The crypto revolution reminds me of the internet revolution in the late 20th century. It's that big and that important. While many people are focused on the "currency" aspects and worry about how crypto assets like Bitcoin (BTC 0.08%) will affect the dollar or the euro, that's only one part of our world that's transforming. The major reason you want to make small investments in crypto now is that it's a revolution in internet technology. The old world of massive international megacaps that control our technological future is facing a new challenge -- peer-to-peer networking. It's entirely possible that our internet future will be decentralized. If this happens, you want to make small investments in the blockchain race now, while it's still early.
Why small investments? If you remember the original internet revolution, you know that the vast majority of internet companies either stumbled or went belly up. Amazon (AMZN -2.49%) and eBay (EBAY -0.44%) survived and prospered. But major companies like AOL and Yahoo never recovered from the crash in 2000. And a lot of copycats just disappeared altogether.
I expect similar things to happen in crypto. It's an important internet revolution. There will be a few massive winners. And many, many coins will disappear into nothingness. That's why you want your initial investments in this industry to be tiny. And if you own the right blockchain, that tiny investment will be worth a fortune in a decade or two.
You want to own the Tier 1 platform that all these peer-to-peer networks will sit on
Right now, the biggest Tier 1 platform in crypto is Ethereum (ETH -0.06%). Ethereum, like Bitcoin, has already made a lot of people rich.
A tremendous number of dApps have been built on the Ethereum chain. The problem is that Ethereum, like Bitcoin, does not scale very well. These early chains relied upon proof of work to validate transactions on their blockchains. That's an incredibly slow mechanism for transactions. (Imagine having to wait for some Stanford professor to validate a math problem before you can use your credit card to buy a loaf of bread.) This is why almost the entire crypto ecosystem -- with the major exception of Bitcoin -- has switched to proof of stake to validate transactions.
In other words, the first movers (Bitcoin and Ethereum) made a major mistake in their blueprints. Proof of work does not scale very well. In order to get rich from technology, you really want it to be able to get bigger in a hurry. This is why Solana (SOL) and Fantom (FTM -0.67%) zoomed way higher in 2021. These blockchains are super fast, and transactions on them are super cheap.
Solana's price skyrocketed in 2021, as crypto investors were amazed at the speed and capacity of its blockchain. Fantom coin had an equally impressive run.
While Ethereum remains the top Tier 1 dog at the moment, it might be that faster technology wins the day. That's how Alphabet (GOOG -2.35%) was able to supplant Yahoo as king of internet search. Performance matters. Two of the key attributes you should think about include transactions per second (aka capacity) and time to finality (aka speed per transaction).
|Crypto||Transactions per Second||Time to Finality||Market Cap|
|Ethereum||15||60 seconds||$316 billion|
|Solana||65,000||13 seconds||$27 billion|
|Fantom||25,000||1 second||$4 billion|
One of the key questions in the crypto universe is whether the Ethereum network can improve its transactions per second. The lack of capacity on that network has caused gas prices (the cost of getting a transaction validated on the Ethereum blockchain) to soar.
A charge of $93 per transaction is obscenely high. Both the Solana network and the Fantom network charge much less than a penny. If Ethereum can't improve its capacity, rivals will take market share and win the day.
Why make investments now?
So far in 2022, inflation has been dramatically rising, and the Federal Reserve can and will raise interest rates to combat it. Rising interest rates will strengthen the dollar and make alternative currencies, and investments, less appealing. So expect the crypto universe to see some headwinds as interest rates increase to protect the U.S. dollar.
The Biden administration has also been talking about the need for regulation of crypto. That sort of talk makes a lot of crypto enthusiasts nervous.
Of course the focus is on the most famous crypto, Bitcoin, and also on stablecoins that track the dollar. Right now the market is focused on the currency aspects of crypto. That's why many crypto coins are dropping in value. And these coins might get even cheaper later this year. While this is concerning in the short term, this focus on alternative currencies isn't actually the reason you want to own crypto.
It's the advance in peer-to-peer networks. The computing power and capacity of the blockchain promises to be way higher than a server farm could ever be. While Amazon Web Services (AWS) and Microsoft (MSFT -2.14%) will continue to provide cloud services, those high margins cloud providers enjoy will shrink and contract as the blockchain provides enormous bandwidth at a much lower price. That's why not just the banks but also tech companies are paying attention to the crypto revolution. Small investments now might pay off in huge rewards over the next decade or two.