Goldman Sachs says blockchain could disrupt everything.
Dr. Julian Hosp, co-founder of TenX and author of the book Cryptocurrencies Simply Explained, heartily agrees.
Yes, there's a lot of disruptive buzz around cryptocurrencies like bitcoin and ether, as well as the blockchain technology that enables them all. What's an investor to do?
According to Dr. Hosp, who led the "What Is Blockchain? How Will It Change The World?" session at South by Southwest in Austin, Texas, investors need to be following this space closely.
Admirably, the Austrian-born former trauma surgeon uses a baseball metaphor to describe the opportunity. "We're in the first out of the first inning," he told the audience. "This is the equivalent of the Internet in 1994, before the Internet exploded in 1996."
In true Foolish fashion, he also warns that most "internet stocks" utterly failed after the dot-com crash -- and the majority of cryptocurrencies will suffer the same fate.
Still, the internet has created untold value for society -- and countless millionaires -- and Dr. Hosp believes most investors should start getting at least some small exposure in the blockchain and cryptocurrency space.
He's especially high on the Ethereum platform, which extends far beyond cryptocurrency. Ethereum's ability to securely store data transparently, yet anonymously, means not only "smart contracts" for legal uses but also use cases for insurance, medical records, and even elections.
He has a few simple guidelines for investors. The upside potential is tremendous -- perhaps 50x to 100x over the next few years. But the downside? You could lose everything in the wrong investments, just like some internet companies in the 2000s. Therefore:
- Never invest more than you can afford to lose.
- Spread your investments over several smaller bets -- perhaps 10 to 15 total.
- Many investments will take time to play out, so always think in the long term.
You can get much more knowledge from Dr. Hosp in my video interview below, including a deeper dive into how to analyze and evaluate various cyrptocurrencies and initial coin offerings (ICOs). A full transcript follows the video.
Rex Moore: Dr. Hosp, you had a great session; I really enjoyed it. Let's talk to investors for a moment, and talk first of all about the size of the opportunity -- the blockchain opportunity here. What kind of dollars are we talking about?
Dr. Julian Hosp: You can always lose 100%. I always want to focus, especially in this ecosystem, with the downside first. So, you can lose 100%.
At the moment the market is at around $300 billion to $400 billion -- that's the total kind of market cap. If you look at predictions, these aren't my predictions; these are predictions from the World Economic Forum, some really smart people. We can expect that blockchain as a whole, the entire market, should be going to $5 trillion or $6 trillion over the next five to seven years.
Now, this means we have, I don't know, maybe a 50x to 100x upside and maybe a 1x downside. There is one big challenge in this, though, because if you have this possibility, then it would be a no-brainer to invest. No one knows that if those currencies that are a part of the market cap today are actually the ones that are going to pushing blockchain up to this higher valuation.
So you have to be really careful. Don't make too large bets. See this as speculative, highly speculative. But on the other hand, I also think everyone should be involved in cryptocurrency, because it is a new asset class and it behaves different from most of your asset classes, and it is definitely an investment or a speculation opportunity in that sense.
Rex Moore: What should investors be looking for? It's a pretty vast space. It's pretty varied.
Dr. Julian Hosp: I think instead of looking at the actual solution that something brings, look at the actual problem it's solving and ask yourself, is this actually a problem? Is this a real problem? Can this problem be solved with a centralized solution, or does it need a decentralized solution?
And if it really does need a decentralized solution, it might be a really good play, and it might take quite some time for it to happen, but then it might be a really good play. And I think today most people get very emotional. They don't look at fundamentals, as much as you can have fundamentals in cryptocurrencies, but you can. There are certain fundamentals; they are different to what a traditional stock investor might have for him or herself as fundamentals.
So look for those. Look for the actual use case. Look for the problem that a coin, a company, or a system is trying to solve. Ask yourself, does this make sense?
And then I think you can make sizable amounts of bets on this going up, and I think that having 10 to 15 bets...I think that's a good amount you can oversee. You can also do some due diligence and research. I think you can live with some of those not working out, and others doing really well.
Rex Moore: And I assume you're not just talking about cryptocurrency here. What are some other areas investors can look at to get involved in this?
Dr. Julian Hosp: Cryptocurrencies, I mentioned in my keynote as well, I think it's the least exciting topic of all of them. Yes it's financials, and yes there is money to be made, but just from an executional standpoint...it's not that we don't have digital currencies. I mean, PayPal is digital, right? Yes, one is decentralized and one is centralized, but it's not the most exciting kind of thing.
I think a big, big use case -- obviously, for example Ethereum, which has centralized computer allowing for smart contracts. Smart contracts allow you to make contracts without another human being, but it's actually enforced by this computer program.
All kinds of used cases can happen there. The use case I talked about today was insurance, which can be very interesting, I have to admit that, because I can make insurance, and it's going to be enforced no problem.
But there's also risks attached to that. What if other people start betting on my insurance and start betting on my house burning down? And since there's no one who can control this or there's no law, well, suddenly there's enough people who want my house to burn down. So that was a use case -- kind of the antagonist of this entire thing.
I think data storage in general...I talked about medical data storage. But this can also be data storage, one thing I didn't talk about, for example voting. In the U.S. there has been this ongoing discussion about how transparent is the voting, how should it work, what should people do. Blockchain would be a really excellent solution for this. It's very transparent. Everyone can see that it's done properly. It's completely anonymous, and one doesn't have to trust anyone. You don't even have to trust the government. You just trust that system, right? It's actually a very interesting approach.
In Africa, Sierra Leone, they are now trying this out for the very first time. Obviously a third-world country, right, but obviously interesting to see where this is leading to.
Rex Moore: Now you probably haven't thought of this, but if you were an investor, how do they participate in everything you just mentioned? Are there certain companies you see that are involved?
Dr. Julian Hosp: You have two ways. You can participate in the traditional VC or angel route. There's very few companies in this space, because the space is so young, that are publicly traded. So you have to probably be an accredited investor to be able to participate on an equity kind of basis.
And then obviously you have some companies who create a token. For example, my own company TenX, we have a token (PAY) and you can participate with that token on the company's success. Now obviously there are different rules and different kind of systems as the underlying equity, but for some people this might be very interesting.
Rex Moore: Your company...what problem does TenX solve?
Dr. Julian Hosp: What we are doing is solving the problem of the usability of cryptocurrencies right now. We have something we are working long-term on, but at the moment we're really solving that these cryptocurrencies like bitcoin or ether or dash are actually not really usable.
Yes they are there, but how do you go to a gas station or Starbucks and actually use your Bitcoin? You can't. So what we do is we have a debit card system where you can connect bitcoin, ether, dash tokens, and so on with this debit card, and then you can just go there and use your cryptocurrencies there.
The major use case obviously is -- maybe in the U.S. a little bit because I understand most in America will have a credit card, many people have -- but there are a lot of people all around the world that don't have access to a bank account, don't have access to a credit card. So we have a lot of these people actually asking.
And then obviously people who are investors in cryptocurrencies, and they want to stay very liquid and very flexible and say, "I don't want to go to an exchange and swap my coins there. This takes time until I have my money out." It's just, I have my card from TenX, I can go to any store and just spend my coins. So if the coin's going up, great point in spending them right now.
Long-term, and I really want to point this out, long-term it's really about moving value between point A and point B, and right now this is what a traditional system, fiat...one thing we're developing is something called COMIT, where it's really about connecting cryptocurrencies, connecting blockchains, and shifting value, moving value back and forth between there.
Because the major problem that I see coming up is that we have all these blockchains almost like silos; how are they communicating with each other? This is going to be really exciting once one blockchain can communicate to the next one. There's no person that's responsible for this, so you need to create protocols. These protocols are going to be worth a lot. The highways are going to be worth a lot. So that's what we're really working on on a mid- to long-term basis.