The Crypto Playbook: How to Invest in the Future of Technology

In each of these cases, investors saw the truth: these technologies were going to change the world, and there was a lot of money to be made. The chaos came from not knowing where the money should go.

The early 1900s saw a boom in the automobile industry, with new companies emerging rapidly. However, the industry was still nascent, and it was unclear which companies would ultimately succeed.

This led to a lot of speculation in auto stocks, with some companies seeing their stock prices soar, only to crash when they failed to deliver on their promises.

Many auto companies went public despite having a limited ability to actually make automobiles. But slowly, investors began to understand that auto production was expensive, and only companies that were well-capitalized and had mass production techniques would survive.

Which is why the Model T was a game-changer. Marketed as the first affordable automobile, it was durable, reliable, and easy to maintain. (Ford eventually got the price down to $260, or about $4,000 today.) It could handle rough roads without losing a wheel. Soon, Model Ts were everywhere, which made it easy to find parts and service.

Surprisingly, Ford did not go public in those early days: the company was privately held by Henry Ford and a small circle of investors. But the company’s success fueled a renewed boom around other auto stocks, as investors placed their bets on the “next Ford.”

This continued until the famous stock market crash of 1929, when the auto industry shrank into a few major players who could withstand the Great Depression (notably Chrysler, General Motors, and Ford). Most auto stocks plummeted, and their cars have survived only in vintage auto museums.

The investing principle is that in emerging industries, we must distinguish between companies with real value, and companies built on hype. Ford had developed something of real value: an auto company that could scale. Meanwhile, a lot of investors poured money into two guys in a garage.

If this sounds familiar, it’s because the crypto industry is in its early stages of valuation, where nobody is sure what to pay for anything. But there are long-term lessons we can learn from this time in history.

Survival and Consolidation

The U.S. didn’t need 100 different auto companies. It needed, like, three.

Today, the world doesn’t need 100 different blockchain platforms. It needs, like, three. If you’re starting a new blockchain platform today, it’s like starting a tiny auto company in 1908. How are you going to attract developers, to build more dapps, to attract more users?

The layer-1 battle has already been won: it’s Ethereum. This could change in the future, of course, but understand that blockchains develop huge economies of scale that become self-reinforcing feedback loops: more developers, more dapps, more users.

The principle is that over time, technology industries tend to consolidate among a few large companies. This certainly happened with automobiles, and it’s our investing principle with crypto (see our Guide to Sector Investing for more).

This is due to two things: survival (smaller companies are eventually crushed by the big ones), and consolidation (smaller companies are gobbled up by the big ones).

For investors, the principle is pretty simple: invest in the crypto companies that are clearly leading their category, and that seem to have a sustainable competitive advantage (as Ford did with its assembly lines and Model T economies of scale).

Look for: Daily Active Users, Market Capitalization, Transaction Volume, Total Value Locked.

Innovation and Scalability

We all know the stories of reigning tech companies that failed to innovate with the times: Kodak and digital photography, BlackBerry and mobile phones, Yahoo and search.

But what about the crypto companies that failed to keep up?

Bitcoin Cash, for example, was a spinoff project that tried to solve the primary problems of bitcoin. BTC is famously slow and expensive; BCH was supposed to be fast and cheap. But Bitcoin Cash didn’t solve these problems quickly enough, and today only a few BCH holders still believe in it.

Compare this with Ethereum, a good example of a company with an inferior technology (Proof of Work) that successfully pivoted to a better one (Proof of Stake). Ethereum is also slow and expensive to use, but has developed layer-2 scaling solutions that are making it faster and better.

Ethereum’s advantage comes from its network of active developers (who meet up regularly IRL around the world), its Ethereum Improvement Proposal process (which allows structured and community-driven innovation), and the humble leadership of Vitalik Buterin (its spiritual CEO).

Just as Ford was able to pump out 15 million Model Ts on its assembly lines, then reinvest the profits into further innovations, the best blockchains have a self-reinforcing feedback loop of good ideas and good execution, at scale. Invest in crypto companies that can innovate and scale.

Look for: Developer Activity, EIP Improvements/Proposals, New Features/Upgrades, Transactions Per Second, Gas Fees/