2021 has a very weird year to say the least , with pandemic going through multiple waves , energy crisis pushing oil prices from nearly $0 to mid-80s , a theoretical gain of infinity % , bull market in equity markets which some say is totally unconnected to economy prospects , crypto becoming legal tender in El Salvador, there are many other events , but these ones stole the limelight for me.
Personally also it was a different year , after so many years I spent so much time with my parents and family , having lived last decade of my life in far flung cities , it was a pleasant surprise. I also got an opportunity to learn more about cryptocurrencies as I landed a job with one of the top crypto VCs as an analyst. I started with a typical mindset of someone with background in traditional markets, looking for things such as P/E , Revenue growth, Gross Profit Margins and whatnot . When my team used to discuss these projects , based on their on-chain metrics, their fully diluted market caps, teams behind them , I used to feel really out of place. This continued for first 3 months, I concentrated on doing macro analysis and correlation analysis between crypto prices and other asset classes , but never understood the purpose of these cryptos , because we already have banks , Paypal , central backed currency in place.
Come my 4th month at the firm , I was expected to learn better ways of evaluating crypto opportunities , but I struggled getting used to methods my other team members were so conversant with. So I decided to go back and learn more about the history and views of crypto proponents , I read the following books apart from any editorial I could get my hands on: (1.) Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.” by Nathaniel Popper (2. )The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous (3.)The Psychology of Money by Morgan Housel (4.) Crypto Asset Investing in the Age of Autonomy: The Complete Handbook to Building Wealth in the Next Digital Revolution by Jake Ryan, last one is my favorite. After reading these , I realized we know so little about history of money, all of the people in internet generation grew up thinking that money derived value from Central Bank’s trust, but that was not the case for majority of human history. It is just not about centralization, it is about the fact that everything in this world derives value from scarcity , even securities , whenever there is scarcity of ‘sellers’ in the market , the prices rise , why do we find it so difficult accept the same for cryptos? I really think that framework for fundamental analysis of cryptos would evolve over the next few years. There are already on-chain metrics which sophisticated investors are using to analyze cryptos , but they are not widely known and not part of curriculum of financial analyst programs, this will change in the coming years. I am sure that you would see mention of cryptos in CFA curriculum within next 2–3 years. I would really recommend anyone struggling to understand the purpose and need of cryptos to delve deep into macroeconomics and quantitative easing programs which have been continuously going for a decade now. More on this later !