Call me a pedant, but I'm not a fan of the word "crypto". It may have been a serviceable category back in 2011 when there was only one type of crypto thingy – bitcoin. But it's ceased to be a meaningful term and, if anything, it causes a regression in understanding.
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| Source: Fidelity |
Case in point is the above diagram from Fidelity, which suggests
that clients should conservatively invest 40% of their wealth in
"equity," 59% in "fixed income", and the other 1% in "crypto."
These categories are nonsensical because in many cases, crypto
*is* equity. (And in other cases, crypto *is* fixed income.) Fidelity's buckets are not mutually exclusive.
For
instance, take MKR tokens, which are inscribed on the Ethereum
blockchain and are a top-100 asset listed on CoinGecko. MKR may sound like it deserves to fall in the crypto bucket, but hold on a sec. As a MKR holder, you enjoy
a right to the earnings of MakerDAO, which is effectively an offshore
bank. You enjoy buybacks, voting control, and a residual claim on assets
after creditors in case of windup or bankruptcy. Guess what, folks.
That's equity! Yep, buying MKR shares is economically equivalent to buying shares in Bank of America.
Likewise with Dai tokens, the payments instrument – aka stablecoin – that MakerDAO issues to customers on the Ethereum blockchain and the 25th largest asset on CoinGecko. Sounds like crypto, no? But along with being pegged to the U.S. dollar, Dai pays interest of 5%. That puts it firmly into the fixed income bucket, very much like an uninsured interest-yielding account at the Bank of America.
What exactly is crypto, then?
The word "crypto" describes a database technology, not an asset class. Various asset classes – equity, bonds, options, and savings accounts (or various combinations of these) – can be recorded and stored on crypto databases, much like how MKR shares are served up on Ethereum, one of the most popular crypto database. These crypto databases fall in the same bucket as an Azure SQL database or an Oracle databases, both of which record assets but neither of which belongs itself to an asset class.
So now you can see why Fidelity counseling its customers to invest 99% in equity + fixed income and 1% in crypto is absurd. It's a category mistake, like if Fidelity advised folks to hold 99% in equity + fixed income and 1% in assets stored on Oracle databases.
Telling customers to invest 1% of their wealth in generic assets stored in Oracle databases isn't just a category mistake; it's downright reckless. All sorts of wild financial stuff appears on Oracle databases, including sports bets and zero day options. Conservative investors have no business touching these. As for crypto databases, they are particularly notorious for holding financial fluff like ponzis and digital chain letters (i.e. litecoin, dogecoin, floki inu and their various ancestors and cousins); none of which Fidelity should be hocking to serious customers.
Crypto doesn't refer to an asset class, it describes the database technology on which assets appear. Better yet, let's just get rid of the word altogether. It's beyond repair.
i think 'crypto' accurately categorizes things that are decentralized (to whatever degree). Maker tokens are equity in a protocol, but that doesn't belong in the same category as equity in a company, in my opinion.
ReplyDelete"that doesn't belong in the same category as equity in a company, in my opinion."
DeleteSo let's plunk it into the same category as chain letter assets like doge or floki inu? That makes about as much sense to me as categorizing Microsoft shares into the same bucket as Sergei Mavrodi's MMM scam because they're both deployed on an Oracle database.
I’d categorize 100% blockchain native assets like BTC and ETH as “crypto” in terms of a differentiated enough asset class.
ReplyDeleteShiba Inu, Dogwifhat, and Pepe on your list, too?
DeleteYes but who says all of these will find allocations within the crypto part of a portfolio? It's just like penny stocks indeed are 'Equity' - just ones that a good portfolio won't allocate to.
DeleteShiba Inu isn't equivalent to a penny stock tho, it's 11th on CoinGecko -- which makes it a high quality blue chip. Pepe is no slouch, either, at 48th.
DeleteEven though the vast majority of every digital asset that can be called crypto is either a digital chain letter or has reserves based on it in the background regardless of if it's fixed income or equity, ponzinomics aren't exclusively limited to dogecoin. Social security and the real estate market are both slow ponzi type systems that avoid being popped by merit of piggybacking off the productivity growth of the real economy. Because people are willing to buy back into these markets after a crash due to the digital rules of the fair chain letter system, it no longer has traditional ponzi aspects of quickly self destructing in a permanent fashion. Even if housing is also a ponzi scheme conservative investors are perfectly happy to invest in it since it siphons off other sectors' productive economic output.
ReplyDeleteThe difference with crypto is that at least for now, people can largely choose to opt out of it unlike how the more destructive aspects of housing speculation play out on affordability. At least until some idiot bank ends up plowing their customers retirement funds into shit coins, too big to fail plays out, and we end up seeing the absurdity of the government bailing out 420skibiditoilet coin because it's in the top 20 by marketcap.
Personally, i consider the native “coin” of the blockchain to be a newish asset class. Sort of Non-state issued currencies. But I 100% agree that any token built on top of a blockchain using a smart contract can easily be categoried into existing buckets like equities, fixed income, collectibles, etc. they are just assets on a ledger.
ReplyDelete