When you invest in crypto, what are you really investing in?

When you invest in crypto, what are you really investing in?

Happy Memorial Day from me and everyone here at RiskHedge.

The markets and our offices are closed, but I thought you might find my following discussion with Chief Analyst Stephen McBride useful…


Chris Reilly: Stephen, a RiskHedge reader asks a great question:

I do not understand how owning cryptos like Helium (HNT) or Ethereum (ETH) gives you ownership in the companies behind them.

Isn’t it more like buying jewelry from Tiffany’s? You own the jewelry which has value and could appreciate. But you do not own Tiffany’s stock.

You cannot vote for directors or officers of the company. And you cannot buy enough HNT or ETH to control either company.

Can you explain?

Stephen McBride: For over 100 years, there have been two main ways to invest in a business.

You can buy equity in a company—its stock.

Or you can buy the company’s debt—its bonds.

Crypto is a third, new way to invest in businesses—tokens.

In many cases, tokens are the ONLY way to buy into rapidly growing crypto projects.

For example, there’s no Ethereum “stock.” Ethereum doesn’t issue bonds.

Instead, you buy its token, ETH, which represents ownership in the Ethereum network.

Chris: I think that’s what’s confusing people. How is owning ETH like “owning” Ethereum?

Stephen: Think about what it means to own a stock. When you become a shareholder in Apple (AAPL), you own a piece of its business. If you own 100 Apple shares, you own roughly 0.000001% of Apple Inc.

An ownership stake in Apple entitles you to three main things.

One, you profit from appreciation in the company’s share price.

Two, you can vote on key corporate matters, such as naming a board of directors.

Three, you’ll get any dividend Apple pays.

Chris: I see how point #1 is a direct parallel in crypto. When you own ETH, you profit from appreciation in its price.

In the past two years, Ethereum has risen from $245 to about $1,850. ETH owners enjoyed those 650%+ profits.

Stephen: On point two, owning ETH entitles you to vote on key decisions. Just like owning AAPL gives you a vote in Apple’s decisions.

Now, most crypto investors don’t exercise these rights. And that’s okay… most Apple investors aren’t voting at Apple’s meetings, either.

And as the reader question mentioned, it’s next to impossible for an average investor to accumulate enough of a token to influence management decisions, but that is the case with publicly traded companies as well.

In fact, in many cases, owning a crypto gives the average investor much more say over the direction of the business than owning a stock does. For example, last year, token holders of the decentralized exchange Uniswap could vote on how its Treasury was spent.

Chris: What about dividends? Ethereum doesn’t pay one.

Stephen: No, like almost all fast-growing tech companies, ETH doesn’t pay a dividend. It retains its earnings to pay developers and fund growth.

But plenty of cryptos do pay dividends. Like SushiSwap, as we discussed last week.

Remember, Sushi is an online exchange that allows you to buy and sell thousands of different cryptos. Over $4 billion worth of trades happened on its platform in the past month.

It makes money by charging a 0.3% fee on each trade.

Investors who own one of SushiSwap’s tokens, called xSUSHI, get 0.05% of this fee. In the past month, Sushi has paid out $2,000,000 to token holders.

The company takes some of the cash generated from transaction fees and uses it to buy Sushi tokens in the open market. Then it gives these tokens to the holders.

So the dividend isn’t paid in cash; it’s paid in Sushi tokens. And the dividend is paid daily. When you own xSUSHI, your balance will rise every day.

It’s important to understand that all cryptos are different. They don’t all function like equity in a business. And some accrue value back to token holders in different ways.

For example, Maker (MKR) rewards token holders by buying MKR tokens off the market and “burning” them. In other words, they get deleted from existence.

Chris: Sounds similar to buybacks in the stock market…

Stephen: Exactly. By “buying back” tokens, the supply is reduced, and the remaining tokens increase in value.

Chris: You also mentioned recently that cryptos allow you to invest in the technology and protocols that underpin crypto. How is that possible?

Stephen. Right. Cryptos give investors a whole new way to make money from technology.

Ever hear of Tim Berners-Lee?

He invented the World Wide Web. He literally wrote the code that the modern internet runs on.

Berners-Lee was named one of the 20th Century’s most important figures by Time magazine, honored at the Olympics, and knighted by the Queen of England.

You’d expect the man who invented the internet to be extremely rich, right? His code is behind every transaction we make on the internet today. Amazon (AMZN)Google (GOOG), and Facebook (FB) couldn’t exist without it.

But Berners-Lee never directly profited off his world-changing invention. He didn’t make a dime from the web.

Chris: Why?

Stephen: He gave the source code to the World Wide Web away for free. So no one owns the internet. There was no way to invest directly in the tech that made the internet possible.

That’s what’s different about cryptos. We can invest directly in the underlying technology.

In fact, crypto gave Tim Berners-Lee a way to finally profit off the web.

He sold the original source code for the world wide web as a non-fungible token (NFT) for $5.4 million at a Sotheby’s auction house.

As I’ve explained, an NFT is a certificate of ownership stored on a blockchain.

The bottom line is, after 30 years, crypto finally gave Berners-Lee a way to make money off of his invention.

This is important for crypto investors because this breakthrough allows us to invest in the tech behind rapidly growing cryptos. Think of it like owning shares in the internet.

Chris: Thanks, Stephen. How do you recommend readers take advantage of this opportunity in crypto?

Stephen: My “slam dunk” crypto pick for the next 10 years is Ethereum (ETH), which I mentioned earlier. It’s the world’s second-largest crypto, but I believe it will eventually surpass bitcoin (BTC) as the #1 crypto asset.

Think of Ethereum like a virtual computer that allows you to transfer money, buy or sell assets, store files, and so much more. It’s like Visa, the New York Stock Exchange, and the Google Cloud Platform rolled into one.

Ethereum is just seven years old, yet it processed $11.6 trillion worth of transactions last year. That’s more than Visa, Mastercard, or PayPal.

Unlike bitcoin, it’s a REAL business making REAL money and growing rapidly.

And the recent volatility in crypto is presenting an attractive entry price. As always, with any investment but especially crypto, don’t “bet the farm.” Crypto is the world’s most volatile asset class. If you can’t stomach big drops, crypto might not be for you.

If you are interested, it just takes a tiny stake in ETH today to potentially see a huge windfall down the line.

Chris Reilly
Executive Editor, RiskHedge

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