Disclaimer: NONE of this should be construed as investment advice! This is an exploration of the economic factors in crypto, and general principles of value flow. Make your own determinations on what makes sense to buy, and why.
Crypto is awesome. It's huge. It's growing everywhere. Untold trillions in capital are pouring into the space. Yet somehow, a bunch of crypto investors just aren't making money.
I've thought about this a lot. I don't have any kind of an investment background, so take what I say with a grain of salt and make sure what I'm saying makes sense to you. But I believe lots of people trying to be successful are just doing it all wrong.
Imagine seeing the espresso boom kicked off by Starbucks, then buying a giant bag of coffee beans that you throw in your basement, then getting mad when you don't 100x your investment in a few years. Imagine seeing the craft brewery boom, then buying all the very best craft brews in bulk, and then somehow expecting to resell them at massive profit many months later.
If those situations sound silly, yet you've bought a cryptocurrency that's a good quality project and are frustrated that it hasn't financially performed well, maybe this is a post for you.
Three Different Token Use Cases
The biggest mistake I think people make is by thinking of cryptos as a stock. They aren't stocks.
It's an entirely new world of decentralized tokenized ecosystems that don't have 100% parallels to the investment world, so we have to relearn some things. There's actually three very common categories/types of token in crypto. I'm going to quickly break them down for you.
Note that very few crypto projects actually have three separate tokens for these cases. In the beginning, they had one token for all three (which is one reason old projects have struggled in the modern age). Even today, there's often some role overlap.
Okay, let's go.
Gas
The first big use case for cryptocurrency is the gas token. This is the native token of the network, and what the network uses to pay for operations. You need gas tokens to do anything on the network, the network is exclusively paid in gas, and exclusively prices things in gas (even though some systems auto-adjust gas prices based on some external metric, like fiat currency value).
Demand for a pure gas token comes from users of the network. They will buy however much they need to do what they're going to do. As long as gas is plentiful and easy to come by, and demand for it isn't too crazy, you can't expect the price to go up that much. Supply and demand. Even if you put a life-or-death value on using the network, this won't drive up the prices until supply becomes sufficiently constricted where it's below demand. See Austrian marginal utility.
When does it make sense to buy gas?
If you want to use a network, you should buy enough gas to use it the way you want to, but not much more. This applies whether you're a regular user, or a business built to use the network, in which case gas is something you need to have in order to make money, but it doesn't make you money on its own.
This includes if you're a "gas dealer" such as an exchange. If your primary business is selling gas, remember: gas doesn't make money, selling it does. You should only buy as much gas as you intend to sell (plus extra in case you miscalculate demand). If you're a speculative investor, you should not buy gas!
If you expect to make money off of buying and holding a gas token, this is only if you expect high demand in the future and a constricted supply. In this case you're anticipating being a gas dealer in the future, and are just locking in a good price for necessarily supplies for when you open up business in the future. But if your business model relies on doing something in the future that isn't profitable for you today, you always risk simply never having a business model and losing money.
Investment
An investment token is equivalent to a share in a company. You acquire a token that lets you take part in the profits from the network. Not many cryptocurrencies have explicit investment tokens because they're considered securities in many jurisdictions.
Staking is often considered to be buying investment tokens, since the primary thing you need to do it is the token (usually the gas token), and you get paid when the network makes money. But staking requires more than just owning the token, such as running a validator, so I'd personally classify it as a business where you need a supply of the gas token in order to operate.
I would consider a liquidity position in a DEX like THORChain to be an investment token, because the exact number of tokens of both assets in the pool that you own fluctuates (you own a certain piece of the pool instead), and your revenue is directly tied to that pool's revenue.
The best true investment token I know of is $MAYA for the Maya_Protocol, because it's a token that does nothing other than give you 10% of the rewards from the protocol. You don't need to explicitly stake it or run infra, you just buy a share and earn.
When does it make sense to buy investment tokens?
You should buy an investment token if you believe the underlying network/business will make money, and the investment token will confer said profit back to you. It only makes sense to buy an investment token when it's directly tied to the enterprise from which you make money. Don't make the mistake of buying a token associated with a profit-making enterprise that doesn't actually give you equity or profits in that enterprise!
The ICO boom ended partially because of this. People paid untold billions to buy tokens associated with companies they thought would be successful. And some were. But at the end of the day, token holders didn't own any part of that success. They just successfully donated money to companies!
And finally, remember: just because the blockchain's idea is really cool and awesome doesn't mean that it'll end up generating revenue for its investors. Make sure there's a realistic plan for generating on-chain revenue eventually, and for that revenue to make it back to investors like you.
Product
Finally we have the product, which is whatever is meant for end users to actually use. This is the thing that costs gas tokens to use, and generates the profit for the investment token.
In most payment applications, the product token is either the same as the gas token in a digital currency coin like Dash, Litecoin, Zcash, Monero, and so on, or it's a stablecoin. For other applications it could be any number of things: tokens, NFTs, DeFi products, etc.
When does it make sense to buy a product token?
You should buy the product token if you want to use it personally, or if you have a business that uses it. You should also buy the product token if you have a business that resells the product token, or if you anticipate some future supply shock coupled with high demand, and want to resell it later at a significant markup.
But just like with the gas token, be careful, as a project could become extremely successful without the price of the core product token changing significantly.
Bitcoin Doesn't Count!
You might be asking yourself: "If all this is true, Mr. Lynx man, why did I believe in Bitcoin, buy it, then it kept going up? Why is there only one Bitcoin token?"
Bitcoin is a special case. As I mentioned earlier, many coins have multiple use cases for a single token, and Bitcoin certainly combines this. But it's pretty unique in that it is the product token: the end user wants to hold Bitcoin, investors in its future want to buy Bitcoin hoping it goes up, and Bitcoin is the gas token to move the product.
So many investors have been ruined by expecting the Bitcoin dynamics to apply to another coin. They won't. You can't just lazily buy another coin and expect to make money the same way. You have to think about which of the three token types you're buying, and see a realistic path to profitability.
Don't Hoard Gas Tokens! (probably)
If you come away with one big message from this, let it be: DON'T HOARD GAS TOKENS!
So many people see a project that's exciting, then buy their gas token (the most visible coin), and then get frustrated when the price doesn't go up and they lose money. Meanwhile, exchanges are making money, NFT sellers are making money, everyone else is making money.
People buying and holding RUNE (The THORChain token) is what inspired me to write this. I wrote an article on a much more specific application of the principles I'm writing about here, check it out for a more targeted use case.
https://inleo.io/@thedessertlinux/surviving-the-thorchainmaya-bear-fot
Setting REALISTIC Expectations
This isn't just a rant against gas token buyers. It's an attempt to get people to be realistic and think through their investment thesis when they buy something. And yes, this includes all token types.
Even if you identify a highly promising project, and you buy their investment token, you have to have a realistic vision for how the project will succeed, and how succeeding will translate to profits for that token. It's super simple: how will money realistically flow into the project, and how will you get some of that?
Ask the "whys" up front: why will this succeed? Why will I make money? If I lose money, why will that be? If you make or lose money, it shouldn't be a surprise when it happens.
I can name an endless list of projects where people identified a key value proposition and invested in some of the very best tech, and then were frustrated by future price performance: Zcash, BAT, Dash, AMP, THORChain, Firo, Beam, and so many more I can't count. I still believe many (even most?) of those will end up making people money in the end, but it won't be because of magic. It'll be because of everything I've been writing about here. The faster the good projects rethink their profitability thesis and focus on business that will bring the revenue they seek into areas they want, the better.
Realistically, in the 16 years of crypto, the people who have made the most money have been exchanges. People buy and sell tokens for tons of reasons, usually for speculation. Whether they make or lose money, the entity facilitating that trade gets paid on the pump and the dump. No wonder the richest crypto oligarchs are exchange founders!
So Which Token Should I Buy?!
I'm not going to tell you. I don't even know.
I just have a feeling that the age of buying a token for profit is over soon.
Tokenomic models, in my opinion, will get a lot more advanced soon, as will revenue tracking and projection. Especially with legal clarity around securities in much of the world, the "which token should I buy" question will become much more obvious, and we'll have "crypto stocks" vs. "crypto products" vs. "crypto commodities" separated out a lot clearer for the average person.
But here's your homework, do a quick thought experiment:
- Identify the three use cases for a project you like (gas, investment, product)
- Identify how the project will make money when used as intended, and where those revenue streams will show up
- Identify how realistic you think it is that the project even will make money
- Identify how you can position yourself to collect some of those revenues as they come in
- If you can't do the above, then maybe look at other projects until you can figure out a realistic investment thesis
Maybe I'm wrong, and I welcome discussion from people who are much more sophisticated in the investment space to evaluate this take and let me know what I missed.
But in the meantime, just stop hoarding gas tokens for a minute.
Posted Using INLEO
It definitely got me thinking about crypto differently, especially from an investment perspective. Will bookmark this post, and re-read it again. Thanks for sharing this valuable insight :)
Thanks! Will do multiple takes on it focusing on specific coins/projects, including Hive.
This is one of the best introductory content I have seen for a beginner looking to invest in cryptocurrency. Even some of the old timers are not fully aware of these distinctions.
Cool, thanks! I hope it's helpful, because I keep seeing people hoarding gas tokens hoping to get rich.
Nice article, congratulations for your effort 🔥
Thanks!
This is something everyone here should read. Good stuff.
Cool thanks, I hope it gets people thinking differently about crypto.
Nice, but the way you put it It feels like BTC is the only way to get some gains by "just lazily buy a coin and expect to make money". Which is what majority of people want. BTC is special in being a product token the end user wants to hold. It is kind of mind bending yet trivial.