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.
Counting Down to New Year’s
Christmas presents are barely unwrapped and I’m already busy breaking the New Year’s resolutions I haven’t made yet.
Welcome to the holiday season.
But before I go get my third slice of leftover cake, I’d like to give you a late Christmas present:
My No. 3 Moonshot pick for 2022.
My No. 3 Pick For 2022
Earlier this year, I was asked a simple question by the editors here at InvestorPlace:
If I could only buy one cryptocurrency, which would it be?
It was obviously supposed to be a hard question. If I could buy 20, I would have spread my bets across Cardano (CCC:ADA-USD), Chainlink (CCC:LINK-USD) and Algorand (CCC:ALGO-USD)… and then loaded up on as many meme tokens that my Momentum Master strategy could unearth.
But buying only one crypto is much like being at bat in Game Seven of the World Series with the bases loaded.
You only get one shot.
That’s why I chose Ethereum (CCC:ETH-USD), the cryptocurrency I knew had the best chance of success.
The coin proved to be a winner last year. And for those who missed out on Ethereum, I have great news:
It’s not too late to buy.
The Tokenization Revolution is Here
In early 2021, two competing protocols vied for the top spot in NFT trades.
- Flow. The backbone of NBA’s Top Shot had gained a 70% market share in NFTs by late January.
- Ethereum. Early projects like Cryptokitties and Cryptopunks gave Ethereum a head start in digital collectibles, but the protocol lagged in corporate adoption.
Fast forward to today, and a clear winner has emerged:
The community-run cryptocurrency now handles close to 97% of the world’s NFT trade, according to research by Cointelegraph. Today, the protocol dominates everything from digital art to NFT music sales.
The reason for Ethereum’s success has been twofold.
Firstly, the community-led cryptocurrency is surprisingly well run. Last Tuesday, Ethereum developers launched the Kintsugi Testnet in anticipation of a move to a Proof-of-Stake protocol. A successful transition would put the world’s second-largest coin well ahead of Bitcoin technologically.
And secondly, Ethereum has a secret weapon: the virtuous tokenization cycle.
The Virtuous Tokenization Cycle
Question: What do rideshare apps and NFTs have in common?
Answer: They both run on positive feedback loops.
While snarky readers might have also said “they cost too much,” marketplaces typically become stronger the more users they have. More sellers mean greater choices for buyers, which brings on more sellers, and so on.
Ethereum puts this concept on steroids.
- Real-world marketplaces are typically interchangeable. You could theoretically buy a used car at an in-person auction and then immediately turn around and resell it online.
- Blockchain-based tokens have a higher hurdle. Assets are typically tokenized on a single blockchain, else you could resell the same good on multiple chains.
That makes it hard for any “Ethereum Killer” to catch up. Buying an NFT on rival Tezos (CCC:XTZ-USD) is also a bet on XTZ’s popularity — if you’re already betting on the value of digital artwork, why risk a gamble on the underlying currency too? Until multi-chain NFTs become a reality, investors will have little reason to stray from the top dog.
Would You Like to Tokenize That?
Ethereum will increasingly find itself in unexpected places.
“End-to-end tokenization of sovereign currencies, securities, loans, real estate, mortgages, pledges, and related payments and credit is a once-in-a-generation opportunity for both entrepreneurs and nimble incumbents,” wrote Jay Clayton of Wall Street Journal. “The iceberg, above and below the surface, is much bigger than we saw just a few years ago.”
It’s a once-in-a-generation shift.
American households currently hold two-thirds of their combined $162 trillion net worth outside stocks and bonds. These harder-to-trade assets, which include real estate (22% of assets), personal businesses (9%) and household goods (4%), often trade at steep discounts because of their illiquidity.
Tokenizing these assets could mean unlocking vast fortunes. Private businesses are typically sold between 3.5-5.0 EV/EBITDA (enterprise value over earnings before interest, taxation, depreciation and amortization), less than one-third of publicly-traded ones. Making these firms easier to trade will be a win-win for buyers and sellers.
The Risks of Ethereum
A bet on Ethereum however, also comes with some significant risks. So before you remortgage Santa’s sleigh, here are three reasons to limit your investment to an amount you can afford to lose.
Firstly, Ethereum still needs to roll out its “2.0” version. The Ethereum community has talked about moving to a Proof of Stake protocol for years, but goalposts continue to get moved back.
Secondly, ETH has a “key person” problem. Co-founder Vitalik Buterin has used his star power to push through protocol upgrades. But unlike most public companies, the Ethereum community doesn’t have a backup or succession plan in place for whenever Mr. Buterin relinquishes his role.
And finally, cryptos only have value because other people think they do. Peercoin (CCC:PPC-USD), Namecoin (CCC:NMC-USD) and Primecoin (CCC:XPM-USD) have all seen their values plummet, despite being some of the earliest movers in the industry.
Still, Ethereum has overcome these growing pains to remain my one cryptocurrency to buy. And that makes it my No. 3 Moonshot for 2022.
“Why Can’t I Just Save a JPEG of an NFT?”
Last month, Reddit co-founder Alexis Ohanian became a minor NFT celebrity after Twitter trolls copy-pasted his NFT avatar.
“Mine now,” wrote a Twitter user after re-posting the image of a propeller-hat-wearing ape on social media.
Mr. Ohanian’s response was unexpected in a community that frequently derides “right-clickers” who save pics of NFTs.
“PLEASE! Right click save as. Make a shirt of it. Share it with the world,” he replied. “Original Mona Lisa only gets more valuable every time it’s copied and shared.”
The surprising exchange highlights the never-ending battle between new technologies and old copyright laws.
In the early 2000s, Napster and other P2P music-sharing apps brought the record industry to its knees by making music virtually free. But those same technologies — namely the Internet — would eventually create new titans of music.
Today, tokenization, powered by Ethereum, has drawn new battle lines in the world of digital art. And if history is any guide, these new technologies have the power to change the way we look at the world.
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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.