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I want to shout it from the rooftops: ALL BLOCKCHAINS HAVE NETWORK EFFECTS! People are pouring money into the blockchain market again, but they’re forgetting this one simple rule: the more users a blockchain has, the more useful that blockchain becomes. Today I’ll show you both how to avoid their mistake – and a simple principle for investing in this new Gold Rush. Network effects mean that every time someone joins the network, the network becomes more valuable for everyone. (Think the telephone, the Internet, or Facebook.) More users = more usefulness. For this reason, networks that are healthy and growing are usually good investments. This is true in traditional stock investing, as well as blockchain investing. For example, here are two charts showing active users on Facebook vs. the market cap (or total value) of FB stock: | |
Facebook active users (source: Statista) | |
Over the long-term, as Facebook continues to add new users, its stock price continues to grow. Compare that with Twitter: | |
Despite how much you may hear about Twitter, their growth has been relatively flat, and their stock price shows it. Now compare this with Snapchat: | |
Snapchat active users (source: Statista) | |
It’s been a roller coaster ride for SNAP shareholders, but eventually, more users generally means a higher stock price. Note that this takes place over the long-term: even while Snapchat grew users in the first year after the IPO, for example, their stock price cratered. So consider it not a rule, but a rule of thumb: networks that are healthy and growing are generally good long-term investments. This is crazy relevant in the world of blockchain, where people are currently throwing gobs of money into the new ecosystem known as Decentralized Finance (or DeFi): | |
This new world is confusing: I’ve called it a “rabbit hole within a rabbit hole.” Much of the growth is driven by people depositing their crypto as collateral to take out loans to borrow more crypto to use as collateral to take out more loans, and so on. It’s a hall of mirrors. In these topsy-turvy markets, it’s easy to let greed get the best of us. If we step back and simply ask ourselves “Who is building valuable networks that are healthy and growing?” we can make much better decisions on where to invest in DeFi. Here’s the total number of DeFi users over time, courtesy of Dune Analytics: | |
That's crazy growth. But note two things: 1) Scale matters. (Check the Y axis.) While Facebook has over 2.5 billion active users, the entire DeFi space has about half a million. Even lowly Snapchat has over 50 million users – that’s two orders of magnitude more than the entire DeFi space. Keep it in perspective. 2) Time matters. Social media networks have been around for years; this new space has been around for months. It's like watching a baby going through a growth spurt and trying to predict whether he’ll be a basketball star. Still, if they can keep up this growth, investing in the tokens behind these projects could be like investing in FB stock in 2012. As Facebook users grew, so did the usefulness of the Facebook network – and the money soon followed. Say it with me: BLOCKCHAINS HAVE NETWORK EFFECTS. DeFi Growth by the Numbers Let’s look at who's growing. Here's the number of users on the popular DeFi token exchange Uniswap: | |
Note that Y-axis on the left. Keep perspective on the total number of users for a DeFi project, not just the hockey-stick growth curve on the right. Uniswap has about a quarter of a million users, which (refer to the chart above) is roughly half the total number of users on DeFi. It's tiny compared to Facebook -- but within this niche, it's enormous. Unfortunately, there’s no way to invest in Uniswap (meaning there’s no Uniswap token, at least not yet). However, most other DeFi projects do have tokens that you can buy and hold as an investment. In a nutshell: You buy ether; Send it to your MetaMask wallet; Then use Uniswap to exchange ether for other tokens. For example, here’s the number of users growing on the open-source money market protocol Aave: | |
Click here to see current prices for their token called LEND. Here’s the number of users growing on the interest rate protocol Compound: | |
Click here to see current prices for their token called COMP. Here’s the number of users on the liquidity protocol REN: | |
Click here to see current prices for their token called REN. FULL DISCLOSURE: I bought all these tokens this week (and more). Why? NETWORK EFFECTS. Invest in Things vs. Investing in Value Would you rather invest in a limited-edition iPhone, or the company that makes the limited-edition iPhone? Would you rather invest in a top-of-the-line Tesla, or the company that makes Teslas? Would you rather put money into a DeFi account, or invest in the company that’s producing the accounts? When we see more people using these DeFi protocols, those networks are growing. And networks that are healthy and growing are generally good investments. Remember: This is not an absolute rule. (Think of it as a rule of thumb.) This is a long-term play. (On any given day, the price of FB stock may be down even though their users are up.) Growth today does not mean growth tomorrow. (Some of these networks may grow quickly, then fizzle out -- remember MySpace?) Also remember: investing in DeFi is still extremely risky. Do not invest more than you are willing to lose 100%! If you’re following our Blockchain Believers Portfolio, the easy way to invest is to simply Uniswap a little of your ether into these new tokens – but no more than you’re willing to lose. But the absolute simplest way of investing in DeFi is simply to buy and hold ether. All this stuff is built on ether, making it possibly the most valuable asset of all. Here’s the number of active users of Ethereum: | |
Note that users are still not as high as the bubble of 2017-2018, but back then the price of a single ETH was well over $1,000. Today you can buy it for around $400. If you believe the network is healthy and growing, then shout it from the rooftops with me: NETWORK EFFECTS! | |
| Health, wealth, and happiness, Sir John Hargrave Publisher Bitcoin Market Journal | |
Hi Everyone, Hope you've had a fantastic week so far. If not, take comfort in the fact that it's almost over now. For our readers in the United States, I'd like to wish you a very relaxing long weekend ahead. Markets are going a bit nutz at the moment, but if we think about it, nothing has really been normal since February. There's a heck of a lot of money looking for a home, and the tendency is for it to gravitate toward whatever can provide it with the greatest return ... for a reasonable risk. So the question is, if all this money has come out of the stock market, where will it go next? The answer could well be that it'll go right back into the stock market. But I believe that most people will be a bit more hesitant to go in and buy the dip this time, if not simply for the fact that valuations have become ridiculous, then for the fact that many noob Robinhood traders have just become first-time rekt and may be hesitant to get back in. The jobs report that came out about an hour ago was really encouraging, showing the U.S. unemployment rate falling to 8.4%, which is really incredible considering analysts were forecasting nearly 10%. Looking at this graph, it's easy to see how things could have been much worse. Even though the report also showed how millions of people can't return to work because their jobs no longer exist, it is quite apparent that the recovery is under way. | |
Of course, the stock market has been extremely disconnected from the economy for several months already, so I don't see any reason for it to start becoming rational now. As far as my big short that I entered a couple months ago, it may be too late for me. My contracts expire on September 18, and are still way out of the money. As for my crypto portfolio, we're still in fantastic profits, and after this morning's big test of $10k and a picture perfect rejection on the first attempt, I'm buying the dip. Not that it might not break on the second attempt, but if it does, we still have the 200-day moving average directly below and the famed CME gap at $9,500 that's yet to be filled. Have a fantastic weekend! | |
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