I was recently at one of the leading family-office investment events, speaking about investment opportunities in the current market situation. A question I heard many times during the event – and have also heard in many other places – is this: what do you think about crypto and blockchain investments? When I start my answer by saying, “It’s not so simple, but let’s look at some underlying facts,” I see many people are disappointed. They expect to hear whether crypto and blockchain are good or bad. But like it or not, the reality is complicated.
So … let’s look at those underlying facts.
I had a discussion at the event with a former entrepreneur who is now investor – he said he is now 100% in for crypto, so he doesn’t invest in anything that has no crypto or blockchain element. He sees crypto as a bigger change for the business than the internet was.
I have also been in discussions where parties believe the crypto bubble is bursting now. The value of Bitcoin and many other cryptos are going down; Web3 and blockchain earning models are still unclear; and the Russian sanctions have shown that cryptos are not nearly outside government control and regulation as crypto fans had hoped. One person said to me, “Bitcoin has now gone down to $19,000, and it is still overvalued by about $19,000.”
Those comments demonstrate how many different opinions we have about cryptos now. And those comments didn’t come from some random people, but from people who have experience and actual investments in startups, new technology and innovations.
But let’s try to look at the situation more systematically. One good starting point is to try to clarify terms. We often talk about cryptos, blockchain, Web3 and decentralization in the same conversation, but they are different things. And each of those terms encompasses several technologies and business models. So, we must be clear and careful when we comment on these areas, and not try to simplify and generalize too much. It is also very difficult to find one official definition for those terms. When we want to analyze any market, we must clarify what we really mean.
I’ll try to organize these terms now and clarify how I define them. Let’s start with the largest one:
- Decentralization: Decentralized solutions are solutions where processing and data storage are not in one centralized place, but decentralized in several places. This can be done many different ways for many different purposes. It can mean a blockchain type distributed ledger, but it can also mean that processing is decentralized closer to the users (e.g. edge computing or on user’s devices or their environment). It can also refer to AI/ML that is decentralized to different places and devices.
- Web3: I have earlier written that Web3 (also called Web 3.0) is a term that has been used for many different purposes during the last ten years. One way to define this is that Web3 means services that include blockchain transactions – for example, a service where cryptos, tokens or NFTs are used to ‘pay’ for use of a digital service, content or underlying assets. So, Web3 services at least have an integrated earning component.
- Blockchain: Blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems. But there are many ways to implement blockchain, so it is not just one technology, but a bunch of models to allow adding blocks – and the ways to allow it and distribute it vary. It is important to understand that all blockchain implementations are not compatible and it can be hard to upgrade a blockchain implementation when it must also be able to handle the whole history of the blockchain.
- Crypto: Crypto is a digital or virtual ‘currency’ that is secured by cryptography. But even this is not so simple – some parties call any digital currency a crypto, while other parties say that true cryptos must be based on a real distributed blockchain (i.e. one that no single party controls). Then there are cryptos and tokens that are supported by communities of millions of parties, and other cryptos only supported by a few parties, or even just one.
The definitions above are not official definitions by any means, but hopefully they clarify a little bit what those terms mean and how they are linked to each other. But they also remind us how many levels are needed to define terms and functionality. So when we receive a question about whether something is a good investment, we must really know what we are talking about.
So if I try to give an answer to someone who wants to ask about investment opportunities, I say something like this:
“I’m sure decentralization is going to be a big thing and it’s going to have an impact on most internet services. But it is not yet clear how and when this will happen – there are many decentralization trends like blockchain, edge, user-held data, federated learning and others.”
Then I continue: “It is important to remember decentralization is not only blockchain, and blockchain is not the only solution for all decentralization needs. With Web3 and blockchain we still need to see which technologies, use cases and business models really work and attract users. And cryptos are still quite isolated items – in some communities they have a lot of speculative value, but the links to real value in services and in the finance system, as currency or as an asset, is still quite weak. The Financial Times once concluded that cryptos are not a currency at the moment, or even a commodity, but more like options to a startup – or more specifically, options to new technologies and their accompanying business model.
As you see, my answer is still quite complex. But I think it is risky to simplify evaluations about the future of decentralization, Web3, blockchain and crypto. It is always risky to invest in new technologies and markets, but typically it is better to invest only in things you can understand – otherwise it is a lottery.
That’s why it is still totally ok to ask ‘stupid’ questions if someone try to sell you these new investment opportunities. And if the seller cannot give you answers you understand, whether it’s about the technology or the business model, it is probably wiser to skip that opportunity.