This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
A New Moonshot Industry Emerges
Electric vehicles… 5G… Quantum computing… 3D printing…
You’ve heard all these buzzwords before. And you’re probably bored of them by now. Tesla (NASDAQ:TSLA) has been around since 2003 and 5G technology was invented almost a decade ago. Meanwhile, quantum computing has been the “next big thing” ever since I can remember.
But there’s one Moonshot I bet you’re still wondering about:
That simple concept of turning tradable goods into digital tokens seems to need an explanation every time it’s mentioned. Google search “NFT,” and two-thirds of the results are descriptions of “what are NFTs.”
Imagine how annoying that would get with the word “toaster.”
But tokenization remains one of the most promising technologies of our time. It’s more than just cryptos and NFTs — it’s a path to trading goods and securing data. Carbon credits… private data logs… pictures of bored apes… tokenization allows users to transfer these assets securely and instantaneously between parties.
Today, we’ll take a look at some of the most promising technologies in the tokenization space. And we ‘ll answer once and for all: “what are NFTs?”
Just kidding. I’d rather give you three good investment picks than regurgitate a Google search.
To crypto enthusiasts, Bitcoin (CCC:BTC-USD) might have been both the best and worst thing to ever happen to tokenization.
On the one hand, the world’s first cryptocurrency jumpstarted a trillion-dollar blockchain economy. 46 million Americans — 22% of the country’s adult population — now own Bitcoin, according to the editors at Exploding Topics. And it’s hard to go a day without hearing news about how rich you could have been… if you bought $100 of Bitcoin… back in 2010.
On the other hand, Bitcoin has also sucked most of the oxygen out of the collective crypto room. The world’s “digital gold” accounts for 45% of total cryptocurrency market capitalization and over 90% of the world’s crypto hash rate. Ask any precocious ten-year-old to explain the concept of “blockchain” and most would respond with some version of a digital currency.
More than Bitcoin
But the blockchain is more than just cryptocurrencies. It’s an ingenious way to encode data in a secure and public manner. I could publish my social security number or anniversary date (both of which I often forget) on an SHA-256 encoded blockchain, and it would take a supercomputer several centuries to retrieve either number (You’ll find me in the marital doghouse until then). And if anyone were to tamper with the data during those years, everyone would know because the public ledger would have changed.
It’s much like speaking in ancient Egyptian. An observer can hear the words being spoken, but can’t comprehend the encoded meaning — unless they have a copy of the Rosetta Stone handy. It’s a way to keep sensitive data secured in plain sight.
Crypto enthusiasts have used these features to create an entire industry of NFTs, or non-fungible tokens. The most common of these, Ethereum’s (CCC:ETH-USD) ERC-721 token standard, has helped millions of investors keep track of ownership in digital assets.
These tokens are relatively simple, all things considered. The ERC-721 standard, for instance, only has ten key functions (name, symbol, approve, takeOwnership, etc), and two events (Transfer and Approval). It’s a system that’s only designed to encode the ownership of the piece, not the work itself. It’s the difference between a house deed (represented by a piece of paper) versus the bricks and mortar of the house itself.
More than NFTs?
Tokenization has since moved onto more complex problems. Internet Computer (CCC:ICP-USD), a much-lauded project by Andreessen Horowitz-backed DFINITY, promises to bring data computation to the blockchain (in other words, it’s digitizing the house as well). In theory, that could create a decentralized cloud service to rival Google (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).
Meanwhile, some applications are tackling more modest issues. Moss Token (CCC:MCO2-USD) aims to make carbon credits tradable among firms. VEChain (CCC:VET-USD) is tackling supply chain issues by creating a public record of Radio Frequency Identification (RFID) tags.
The issue of course, is that no token is guaranteed to succeed… until it does. The EU Commission could easily crown MCO2’s rival Universal Carbon (CCC:UPCO2-USD) as its official carbon credit and send MCO2 prices down the drain. And as ICP’s DFINITY has discovered, digitizing the entire house isn’t as easy as it sounds.
3 Investments to Ride Tokenization Higher
But several clear winners are already emerging in the race to tokenize the world. Not only do these players have superior technology; they also have a head start in adoption.
Perhaps the most underrated cryptocurrency in the world is Hedera (CCC:HBAR-USD), a project adopted by no fewer than 23 major organizations including Google, IBM (NYSE:IBM), and Tata Communications.
Hedera offers two distinct services.
- Tokens. The ability for companies to configure, mint and manage tokens without deploying a smart contract.
- Consensus. Allows users to send event data to verify and track records.
Essentially, Hedera is creating a platform for enterprises to deploy blockchain applications.
Let’s take an example.
If law firm DLA Piper wanted to track every time anyone edited a sensitive legal document, they might start with a “track changes” function in Microsoft Word and use an honor system to enforce the rules. More enterprising IT managers (and alarmed compliance officers) might eventually contract a third-party firm like IBM to manage security.
But both of these systems are susceptible to fraud. With enough time and skill, an outside player could break in and change a document without anyone ever knowing.
That’s where tokenization comes in. By encoding these logs on a public ledger, Hedera removes the ability for secret changes. Any alterations would get caught by the blockchain’s consensus function.
HBAR is currently available for less than 40 cents. With tokenization surging, don’t be surprised if this cryptocurrency reaches $5 in the future.
It’s hard to mention “tokenization” without a nod to NFTs. And in that realm, Ethereum has become the undisputed king.
Since the beginning of the yera, Ethereum’s market share of NFT sales has risen from 50% to 97%, according to data collected by CoinTelegraph. Its only major competitor — NBA-backed Flow Blockchain (CCC:FLOW-USD) — has long receded into distance.
The reason is obvious, as I mentioned in my article “If You Only Buy One Cryptocurrency…”
“Any new NFT coin looking to replace Ethereum will theoretically need to create new tokens for every asset that ETH-USD now secures… ETH’s dominant position in NFTs and smart contracts make it one of the safer bets in the crypto world.”
Put another way, it’s good to be first in creating a new standard. Upstarts from Polkadot (CCC:DOT-USD) to Cardando (CCC:ADA-USD) have poured millions of dollars into their business development projects, sapping funds that could otherwise be used to hire star coders.
Meanwhile, Ethereum has used its head start to innovate. On Wednesday, the ETH community launched the Altair upgrade, paving the way for an energy-efficient Proof of Stake (PoS) protocol.
These gains haven’t gone unnoticed. Since January, Ethereum has outperformed Bitcoin by a 4-to-1 margin, turning $100,000 investments into $450,000. And as tokenization continues to take hold, investors can expect Ethereum to keep notching more gains.
Finally, there’s one coin that’s recently made the Moonshot cut: Chainlink (CCC:LINK-USD).
LINK is what’s known as a “blockchain oracle,” a trusted data feed that helps smart contracts make decisions. If a programmer wans an Aave (CCC:AAVE-USD) DeFi contract to pay out a certain USD value of Bitcoin, they’ll need to Chainlink or some other blockchain oracle to provide accurate pricing data. And if a contract needs a trigger, they can rely on Chainlink to provide a decentralized fuse.
There’s a good reason why programmers will use Chainlink — the penalties for mistakes are disastrous. Spoofed data can cause an avalanche of smart contracts getting executed at the wrong prices. And incorrectly-timed triggers can initiate transactions that were never meant to happen.
That’s why Chainlink and other oracles will play such a key role in tokenization. No matter how thick a bank’s safe walls are, it’s only as secure as the guard watching the front door. And in the world of smart contracts, Chainlink plays a critical role in managing the data that determines how tokenized assets move.
Selling is Equally Important as Buying
Avid Moonshot readers may wonder: where are the stocks in all this? Surely, there must be some companies that are also pushing the envelope in tokenization.
And in fact, there are. Startups from Arweave to Handshake are already tokenizing everything from disk space to internet domains. The most promising of these upstarts have already raised billions of investor cash.
The problem is that most of these companies are tucked away in venture capital funds. And much like tech startups in the mid-2010s, those that are publicly traded, like Circle (NYSE:CND) and Coinbase (NASDAQ:COIN), trade at a significant premium.
That means the best way to find Moonshots remains in the tokens themselves. And as Wall Street wakes up to the fact, you can be sure that these promising cryptocurrencies will be part of the next Moonshot industry.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.