Crypto Growth is Free (as in Beer!)
I am interested in exploring the idea that it is much easier to evaluate the potential for price appreciation of a crypto asset, as opposed to that of a traditional stock, because crypto growth is not financed by debt.
This, on its face, is a curious idea. What effect does debt have on value? Several authorities would suggest to us that debt is a marvelous tool to finance growth, at least in moderation. And they may well be right, but cryptos competing model is growth without debt; no matter how good a tool, free beats debt every time. It is also important to keep in mind that although debt can be used to finance growth, interest payments on that debt are a huge drag on the growth we are trying to achieve, and leveraging this debt can lead to calamity for any enterprise.
Is crypto growth truly “free” however? The answer to this question is a qualified “yes”. It is free in the sense that the network is indifferent to the expense. Development time, promotional efforts, the very expensive need for miners to secure the network, are not expenses that affect Bitcoin (the network) as a whole in any major way. Unlike a centralized company attempting to replicate Bitcoins’ features and footprint, Bitcoin (the network) does not care if securing itself or deploying a Layer 2 solution cost a million dollars in developer time, it could cost a billion, there is no debit to Bitcoins account. Once the tool is deployed, it is pure added value for the protocol.
This idea that “there is no debit to Bitcoin’s account” is rather magical. Imagine your local construction company could add 30 cement trucks to its fleet without spending a dime of company money, if people would just come in and drop the brand new trucks, with a bow on top, at the company’s location and ask them to operate them. That would be a remarkable thing to see, yet in Bitcoin this happens every day.
Another factor is the collateral benefits accrued by a token from third party deployment of capital or talent. Even if a new feature or promotion is not built or deployed on top of Bitcoin, for example, a travel app is made that accepts crypto payments; the mere existence of this new business will add value to the protocols it accepts as payment. This goes back to the “ecosystem of value” idea we discussed in a previous article. There is no equivalent to this model outside the crypto business ecosystem. My construction company gets no additional value if a lot of people use an office park I helped build, or if someone takes my cement and builds a statue of Hulk Hogan. It doesn’t help me.
So, going back to the idea of intrinsic value, you could say that if there is no “cost” to the network to add one unit of value to the ecosystem, then from the perspective of the network, added value is free of charge. Added value leads to growth, and growth will eventually lead the token to appreciate over time. I think this is the key insight to understanding why crypto tokens are the real “this time is different” investment.
If we take a step back and try to evaluate a new crypto token from the perspective of intrinsic value, we will soon identify the asymmetry created by the zero cost model of the “ecosystem of value” and free growth. But the growth is also exponential, in the sense that much like a billiard ball hit with a lot of force, a credit to a tokens ecosystem, such as a new wallet for example, will bounce around against other ecosystem players, and create growth momentum for them as well. For example this new wallet could be easy to use and bring in new users to the ecosystem who will also use the token to buy discounted items at a retailer who uses the same wallet software. This retailer will take those tokens and invest them in promoting its crypto business and so on, as cause leads to effect in a haphazard but ever growing wave.
This feature is not unique to crypto assets but the difference is that ecosystems of value within crypto assets are tightly integrated, from the very nature of a much more compact system. Real stocks don’t behave that way, their ecosystems of value are much more dispersed, and colliding one billiard ball with another will not lead to a chain reaction, stock ecosystem players are much more spaced out than in crypto ecosystems.
Debt is an enormous drag on growth. Lack of debt, and a tightly integrated ecosystem where value can be added at no cost to the token, and where this value will collide with other ecosystem players and create even more value for the ecosystem is a recipe for exponential growth. And growth will always tend to price appreciation.