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1/THREAD: A few thoughts on “fundamentals analysis” of cryptocurrencies
2/A cryptocurrency is an asset that makes a decentralized application (“dapp”) possible
3/If you buy cryptocurrency you should be able to argue for why the dapp is valuable
4/The first dapp was a decentralized payment network, and that network’s cryptocurrency was called Bitcoin
5/In general, a dapp allows you to do something you can already do today (payments, computing, storage) but without a trusted central party
6/Just as Bitcoin is a dapp for payments, Ethereum is a dapp for computing, and Filecoin is a dapp for storage
7/You CAN'T argue that for EVERYONE Bitcoin is “better” than Visa, Ethereum is “better” than Amazon EC2, Filecoin is “better” than Dropbox
8/In fact, on almost every dimension – speed, cost, UX, features, governance – dapps are WORSE than their centralized counterparts
9/But on one critical dimension – censorship resistance – dapps are not only better, they are arguably the ONLY solution
10/Censorship resistance means that the transaction is UNSTOPPABLE as long as the dapp's fee (denominated in the cryptocurrency) is paid
11/Thus, the “fundamental” value of a dapp = how much a given user group NEEDS censorship resistance in a given market
12/I say “needs” and not “wants” because, as I already pointed out, dapps are WORSE user experiences; you have to overcome that friction
13/Most people do not feel persecuted by centralized payment systems; but for some, bitcoin truly is the ONLY way to make a payment
14/Who are these people? Why do they need or want censorship resistance? Will this group of people grow in size over time? If so, why?
15/These questions = fundamental analysis of a cryptocurrency
16/Likewise, most people are not concerned by centralized file storage; but for some, filecoin may be the ONLY way to store/transfer files
17/Again, who are these people? Why do they need/want censorship resistance? Will this group of people grow in size over time? If so, why?
18/A valuable dapp is one that has found users who are truly harmed/oppressed/taken advantage of by the intermediary in the market
19/And where, for whatever reason, competitive forces or government regulation either have not, or will not, solve the problem
20/And thus this group of users is willing to put up with all the ways in which the dapp is WORSE than the centralized option, and switches
21/This is why people tend to point to China or Venezuela as countries where using bitcoin could make sense (I tend to disagree btw)
22/And also why people point to black markets or illegal uses as “good use cases” for bitcoin (I tend to agree)
23/At a macro level, investors buy STOCKS because they believe the corporate form of organization will continue to create value in society
24/Those investors can also study specific companies and try to figure out which ones will create the most value
25/They can argue for how and why Apple or Tesla or GE will create value for people and do so in a defensible way over time
26/Likewise, investors buy bonds because they think governments create value and will capture some through taxation to pay back debtors
27/Those investors can also look at specific governments and argue for why Venezuela or the U.S. should have a certain rate of return
28/Investing in cryptocurrencies SHOULD BE NO DIFFERENT
29/Investors looking for a fundamental reason to buy cryptocurrencies have to believe that decentralized apps will create value for people
30/If they buy a specific cryptocurrency, they should be able to argue for why that specific dapp NEEDS to exist
31/They should be able to articulate immediately why those people need censorship resistance and can’t use a centralized option
32/Ideally they should also be able to explain why this cohort of people will grow in size over time
33/If they CAN'T do this, they are the worst kind of speculators because they have no conviction (🎶"Jefferson has beliefs. Burr has none"🎶)
34/They either assume a) someone else knows the why the dapp is valuable or b) someone else thinks someone else knows why it’s valuable
35/Bottom line, a cryptocurrency has ZERO fundamental value if the dapp has no value to a human
36/Show me a dapp that people NEED (or believes they will soon need) and I will show you the price of that cryptocurrency going up over time
37/Show me a dapp that NO ONE RELLY NEEDS and together we can watch as the value of its cryptocurrency goes to zero
