’s the fear of losing the client, the job, the career. For the investor, it’s the fear of losing the profit, the original capital, the entire bank account.

But if you’ve trained it (i.e., if you’ve visualized and put in the daily grind), then you can trust it. As Hogan said, there’s no practical reason that you might suddenly lose it all. Life doesn’t work that way. You will have setbacks, of course, but for the person with the champion mindset, you’ll eventually bounce back.

Investor Takeaway: 5 Mental Exercises

To become a champion investor (or anything else), here are some exercises for you to try right now:

Visualize: Clearly define where you’d like to be in ten years. What kind of life do you want to be living? What does your job, family, and house look like? Write it down, somewhere that you can refer to it frequently, whether that’s a journal or Evernote.

Repeat: Set aside a weekly time to reread this vision. Sunday nights or Monday mornings are good, but do it first thing, before you get sucked into the work of the day. Block 15 minutes on your calendar, and set a reminder alarm.

Work: Block off time each day to move forward toward this future. If your dream career is not the job you have now, for example, carve out time to get training or experience, even if it’s over a lunch break or before you start work. Make your own version of LeBron’s 200 3-pointers.

Discuss: Sharing your goals with other people – especially supportive people – is helpful for moving toward those goals. Talking about them can also improve your goals by getting you different points of view, as well as opening up potential connections and opportunities.

Review: It helps to evaluate progress against your goals on, say, a quarterly basis. I find it helpful to look at long-term progress against the goal: if you’re working on it daily, you will invariably see long-term progress, regardless of your short-term results.

Most of us are not lucky enough to have a coach like Bob Rotella. No one is going to challenge you to become a champion. But I am.

You have what it takes to be a champion investor, businessperson, parent, partner, or any other life role. Visualize it. Do the work. Love the grind. Train it and trust it. Review results regularly.

This is not just how champions think, it’s how champions act. Let’s be champions.

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