As the world of cryptocurrency approaches its 13th year of existence, a look back reveals that it has changed vastly from what it was in its infancy. Born from the aftermath of the 2008 financial crisis, Bitcoin and cryptocurrency started out as a hopeful movement among cypherpunks and computer programmers set on changing the world through revolutionizing the way currency works: introducing the concept of “decentralization” and getting rid of the need to trust financial “counterparties” (a fancy term for the middlemen that sit between you and your money, i.e., banks). After sensational stories of Bitcoin’s meteoric rise, the crypto space has mostly devolved into a realm where hordes of speculators hope to win their next lottery ticket to financial freedom by piling into the latest trends, all while ducking and dodging the plethora of treacherous scams that exist in the space along the way.
Many ideas exploring the potential practical uses of crypto have come and gone, not unlike the dot-com bubble of the late 1990s. From the huge ICO (initial coin offering) boom of summer 2017 to the current DeFi (decentralized finance) craze that started in summer 2020, many promises with grand visions were made, but most projects took investor money upfront and had little or nothing to show for it. This is very evident on the coin-ranking site Nomics.com, which displays a growing list of 1,927 “deadcoins” that currently have no investor activity. A few of these failed projects amounted to nothing more than outright scams where the website creators took pre-order money and disappeared.
Others got as far as having partially completed road maps, running out of investor money to cross the finish line. In more recent cases, many crypto projects have displayed critical vulnerabilities to hacks, technical exploits, bugs, and even “bank run”–style collapses from something as simple as changing market sentiment, with investors deciding to flock onto the next big thing en masse. There are endless ways to lose money in crypto, seemingly almost more ways of losing it than making more.
Getting past all the negative and dangerous aspects of crypto, the most practical use for crypto is its original intended use-case: wealth preservation and capital growth. As governments and their central banks continue printing fiat currencies endlessly, we see and feel more of the effects of inflation every day. Here in the United States, we can’t escape the reality that because of the Federal Reserve’s money-printing, it continually requires more dollars to buy the same amount of goods and services year after year. Choosing to hold the majority of your wealth in a government-issued currency is like playing a game that’s designed to make you lose: Inflation is paid to banks, making it so that your piece of the pie stays the same while the overall pie grows larger by the year, causing your piece to represent a smaller and smaller share over time.
A decade ago, Bitcoin was king for trying to solve this issue. But as its unit price increased (it was more than $40,000 as of January 1, 2022), it became so expensive that it’s now difficult to recommend as the revolutionary financial breakthrough it was originally meant to be. The only entities that are able to buy whole units of it are the banks and financial institutions, which Bitcoin was ironically invented to replace, along with a few insanely wealthy individuals.
Elsewhere in crypto, there are alternatives rising that are reminiscent of Bitcoin in its early days, when it still had the potential to benefit “the little guys.” The DeFi coin Hex, which is the world’s first blockchain time deposit, created in December 2019, is one such alternative. Although it shares a few similarities with Bitcoin in its design, it also has added features, a key one being the ability to time-lock your coins and earn a stable yield (on average a 40 percent annual percentage yield). Similar to a real-world bank time deposit (or certificate of deposit as it’s called in the United States), the bigger their principal, or the longer amount of time they choose to lock up their coins, the more yield they earn back in the protocol’s native coin.
In addition to time deposits, there are other crypto products that replace their legacy counterparts, such as loans. Protocols such as Aave and Compound allow you to take loans on your crypto and make speculative moves or make purchases without completely relinquishing ownership of your coins. This comes at the risk of liquidation if the market price of your supplied collateral drops below a certain threshold price. As an extra incentive for using their platform, they also pay out rewards in their own token, which has a different value than what you supply or borrow.
Crypto has also found a use as a logistical and scaling solution for tech sectors such as distributed computing. Coins such as Filecoin, SafeCoin (MAID), Siacoin, and Storj all provide decentralized cloud storage for people who want to store data across multiple locations, and in exchange they pay the providers in their respective coins. Coins such as Curecoin also pay people to “fold” for their team using the well-known distributed computing project software Folding@home, which leverages CPU/GPU computing power from users all over the world to simulate “protein folding” in an effort to assist medical researchers in finding cures for diseases such as cancer, Alzheimer’s, and, more recently, COVID-19.
Other investment sectors are starting to incorporate crypto usage as well, seeing its innovative potential. RealT, for example, is a crypto “fractional-investing” platform for real estate, which tokenizes properties and allows investors to spread their investment risk among a collection of properties rather than having to invest in and manage a single unit. Some real estate companies are even starting to accept payment in Bitcoin, offering people alternatives to traditional payment methods.
There is an entire sub-universe of crypto in the form of NFTs, or “non-fungible tokens.” Unlike most currencies where one unit of the currency is virtually indistinguishable from the next (or fungible), NFTs all have a digital “serial number” that makes them unique from each other. This entire space is intended for artists (mostly in the visual arts), who can issue limited runs of their digitized art and find new audiences through marketplaces such as Rarible, SuperRare, and OpenSea. Another example of this is NBA Top Shot, where speculators can buy and trade digital “cards” in the form of short video clips featuring their favorite pro basketball players. There are some pitfalls in this space, both on the creator and the consumer side: Tokenized art can easily just be copy-pasted to bypass any perceived exclusivity, and NFTs can often be disappointing as an investment because of their non-fungible nature. Speculators, proceed with caution.
Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.” As the highest and fastest appreciating asset class in the history of mankind, carefully selected cryptocurrencies are the best chance anyone has to generate passive income streams that outpace government inflation of national currencies. While crypto can be an overwhelming and sometimes dangerous space, it can also be incredibly rewarding when you find coins that have a clear, practical purpose and good “pumpamentals,” which is just a fancy term for a coin’s basic economic and game-theory design that incentivizes good user behavior, leading to positive price action, and, conversely, disincentivizes actions that would result in negative price action.
