Cryptocurrencies sometimes remind me The Real Housewives.
Everything is a drama. It's a constant stream of feuds, arguments, and over-the-top crises. There is a large amount of alcohol. And if nothing exciting happens, they'll make up some new drama, because we all get addicted to the dopamine rush.
As entertaining as it is to watch Teresa Giudice's table-turning or the ongoing feud between Lisa Vanderpump and Kyle Richards, most of us would agree that Stability is generally better than volatility..
Children do better when they live in a safe, stable home than when their parents are raging alcoholics.
Relationships work best when both partners know what to predict, rather than manic-depressive outbreaks.
Economies do better when the value of the national currency is predictable, rather than hyperinflated.
And crypto projects work best when their token price is stable, not all over the map. This is why.
The strange thing about token investments
As I invest in this space, I recently realized something important: Your investments are denominated in the protocol token.
Let's say we invest in ETH. Ethereum, of course, is like a huge computer that people pay money to use. Every time you use a dapp or buy an NFT on the Ethereum network, you pay a fee.
You don't pay the fee in dollars, you pay it in ETH.
Now, our investment philosophy is that when you buy ETH, you are also buying "shares" of the Ethereum "company." If you believe in the long-term future of Ethereum, simply buy and hold ETH, like you would with Apple, Tesla, or any other technology company.
But if you have ETH, you have the native currency of the network.
This is the strange thing about cryptocurrency investments. When you buy Apple shares, they are denominated in dollars; You have a stable reference. If the price of $APPL goes up or down by 10%, it doesn't suddenly become 10% more or less expensive to use your iPhone.
But when ETH rises or falls by 10%, does be more or less expensive to use the network.
Stop and think about this for a moment. I'll wait.
Volatility hurts users
Because cryptocurrency investments often use the network's own token, here's why volatility is bad, again using ETH as an example.
Higher costs: When the price of ETH increases, this makes the network more expensive for users, which discourages adoption: it's like using an ATM that may charge a fee of $2 or $20, depending. And it's not just the cost of using Ethereum, but every dapp built on it.
Uncertain rewards: Many DeFi protocols built on top of Ethereum offer rewards in their native token. But if the price of ETH drops significantly, it reduces the value of his token as well, which frees users from those protocols and dapps. (Remember, users = value).
Devalued savings: Users also hold ETH as a store of value within the network (not as an investment, but to use the Ethereum computer). If the price drops, your net worth drops, eroding trust in the Ethereum network as a whole.
Volatility hurts investors
While short-term traders love volatility, long-term investors like us don't. This is why:
Volatility risk: It's fun and rewarding to see the value of your ETH increase by 50% in a couple of weeks, but when it happens the other way around, investors cut their losses and sell en masse. Even if you have the stomach to hold on, it's hard to maintain enthusiasm when you've lost 50%.
Market correlation: Since ETH tends to rise and fall with the price of bitcoin (and the crypto market in general), the price may have nothing to do with how well Ethereum is doing as a "business." Even if you're gaining users and adoption, volatility can paint a different picture.
Future value: This is the big one. The more volatile the price of ETH, the less predictable its potential fees are, which affects everything: user growth, developer activity, works. It's like investing in AT&T, not knowing if their phones will cost $40 or $400 a month.
I've used Ethereum as an example here, but The principle is valid for all Layer 1 projects where you invest in the token that runs the network.. And it is even more pronounced in Layer 2 projects, where volatility is now invested in addition to volatility.
I'm not saying you shouldn't invest in these protocols, but that Long-term investors should look for stability..
Stability > Volatility
By saying that stability is better than volatility, I do not mean that the price should never change. Ideally, we can see constant and (fairly) predictable growth, like, for example, the US stock market, whose volatility smoothes out over time:
This is an ideal, of course. Nothing in nature is completely stable. We have hurricanes, floods and fires. But in the long term, there is an underlying stability that allows us to predict that the seasons will change and that the sun will rise again tomorrow.
Let's celebrate stability when it happens, because that's how people will trust cryptocurrencies. That's how people will actually use it, for more than just speculation.
It won't be a great reality show, but it will be a great investment.
Health, wealth and happiness,
John Hargrave
Editor, Bitcoin Market Diary
