During the American gold rush thousands of prospectors risked everything they had speculating on potential mines. Most of these enterprises failed spectacularly, leaving their desperate investors with nothing. This makes sense: while new technologies bring with them fresh investment opportunities, they are inherently risky. There's no track record to draw upon and nobody fully understands the scope or capacity of the new tech.
In hindsight, one group of business owners did remarkably well during the gold rush: the people selling prospectors their shovels. While individual miners were risking their health and wealth on plots of land, those selling them the tools of their trade were essentially risking nothing. Shovel makers. Innkeepers and hostlers. Tailors. Tertiary professions that saw their personal fortunes explode tending to the ever-increasing waves of desperate young men looking to strike it rich.
Cryptocurrency is going through its own digital gold rush. There are now over 1300 different digital currencies vying for your attention and investment dollars. These are the mines of the 21st century: hundreds of different plots of digital land that promise you fertile veins of crypto gold. Much like the speculative mines of old, most of these cryptocurrencies will produce nothing. Desperate investors are going to be jumping from plot to plot (currency to currency) hoping to strike it big. Sadly, when they dig down into the murk underneath most cryptocurrencies, they're going to be left holding nothing but a bag of dirt.
While a few cryptos are going to be remarkably successful the odds of the average person picking that rare fertile mine are slim. Most people don't have the time or capacity to filter out the 90% of these 1300+ crypto investments that offer nothing of value. They could get lucky picking a mine at random, but they'd be far better off looking to invest in shovels. A smart investor shouldn't be looking at the millions of people flooding into cryptocurrencies as their competitors - rather, they should regard them as millions of potential customers.
This begs the question: If nobody is doing any actual digging, what are the "shovels" of the 21st century?
The answer may lie in the exchanges themselves.
Cryptocurrencies are commonly sold on digital exchanges - websites that broker the tokens between buyers and sellers much like a stock exchange would (e.g. Questrade, RBC, Ameritrade, etc.). Crypto exchanges have recently grown exponentially, with tens of thousands of new clients every week. Some of these sites are pulling in hundreds of thousands of dollars in daily trading fees from their customers. These are the purveyors of digital shovels.
While most exchanges are privately owned (meaning you can't invest in them directly) a few of them have now created their own digital tokens. These assets provide a vehicle through which a customer could invest in the success of the exchange itself. These tokens can take many different forms, but they typical allow for token holders to take a very small cut of the site's daily profits. Some percentage of the daily rake gets split amongst all of the holders in proportion to the number of exchange tokens that they own. Other exchange tokens also offer discounts on the exchange's fees IF the fees are paid in the site's own token (thereby rewarding holders of the token).
Imagine if you went to an amusement park that sold its own form of currency called "Fun bucks". If all of the rides and food cost the exact same amount regardless of whether you spend USD or Fun Bucks, chances are you wouldn't invest in any Fun Bucks at all. If your real dollars have other uses outside of the park, why would you invest and "lock them up" as Fun Bucks (for no additional benefits or utility)?
But what if the park offered you a choice: hot dogs are now 1 US dollar OR you can pay the equivalent of 50 cents in "Fun Bucks"? Chances are most people would buy a few Fun Bucks, just in case they want to grab a bite to eat later.
Now imagine that by holding those Fun Bucks in your wallet, you were also entitled to 0.001% of ALL of the daily profits of the amusement park. To thank you for investing in the park's infrastructure (through your purchase of Fun Bucks) the park sends a small trickle of Fun Bucks and dollars into your wallet as other patrons buy rides and concessions. You can spend your Fun Bucks on cheaper hot dogs to eat, or you can hold on to them as a form of passive income. As the park does well, so does your wallet.
This is how exchange tokens work. While they're far from guaranteed, as the exchange grows and succeeds, your exchange tokens become invariably more valuable and profitable. As more customers join the site, the total pool of trading fees swells, and your tiny slice starts getting cut from an ever-growing pie.
Some of the largest exchanges now offer their own token. Binance Coins [Token: BNB], Kucoin Shares [Token: KCS], and Bridgecoins [Token: BCO] are just a few of the exchange tokens currently available. Not only do these tokens offer various discounts and advantages for their holders, but also collectively could represent an asset class with huge untapped potential. As long as the site selling the exchange token remains profitable, so does your investment.
PROS and CONS:
Pros:
- As long as the exchange continues to be profitable, your specific token should continue to earn you passive income.
- You are no longer relying on the success of a specific currency, but rather investing in the success of crypto generally.
- There is less due diligence required as you are no longer vetting thousands of potential tokens.
- Exchanges are typically very profitable, and you're investing in an actual working business with a proven record.
Cons:
- If something bad happens to your exchange then you are seriously exposed. If there is a hack, technical issue, or any other form of insecurity, this FUD will have an effect on the exchange's profits (and subsequently your own).
- If another exchange offers a better token (that offers a higher % of profits or steeper discount of fees) customers may choose to patronize that exchange, instead.
- Unlike shareholders, exchange token holders typically have no input on the business decisions of their parent exchange.
- Customers are inherently fickle - as different tokens come on to the market, investors often jump between various sites in search of the new hottest investment. If your exchange stagnates or fails to offer newer tokens it may slowly find its market share eroding away.
In summation, it is clear that exchange tokens offer an exciting alternative for some investors. They carry a very unique risk profile and may represent a more "traditional" business opportunity for speculators. Instead of struggling with endless white papers examining the 1300+ cryptocurrencies currently on the market, perhaps consider taking a closer look at the handful of exchanges that offer their own token.
Full disclosure: I currently own small positions in several exchange tokens. None of this is investment advice and there are no guarantees in crypto. Any particular exchange can fail, leaving you with nothing. Please do your own due diligence and speak to an investment professional before making any financial decisions.
If you're going to be purchasing tokens, please consider signing up with one of the following links. We both benefit if you do! If you have any questions, please don't hesitate to leave a comment, or to reach out to me on Twitter (@416law) or Instagram (@416lawyer).
Kucoin: https://www.kucoin.com/#/?r=1fMxg
Binance: https://www.binance.com/?ref=11181092
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Ethereum: 0xDfE63348e908fAeBb2A27B8e9C6aD3F3E7163708
Bitcoin: 17UNYGdkHPtMYWGC5hA4qkxyXMdRJPyx2f
Litecoin: LTdTV1nkbotvxqremEKorXTcwybyTX9BrU
Neo: ARjVdbdrbJayeEBGyffxCXeyhq1H6aebcC
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