By Byron Gilliam, Markets Strategist at Blockworks.
Is Crypto an Investable Asset Class?
Charlie Munger didn’t think so, and not just because he expected it wouldn’t amount to much.
Even if crypto becomes a big success, the nature of that success is still so uncertain that it doesn’t seem to qualify for Munger’s “sit on your ass” definition of investing — with basic infrastructure questions still unresolved, successfully predicting the long-term winners in crypto feels about as likely as predicting Facebook and Google before the HTTP standard was agreed.
Not many are trying — even crypto natives seem uncomfortable with a buy-and-hold strategy in anything other than Bitcoin.
We’d probably all be uncomfortable with even the minimum holding period that Charlie Munger’s sidekick recommends: Warren Buffett advises that you should "only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."
Does anyone in crypto have a 10-year investing horizon?
Maybe.
But even that doesn’t quite make something an investment, because investing is not just trading on a longer timeframe.
If your return is entirely dependent on someone paying more for an asset than you did, even ten years out, you’re not investing, you’re trading.
By my persnickety definition, investing is when you could — at least in theory — make all of your investment back plus a healthy return without ever selling.
You’re only truly investing if you’d still have a chance to make a good return if the stock market closed tomorrow and never reopened.
That is a little theoretical, of course — but increasingly less so.
After about two decades of underperformance, value investors are having to change their playbook — the standard strategy of finding undervalued stocks and then selling them when they get less undervalued hasn’t been working for them.
“We can’t count on other long-only investors to buy our things after us,” the famed value investor David Einhorn noted recently. “We’re going to have to get paid by the company.”
Giving yourself a chance to get paid by the company is the true definition of investing.
This might work in crypto.
Long-term trading != investing
Uniswap’s recent decision to turn on the fee switch and return revenue to token holders feels like a significant moment for crypto as an asset class.
When I started paying to crypto less than three years ago (feels like 30), most reputable protocols seemed to be taking their cue from Uniswap in carefully explaining to token holders that their tokens grant them nothing more than a right to vote in governance decisions.
Protocols were not considered companies trying to make a profit, and tokens were not to be understood as stocks to distribute those profits.
That has been changing, however, with many protocols detailing right in their docs how they intend to both make a profit and return it to token holders.
Uniswap’s decision on a fee switch may be a green light for more projects to be even more explicit about giving their token holders a claim on profits.
Increasingly, then, it’s at least possible to invest in a crypto token and hope to make a return without ever selling it.
Ipso facto, presto chango: Crypto is an investable asset class — even by my overly persnickety definition of the term.
Of course, just because crypto is investable doesn’t mean you should invest in it — if you invest in the UNI token now it will be a long time before you make your money back in fees paid out as yield.
But collecting yield is not the only way to make your money back.
In addition to paying dividends just like a stock, crypto tokens can accrue value in ways that a stock cannot: Staking, airdrops and governance rights are all novel reasons to invest in this novel asset class.
These additional forms of value accrual may all be reasons why crypto tokens deserve a higher valuation than what you’d expect if they were conventional stocks trading on a conventional stock exchange.
Crypto’s unconventional exchanges are another reason: Decentralized exchanges are borderless, which means that crypto assets have a much larger base of potential investors than a stock does — it’s not easy to buy a stock listed in a country you don’t live in.
Is that enough to justify the lofty valuations that crypto tokens currently get?
I doubt it.
But who knows? It’s too early to have any idea what this new asset class is truly worth.
It is an asset class, however.
It’s just that few, if any of us, are treating anything other than Bitcoin that way.
This is a little ironic because bitcoin does not qualify as “investable” by my definition — your returns in bitcoin are entirely dependent on someone paying more for it than you did.
This makes Bitcoin a trade, no matter how long you plan to hold it — and everything else in crypto is effectively a trade, but only because we’re not yet ready to hold it very long.
Crypto is an investable asset class.
We’re just not quite ready to treat it that way.
About the Author:
Byron Gilliam traded international equities for investment banks and brokers in Frankfurt, London, Paris and New York before becoming the Markets Strategist at Blockworks.
