Economics

Are cryptocurrencies just one giant bubble, akin to Tulip-mania, and will they all become worthless in a few years’ time?

The supply of Bitcoin is limited to 21 million. However the Bitcoin payment system is easily replicated and far from unique. Bitcoin Cash, Bitcoin SV, Dogecoin and countless other cryptocurrencies also have associated payment systems with the same, or greater, functionality than Bitcoin. So other than its brand, Bitcoin doesn’t contain much scarce value – its scarce value is limited to people’s belief it has scarce value.

So is all internet money doomed to just be funny-money backed by no real value?

 

No.

 

After-all, the internet is clearly a valuable resource. So it should be possible to create internet currencies that are backed by the real value of the internet.

The internet’s two chief assets are information and attention. In this article, I will explain what cryptocurrencies are, how they work and how cryptocurrencies can be designed to be intrinsically backed by the internet’s two native assets. In particular I will discuss the possibility of:

• Information (content) backed cryptocurrencies
• Attention-backed cryptocurrencies

and

• Marketplace-backed cryptocurrencies

I hope this article will help readers – both unfamiliar and with some knowledge of cryptocurrencies – gain a valuable perspective that will help them to navigate the extremely confusing and volatile world of cryptocurrencies: a world filled with both immense risks and enormous opportunities. These days, cryptocurrencies are attracting an increasing amount of interest from the general public, due to inflation concerns arising from the decision of central banks, all over the world, to massively increase the money supply, so a sensible guide to evaluating them is indispensable to those who wish to avoid losing their shirt in unwise investments in the cryptoasset wild west.

 

How Cryptocurrencies Work

 

Before explaining how cryptocurrencies work, it is worth explaining how existing currency works. In the standard financial system, banks store a bunch of account names with a number next to each name which records the amount of cash possessed by each account – or the account’s balance. The total list of all the account names and the cash balances in each account is referred to as the bank’s ledger. This information is stored by the bank and forms the basis of all payments in our current financial system which don’t involve paper cash. The owner of each bank account is allocated a secret pin number which they must enter into the banking system before the system will transfer money out of their account and into a recipient’s account. To make a transaction they must also know the name and number of the recipient’s account.

Cryptocurrencies work in a manner that is exactly analogous to our banking system. The core of a cryptocurrency is a programme which stores a ledger of public keys and cryptocurrency balances in each account and enables anyone who knows the private key to that account to transfer cryptocurrency out of that account and into any account who’s public key they know. In the case of cryptocurrency, the public key is equivalent of the account number in standard banking, the private key is the equivalent of the PIN number in standard banking and the cryptocurrency balance is the equivalent of the account balance in standard banking.

To summarize:

A key point to consider with respect to most cryptocurrencies is that the payment process for cryptocurrencies is permissionless and fully automated. As long as you know the private key to your wallet and the public key of the wallet you want to pay, the payment is guaranteed to be processed. In the case of a bank account, however, your bank could, in principle, refuse to process your payment – or even suspend your account. If your bank doesn’t give you permission to use its banking system, then you can’t use it.

So far so good. The first key challenge to a computer programme that runs a crypto-payment system, bitcoin being the original, is:

What if the ledgers, stored on different computers, record different balances for the same accounts (public keys)?

And this is the central problem that the blockchain and other distributed ledger algorithms (such as Hedora hashgraph) address. The solutions are technical, not central to this article, and existing resources cover them far better than I possibly could.

The second key challenge is:

What if no one decides to run the programme that stores the record of everyone’s account balance on the system’s distributed ledger?

Ultimately, the information of every account balance on the bitcoin (or other cryptocurrency) system, is simply data stored on computer drives and, like all data, it can easily be deleted.

The answer is that the system itself pays people to run it in units of the system’s native currency and to faithfully record back-up copies of the core ledger of all the balances and transactions made since the system’s inception. These people are bitcoin, or other cryptocurrency, “miners.”

 

Anyone can open a digital wallet and there are two ways to receive cryptocurrency into your wallet:

• Someone else with crypto-currency transfers some cryptocurrency from their wallet into yours
• The programme itself that runs the payment system, and maintains the ledger, allocates newly issued cryptocurrency into your wallet

 

It is this feature, of the programme itself rewarding miners that run the system, that makes cryptocurrency systems robust. Each miner, keeps an identical backup of the ledger that records how much crypto-currency is contained in each wallet. Any one particular miner, could just delete all the information stored on their computers of how much cryptocurrency each public key ( crypto account ) contains – however this would not be a problem because all the other miners have the exact same information stored on their servers as well – and the core “engine” of any cryptocurrency system is a consensus mechanism where the other mining computers only acknowledge an increase in a particular mining computer’s crypto account provided that miner faithfully stores a ledger that is identical to all the other ledgers stored by the other computers on that particular cryptocurrency network. Furthermore, the less miners there are, the more the algorithm (usually) rewards each miner and, hence, the greater the economic incentive is for someone new to start a crypto mining operation and help to faithfully and accurately maintain the shared records of the payment network’s ledger.

 

At its basic level, all cryptocurrency systems have one thing in common: they are all programmes that run a native payment system which automatically pays people (miners) to run them on computer hardware managed by the miners.

 

Furthermore, it is reasonable to say:

 

That a cryptocurrency system will perpetuate so long as the market attributes a sufficiently high value, to the units of cryptocurrency the network issues miners, to adequately compensate the miners for the cost of running the network’s software.

 

So if everyone decides a particular crypto-currency has no value, then miners will likely all shut off their servers (or more likely, use them to run a rival crypto-currency) and the ledger and payment system for that currency will disappear forever.

So what determines if a crypto-currency has value?

 

How Value-backed Cryptocurrencies Work

 

To reiterate:

There are two ways to receive cryptocurrency:

1. Get someone who already has cryptocurrency to transfer some of their cryptocurrency into a digital wallet that you control
2. Engage in some activity which the programme itself, which runs the cryptocurrency payment system, is programmed to pay you newly issued cryptocurrency to perform

 

Now let’s look at the kind of activities that a cryptocurrency algorithm would pay people to engage in to promote its survival. The first thing a crypto-currency algorithm needs is for people to run it on their servers. Hence, all cryptocurrency algorithms will pay miners to run them on their computing hardware.

However, a crypto-currency programme can only pay people in units of its native currency. And these units of native crypto-currency will only incentivise miners to run the programme if they are worth something. Hence, cryptocurrency programmes may also pay people to engage in activities that boost the value of the native cryptocurrency in the broader market.

Cryptocurrency programmes typically pay newly issued coins to people who:

1. Run the programme, in the case of coins (Bitcoin only does this)
2. Engage in activities that add value to the native coin or token

 

Bitcoin, is just a payment network. Nothing more. However, many new cryptocurrency programmes, that incentivize miners to run them on servers, have all sorts of other functions built on top of the native cryptocurrency payment network. Indeed, there is no limit to the kind of software that a decentralized payment system can incentivise miners to run on their servers: Computer games software, social media, word processors, spreadsheets, videos, etc., etc., etc., pretty much any software that any computer is capable of running.

Quite often, there is an underlying coin-based network that rewards people with coins for running all the software (including token-based software) on their computing hardware and then a variety of different token-based software programmes, run by the same computers which run the underlying coin-based network, which incentivizes people to engage in activities that add value to the token – and in the process the underlying coin as well.

 

Although this is just a rule of thumb, and numerous exceptions may exist, broadly speaking:

• Coins reward hardware providers to host all the software on the network, including numerous token system that run on top of the underlying network which funds itself by issuing new coins to miners. Token transactions often require token users to burn some underlying coins as commission
• Tokens are often (perhaps not always) systems that run on top of coin networks that are programmed to incentivize people to engage in behaviours that add value to the token and, by association, the underlying coin

 

A simple example of a value-based cryptocurrency would be a medium-like programme with a bitcoin-like payment programme underneath where:

The programme pays miners in its native currency to run the programme

Content-producers get paid by the programme (either in coins or tokens) for content they upload onto it according to the number of page views

However, in order to view the content, (or perhaps, like medium, to view more than a monthly limit of uploaded articles) readers must pay a monthly subscription in the native coin or token

 

Such a system would basically be an information-backed cryptocurrency.

 

Readers of the content, would have to buy tokens or coins from content producers and miners who might sell tokens to subscribers in exchange for a national currency. The net result would then be that content creators and miners for this decentralized medium, would get paid national currency by those who subscribe to reading the articles hosted by the website.

Coil is an example of a system like this (it’s still at a very early stage in its development and is a long way from taking off).

The next most simple example would be a cryptopayment system that pays miners to host social media software and pays social media users for generating content that others users like. Reading content on this decentralized Social media platform, run by miners, would be free, but if you spend tokens, you can boost the visibility of your posts. Perhaps this crypto-social-media software could also provide tools to commercial advertisers – akin to Facebook – that would enable them to target particular demographics, with content promoting products or services, in exchange for paying a subscription in the system’s native cryptocurrency. If these salesmen can generate considerable sales revenue, they will probably want to spend more cryptocurrency promoting their product/service than they can earn through engagement or likes of their posts. In that case, they will need to use fiat currency to purchase this cryptocurrency from miners and content creators which have earned a disproportionately large quantity of cryptocurrency for both providing servers to run the social media software and for filling that software with content that people are interested in reading.

 

Such a system would be an attention-backed cryptocurrency.

 

Attention-backed business models are generally more lucrative than information-backed business models, a huge amount of information is freely available while attention is a truly scarce resource – I’ve written other articles which discuss the increasing importance of attention in a world where technological progress has made many other resources abundant. When people focus their attention on one thing, it is to the exclusion of other things. Today, with Twitter and Facebook, content producers have to both produce quality content and monetize their own content through cringe-making sponsorships, or through designing elaborate sales funnels to promote their own, or other people’s, products. The exciting thing about blockchain-based social networks is you can cut out alot of administration, managerial salaries and shareholder dividends and pass the full sum of advertising revenues straight to content producers and those who provide their servers to run the software.

Furthermore, crypto-currency-based social media software could be designed to make it impossible to cancel anyone’s account, providing much needed revenue stream security for content creators who have invested a lot of time and effort into building up an audience.

Torum is an example of a blockchain-based social media platform with its own cryptocurrency. Although XTM is not yet listed on exchanges, this is something that is planned for the future.

 

Staking

 

Staking is a way for distributed ledger systems to punish bad behaviour. Participants can be made to put up a crypto-stake (perhaps purchased by national currency or some other asset) in order to participate in certain income-generating activities facilitated by the crypto-network. If they behave badly, the programme slashes their stake to punish them, and possibly to compensate those who have been harmed by their bad behaviour.

A future application for this could be a distributed ledger based version of Amazon. Suppliers would have to stake the native crypto-currency of the system to advertise their wares on the market place and would advertise their wares denominated in the native cryptocurrency to customers on an Amazon-like interface with software run by miners, that includes search engine software enabling customers to search among the products for what they want. If a product is paid for, but not delivered, customers can leave a bad review and register a complaint that would be passed to an arbitrator (someone the software pays to arbitrate disputes) who would then look at the evidence and decide whether or not there was a breach of contract. Suppliers deemed to have breached their contract, either by not delivering the product, delivering a product that is defective, or different to the one advertised, would have the product’s value deducted from their stake and transferred to the customer in question. Both the miners and the adjudicators would be funded by a commission charged for every transaction, and customers would have to purchase the cryptocurrency from suppliers, miners and adjudicators in order to purchase products from this decentralized online store.

 

This would be an example of a marketplace-backed cryptocurrency.

 

A marketplace is a particularly lucrative form of attention because an online store is a particular place where people pay attention when they intend to spend money. Several minutes on Amazon could be worth hours spent on Google, Facebook or Twitter. The value of a marketplace also comes from trust. A system people trust to properly vet service providers, is valuable to service providers who gain customers through the system that they could not otherwise acquire.

The most well-established examples of marketplace-backed crypto-currencies are, unsurprisingly, cryptoexchanges. Binance is an example of an exchange which uses commissions generated from crypto-trading to purchase its own native cryptocurrency (explained here). Admittedly a crypto exchange lacks an intrinsic value that is independent of the value the markets confer to cryptocurrency and, hence, unlike a decentralized Amazon-like market place for real stuff, the value of native coins for cryptoexchanges remain subject to “greater fool” arguments.

 

Lock-in Dynamics

 

The key feature of marketplaces that enable first movers to “lock-in” is that “sellers” are attracted to the highest density of “buyers” (as more buyers means more sales) while buyers are attracted to the highest density of sellers (as more sellers means more choice and more competition which drives down price, or drives up quality). For online marketplaces like Amazon, this is literally the buying and selling of products. For platforms like YouTube, Facebook, Twitter, Medium, etc., content producers seek an audience and audiences seeking a wide selection of content. The same dynamics apply to dating websites.

Although a severe deficiency in an established marketplace may open up space for new entrants (such as coordinated mass censorship from YouTube, Facebook, Google etc., who are, bizarrely, needlessly shooting themselves in the foot this way), new entrants with similar (even marginally better) functionality to established entrants will likely lose, as buyes and sellers flock to the higher density of “action” from more established competitors.

So, once quality crypto-marketplaces in a given spheres get established and “lock in”, so long they don’t have glaring flaws, the native crypto-currency of that marketplace (which I use loosely to include market-places of ideas, such as a social media website) will likely preserve its value for an extended period of time. Owners of established marketplace crypto-currencies will usually not have to fear a never-ending treadmill of new-marketplaces with new cryptocurrencies constantly toppling existing marketplaces. Although it is likely that a variety of different marketplace crypto-currencies, that fill a variety of different niches, will simultaneously establish themselves and co-exist together.

 

Blockchain Charities

 

Right now there is a lot of scepticism and mistrust of many charitable organisations. Many suspect significant portions of donated funds wind up in the pocket of administrators, or go towards fundraising activity rather than those who need it. Corrupt governments in recipient countries can also seize large portions of the goods that were donated to poorer inhabitants in those areas.

Imagine a blockchain-based system that automatically transferred a regular income, in its native cryptocurrency, to every inhabitant of a country in the bottom 5% of GDP per capita every week. There would have to be some kind of biometric identification process to establish one wallet per person but this might be done through a camera on a mobile phone. Although the cryptocurrency itself would be intrinsically worthless, donors from all over the world could buy these charitable crypto currencies (through fiat currency or bitcoin) and, in the process, raise their price and confer them with purchasing power. And everyone who purchased the charitable cryptocurrency on the exchange would immediately know that they were contributing to transferring capital directly to the poorest members of society without any wasted funds getting sucked up by administration, fundraising and other intermediaries – a kind of crypto-currency version of what the organization give directly does.

An interesting feature of this system is that such a cryptocurrency would blur the line between charitable donation, investment and speculation. Because if a new “charity coin” rapidly took off, gained popularity and appreciated at a rate that exceeded the intrinsic inflation rate, associated with issuing new crypto to those in need, then early adopters could potentially get rich quick by shilling the latest charity coin on the market while simultaneously helping the needy.

 

A Distributed Ledger Run Car Factory

 

This is a pretty wacky suggestion and something like this would probably take centuries to design but I want to drive home the massive potential of distributed ledger technology. At its core, money incentivises people to do things. Indeed, from experience, we know that money can incentivize at least some people to do practically anything ( Shoe Nice being a good example ). Therefore, a programme that issues money to people based on their activity can, in principle at least, coordinate practically any activity under the sun.

In this case, you would have some complex system of staking and earning where the owners of capital and the premises of the factory earn cryptocurrency (from a decentralized cryptocurrency based system that coordinates the manufacturing of cars) by renting their capital out for the purpose of car manufacture. Suppliers would earn the native cryptocurrency by selling the parts they manufacture to the algorithm in exchange for the native cryptocurrency. Employees could earn crypto-currency by doing various tasks relating to the assembly of cars from component parts or maintain the equipment in the factory. Utility companies could earn cryptocurrency by selling electricity or providing gas and water to the factory.

Customers would correspondingly need to purchase the native cryptocurrency in order to purchase the cars whose manufacture is coordinated by the decentralized software. And they would purchase the cryptocurrency in question from the owners of working capital, the suppliers, the employees in the car factory and, of course, the miners who ran the software who could all sell the cryptocurrency they earn for national currency (or indeed several different national currencies, if we assume the operation spans over many different nations).

This would be a goods-backed cryptocurrency where the value of the goods, whose manufacture a distributed ledger system coordinates, backs the value of the native currency of the distributed ledger system itself.

A really important point being that, in principle at least, it would be possible for a sufficiently advanced software system to coordinate complex activities with numerous suppliers, workers, and the leasers of appropriate premises and capital using only a distributed ledger system without requiring any legally incorporated entity to exist in any country at all.

In principle, this could be extended to running an airport, a train network, a utility grid – you name it. The possibilities are limitless. Although, in practice, the more sophisticated applications could take centuries to develop.

 

What Is The Ultimate Significance Of Distributed Ledger Systems?

 

Although cryptocurrency enthusiasts often tend to have libertarian leanings, perhaps the most significant ultimate potential of cryptocurrencies is, ironically, to fully realise the dreams of Karl Marx, in that cryptocurrency systems have the ability to facilitate the complex coordination of workers to provide value to customers in the complete absence of any upper management or shareholder class.

In the long term, distributed ledger systems have the potential to completely eliminate exploitation from the system of capital production.

The software would issue currency to workers for producing value – either through manufacturing goods or providing services to customers, and to miners for running it. The software would coordinate payments for a good job and impose staking penalties for negligence or breach of contract with customers. All these payments and activities could be coordinated in the absence of an executive class which pays themselves inflated salaries. Noone need own these distributed ledger systems, they could be open source and available to all. Most importantly:

Through the medium of value-backed cryptocurrency, workers would receive the full value of their economic output.

This is basically the original aim of communism.

 

Resistance Of Decentralized Systems To Governments

 

The overwhelming majority of people live in the territory of some nation and are, thus, subject to its laws. No amount of fancy coding will change this. But while large companies have a huge amount to lose by flouting a nation’s laws, since they can be fatally crippled by a single large lawsuit and are, thus, usually careful to comply, individuals, can more easily sneak under the radar.

Decentralized distributed ledger systems, have the capacity (in principle at least) to coordinate complex human activities, on a vast scale, without possessing a single weak-point that a large court case can be brought against.

Consider the example of a social media company compared to a social media system coordinated through a distributed ledger:

If the government wants social media companies to censor particular content or communication, it can pass a law that will sue companies for billions in penalties for publishing certain content. The directors of social media companies who allow users to post prohibited content can then be taken to court and ordered to transfer billions of pounds in fines from their company accounts to the government… and, if the directors refuse to do this, they can be sent to prison.

In the case of a distributed ledger system, there is no director or group of directors and no complicated appointment procedures. A distributed ledger system is like a company which only has employees and customers but no management. Hence, while governments can pass laws prohibiting people from using a particular kind of distributed ledger software – there is no head to target or order to modify the system to comply with a certain law. A law court can order an algorithm to pay a fine until it’s blue in the face, but the algorithm will continue to do exactly what it’s programmed to do and completely ignore the court.

Courts can punish those who buy a cryptocurrency, as well as those who earn a cryto-currency, but miners can be in any jurisdiction – including those where their activity is legal. And even in the event that crypto-mining is illegal everywhere, there will probably be jurisdictions where the law is badly enforced.

All this will mean, that while it might be risky for a customer to log into an illicit, blockchain-run social media service, or for a content developer to upload content onto an illegal blockchain-based social media service – and while users and creators, if caught, may face severe fines and imprisonment, it would be very difficult, if not impossible, for a government to take down the service itself… so long as enough users value the service enough to risk legal penalties to access its information and communication channels.

Thus, distributed ledger systems have the potential to have a major liberating effect on dictatorships all across the world.

However, there is also a more controversial, and even sinister, side to all this.

 

Consider a distributed ledger system that coordinates the supply of illegal recreational drugs to customer.

Or even a distributed ledger system that coordinated sex trafficking.

 

The required sophistication of such a system would be comparable to that of a car factory and probably would take centuries to develop. But if such a system did exist, although a government could prosecute those who ran the system, or worked for the system, or used the system to buy drugs or sex-slaves, the decentralized software itself would keep mindlessly running and paying disreputable miners to run it, and any individual willing to receive cryptocurrency to perform roles that contribute to the organized manufacture and distribution of drugs, or the trafficking of sex-slaves.

A distributed-ledger-based drug running operation could even run advertisements on distributed-ledger-based social media systems that advertise illegal drugs to the users of those systems with instructions on how to buy them…. and it would be incredibly difficult for the state to either shut down the distributed ledger based drug operation, or the distributed ledger based social media programme that advertised illegal drugs or sex-slaves to its users.

Unfortunately, some people are willing to pay money to have sexual intercourse with sex-slaves, and this willingness to pay, could confer value to the native cryptocurency of a distributed ledger system that coordinated the supply of sex-slaves through the same logic that would confer value to a cryptocurrency that coordinated the production and supply of drugs – or of cars for that matter.

 

Perhaps in the future, conducting 51% attacks against cryptocurrency algorithms that organise illegal activity might become a standard component of law enforcement. Unfortunately this would apply as much to government censorship as it would to shutting down a drug smuggling algorithm. At this early stage in the game it’s hard to anticipate who would win such a game of cat and mouse.

 

So you can see there are advantages (resisting tyranny) and disadvantages (facilitating coordinated illegal activities that some nasty customers value) to the resistance of these decentralized systems to decapitation by enforcement authorities.

 

Which Cryptocurrencies Will Massively Rise In Value And Which Cryptocurrencies Will Fall To Zero?

 

There are now over 5,000 different cryptocurrencies in existence. The vast majority of which will likely be completely worthless in a few years’ time.

But, as a technology, cryptocurrency is here to stay, and a small number of altcoins with modest market capitalizations today could skyrocket 100-fold or even 1000-fold in value in a few years time. Furthermore, if many of the economic activities that are currently coordinated by multinational companies become coordinated, in the future, by cryptocurrency-based distributed ledger systems, this would result in the market capitalization of cryptocurrencies someday dwarfing that of publicly traded equities. Given the current global market capitalization of equities is around $83 trillion, while the global market capitalization of cryptocurrencies is around $1.6 trillion, that would imply that the cryptocurrency sector, in aggregate, still has enormous growth potential.

…But this must be weighed against an understanding that most cryptocurrencies currently around today will soon be worthless and many of the dominant cryptocurrencies of the future most likely haven’t even been developed yet…

The investment potential of cryptocurrencies are enormous, but so are the risks and many, perhaps most, crypto-investors that bet big, or leverage up, will likely get wiped out. The reality is that noone really knows how to evaluate the bamboozling plethora of exponentially multiplying altcoins out there.

So is there any sensible methodology to evaluate the crazy, volatile altcoin universe – or should we just stay well away from it?

Personally, I wouldn’t advise anyone to put more than a few percent of their net worth in cryptoassets. Having said that, if you’re not a technical software expert I would say: focus on the incentive structure of each cryptoproject. The basic principle of all distributed ledger systems, from a payment perspective, is the same. The key difference between different cryptocurrencies is the criteria for earning them.

With that in mind, I would say that a good rule of thumb for crypto-investing would be to keep in mind that:

 

The cryptocurrencies that will stand the test of time, will be those that most effectively incentivise people to behave in ways that other people value highly.

 

The more people value the output that a cryptocurrency algorithm coordinates the production of, the more value they will exchange for that cryptocurrency to pay for its output and the higher the exchange rate of that cryptocurrency will be and, consequently, the more value the miners, who run it, will receive.

Conversely, if a cryptocurrency does not incentivise the production of any value, then once the dust settles and the speculative frenzy is over, the value of that cryptocurrency will become worthless and, no matter how many units the program rewards the miners with to run it, since a million times zero is still zero, all miners will eventually wipe the worthless payment system from their server and run a distributed ledger system that offers them better compensation in a higher value crypto currency.

There will, thus, be a natural selection between different distributed ledger systems. Systems whose earning criteria produce value will survive, and successfully compensate miners to run them. Systems whose earning criteria don’t produce value cannot compensate miners for hosting them on their servers and will die.

 

Cryptocurrencies should thus be viewed as a decentralized ecosystem that is constantly evolving to incentivise people to deploy their time and effort to produce ever greater value for each other.

 

Bitcoin does not score highly in this respect as pretty much every cryptocurrency out there has an identical payment system to bitcoin, but some crypto currencies have earning criteria that incentivise people to produce value over and above this.

It’s entirely possible that bitcoin might prove to be the Netscape Navigator of the crypto-boom. A pioneering innovation destined to be overtaken by nimbler successors which offer more features and more value. The creed of Bitcoin Maximalism, that Bitcoin is the one true crypto-currency, is a comforting belief for crypto-investors to cling to, as it brings order to the chaos of the crypto-universe. Instead of trying to decide between a confusing pre-cambrian soup of altcoins for which it is extremely difficult to find any sensible methodology to evaluate, the Bitcoin maximalist can pursue a simple, clear path to crypto-investing: invest in Bitcoin, don’t invest in any other cryptocurrencies. It’s a way to enforce order upon the chaos of the nebulous altcoin universe by completely ignoring it.

Unfortunately, reality is not always orderly. As the fate of MySpace, Bebo and Netscape Navigator clearly demonstrate, sometimes the projects you expect to progress from strength to strength fall flat on their faces and become worthless even as the very technology which they pioneered continues to be developed by other companies, that go on to attain valuations in the hundreds of billions.

Given the asymmetric return-to-risk profile of promising altcoin projects with market capitalizations in the range of a few billion, I think it’s worth analysing the incentive structure and criteria for earning some of the less well-established crypto currencies with the aim of identifying cryptocurrencies that are more effective at incentivising people to produce value for each other, when compared to bitcoin.

 

Brave’s Basic Attention Token: The King Of Value-Backed Cryptocurrencies

(Not financial advise)

 

There are numerous crypto-projects that are in the process of pioneering attention-back crypto currency in the form of decentralized social media, where account holders can earn tokens for good content. But most of them are still at the sub 1 million user stage – floating around in the pre-cambrian soup of altcoins. Some will shoot to the moon, most will flop to zero.

Of all the value-backed crypto-currencies, Brave’s basic attention token strikes me as one of the most promising. The Basic Attention Token (BAT) is a token you get in exchange for browsing on Brave and allowing small discrete advertisements to pop up in small boxes on the top while you’re browsing. You can also tip the websites of content creators with BAT that you have earned in your uphold wallet. Basic attention tokens have several things going for them:

• Brave Browser, BAT’s native software platform, is a genuinely innovative, user-friendly browser product that automatically blocks ads, protects user’s private information, and speeds up the load time of web pages in an easy, user-friendly way
• Brave has over 30 million users that’s a huge amount of engagement for a crypto-token based system
• Unlike social media, most browsers don’t have high switching costs for existing users (such as followings attached to particular platforms); this makes the browser space easier for new challengers to enter
• However, unlike other browsers, Brave does have a lock-in feature – BAT. The more users use Brave, the more BAT advertisers will pay to users to show them ads, the more advertisers pay, the more users will earn. So once Brave establishes itself as “the browser that rewards people for using it”, it will be very difficult for new challenger browsers to fund comparable rewards for their users

 

Basic Attention Tokens bring users and advertisers together. Advertisers benefit by discretely showing users targeted ads; users get paid for their time and can find relevant products, services and opportunities of interest. It may be a very basic way to facilitate value creation, but often by keeping things simple you can increase the chance of a successful execution.

 

Most importantly: One of the most exciting aspects of BAT is how easy and cheap it is to receive newly issued BAT. All you need to earn BAT for free is install the Brave Browser on your computer and then sign up to their rewards program. From that point on, you get paid BAT just for browsing.

BAT is probably as close as any well established crypto-currency token comes to paying a Basic Income that practically anyone can receive.

 

This would makes a world that primarily uses BAT dramatically more inclusive than a world which primarily uses bitcoin. The only people bitcoin rewards are first adopters and those who are technically savvy enough to run complex bitcoin mining hardware at a profit. The rest of the world, people who come late to the party (like pensioners, for example) are left with zero. With BAT, however, anyone with a browser can earn it. So a future where the use of BAT is widespread is a future where the distribution of income is also widespread and where anyone with a computer and a browser can earn it.

Despite the fact that BAT tokens are utility tokens whose primary purpose is to enable advertisers to compensate users for viewing ads, there will likely, nevertheless, be advantages to early adopters of the Brave Browser’s reward programme in the event it takes off. The total supply of BAT is fixed . When we consider that $205 billion was spent on digital advertising in 2017 then if we (generously) assume the whole ~$200 billion was used to buy ads with BAT every year, and consider an acceptable income yield to be 5%, that would set a ballpark upper limit on the market capitalization of BAT at 20 times $200 billion, or $4 trillion. Of course, that’s assuming that all the money which advertisers spend on advertising is spent buying BAT, which is obviously not true as a lot of it is spent on market research and content generation and other promotion channels, so a more reasonable optimistic market capitalization would be a small fraction of this $4 trillion figure – less than 10%. Nevertheless, when you consider that the current market capitalization of BAT, as of writing this article, is less than $1 billion, that would still leave plenty of room for future price appreciation.

Nothing in the altcoin world is guaranteed, so buying BAT, like any other altcoin, involves considerable financial risk. The good news is you can get BAT without spending a penny. All you need to do is download the Brave Browser sign up to their rewards programme and then you will automatically start earning BAT tokens, transferred into your Uphold account once you set one up… just for browsing!

Content creators can accept tips of BAT from Brave Browser users on their website as shown in this tutorial as well as for their tweets.

Cryptocurrency is very volatile and many new cryptocurrency retail investors can get scammed or lose their shirt. However, the potential upside of the right crypto-currencies and tokens is very high. For those unfamiliar with cryptocurrencies and crypto-tokens, the Brave Rewards program is probably the easiest way to get exposure to the upside potential of crypto-currency while avoiding any downside risk. And, unlike bitcoin, the value of BAT tokens is based upon a real asset of indisputable value: attention, which does not depend upon finding a greater fool.

 

John