Q: Since you first began following cryptocurrencies in 2011, the price of a bitcoin has surged from under US$1 to more than US$50,000. What do you see as some of the reasons for this strong long-term performance?
Hardy: There are many factors behind the strong long-term performance of bitcoin. The path certainly hasn’t been straight up though—there have been several bull and bear markets along the journey. Demand has significantly grown over the past decade, but at the highest level, there is currently a fixed supply of 21 million bitcoins, the majority of which have already been mined. So, the price will naturally rise because of that.
At a more granular level though, there is a confluence of factors driving the runup over the past few quarters. On the macro side, there is a search for inflation hedges given the unprecedented amounts of money printing from the central banks, and also a search for returns given the low interest-rate environment and frothy equity and bond markets.
On the technology side, there are developments such as the most recent bitcoin halving, the rise of decentralised finance or DeFi—an alternate financial system using public blockchains rather than financial intermediaries such as banks—and advancements in custody that have played a role in driving up demand.
On the ecosystem side, there have been announcements of large institutions investing in bitcoin on their balance sheets, popular consumer fintech apps making it easier to buy, sell, and pay with crypto, and the upcoming Coinbase initial public offering driving attention to the space. Last, but certainly not least, there is an element of FOMO (fear of missing out) in the crypto market, which can also help drive crypto prices higher.
Q: Do you think we’re witnessing the birth of a new financial and internet ecosystem, or a crypto bubble that is about to burst?
Hardy: My view is that crypto is here to stay. There will undoubtedly be future bull and bear markets, but in my view, the technological feat of solving for digital scarcity and the innovations currently happening in the space cannot be forgotten. I think we will see the birth of a new financial and internet ecosystem, but I also believe that it will coexist with the current one. These trends will likely play out over the course of many years, and possibly a decade or more, so it’s still in the very early days despite the rapid growth the ecosystem has seen over the past few years.
Q: In a podcast from 2018, you said companies are continuously coming up with new applications for cryptocurrencies. What do you see as some of the most innovative ones today?
As a general comment, the ability to use tokens to build new networks/communities and incentivise adoption is fascinating. Two applications that I’ve been paying attention to recently are what’s known as ‘yield farming’ and non-fungible tokens. Yield farming is a type of lending activity, wherein one with crypto assets lends them to someone else, in order to generate profit. Having a liquid market with active borrowers and lenders is an important building block in a financial ecosystem, so yield farming is helping to build that leg of the stool in crypto. Non-fungible tokens are unique and not interchangeable—they take the innovation around digital scarcity and apply it to the collectibles-use case. With some of the new platforms out there, you can have a provably unique piece of digital artwork or own a clip of a famous sports moments, for example. I grew up collecting physical baseball cards, so it’s fascinating to see the world of digital collectibles develop.
Q: Many younger investors in particular seem to be interested in both cryptocurrencies and environmental, social and governance (ESG) factors, but may not be aware of the massive carbon footprint that comes with cryptocurrency. On the other hand, blockchain technology could be used to better evaluate and manage ESG risks. Can you explain the interaction here?
Hardy: A lot of attention has been placed on the fact that bitcoin mining requires a substantial amount of energy use to maintain the security of the network. This is obviously not ideal from an environmental perspective. One response from the crypto ecosystem to reduce the environmental burden of mining is to shift the consensus mechanism for Ethereum, the second largest cryptoasset, to proof-of-stake, which is significantly less energy-intensive. Proof of stake is a type of consensus mechanism blockchain networks use, and it represents a heavy technical lift that has been years in the making. On the positive side, crypto has the potential make a meaningful impact on the social and governance side by democratising access to financial services and innovating around how companies/projects/networks are governed.
Q: Why do you think people are investing in crypto currencies today? Do you think they understand what exactly they are investing in—and the risks?
Hardy: Similar to what we’ve witnessed in the traditional equity markets over the past few quarters, there has been a large influx of new investors into the crypto markets. In my view, this is a good thing over the long run, as market participation is an important factor in compounding wealth over one’s lifetime. There is certainly a risk that some people don’t fully understand what they’re investing in, but at the same time, bitcoin has a relatively easy to understand use case of being a digital store of value, which is something that investors are looking for in the current market environment. Digital store of value is the first major use case of crypto. Over the next few years we will see other use cases become more prevalent, especially as large platforms like Paypal and Square bring more users into the ecosystem and enable merchants to accept crypto as a means of payment.
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What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Buying and using blockchain-enabled digital currency carries risks, including the loss of principal. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk. Among other risks, interactions with companies claiming to offer cryptocurrency payment platforms or other cryptocurrency-related products and services may expose users to fraud. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. Investing in cryptocurrencies and ICOs is highly speculative and an investor can lose the entire amount of their investment. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
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