It wasn’t long ago investors had to dial up a stockbroker on the phone for a stock quote. They’d send off mail-in buy orders, waiting weeks for ownership of shares… Then repeat the process over again to execute a sell order. Today, trades are instantaneous. The internet has replaced outdated systems of communication and information. But future advancement can only go so fast. At some point, innovation can’t offer faster speeds unless they keep fractionally cutting latency. That just won’t cut it.
Innovation is splitting from its past trajectory with the recent advent of Bitcoin, blockchain, cryptocurrencies, and CBDCs. Narratives for each of these four developments have yet to fully unfold. But one question for investors remains applicable to each of the above: if you can’t think of what something might replace or improve, what place will it hold?
As a caveat, none of the aforementioned technologies will entirely replace our existing tech in the immediate future. More specifically, they will enhance our current systems.
The Narratives Of Financial Innovation
CBDCs have very clear intentions
They aim to replace physical currencies with digital ones. Day by day, the world becomes a little more digital and a little less analog. Furthermore, CBDCs offer governments a slew of benefits physical cash does not. And it’s only a matter of time until they catch on. CBDCs role in the future seems the most inevitable of any upcoming innovation. It’s not if, it’s when.
Blockchain is best seen as an internet 2.0
Blockchain will likely replace many of our old ways of record-keeping, organization, and verification. Nobody could have guessed the internet would be used for YouTube, shoe shopping, or paying a bill. But now with blockchain, we can go about our everyday lives with a heightened level of trust, security, and decentralization. Blockchain will continue to surprise us, just like the internet. We already see blockchains implemented in voting, healthcare records, banking, nuclear disarmament and more.
Think of Bitcoin as gold 2.0
Bitcoin offers its own value proposition for investors seeking safety. Unless Lightning Network finds rapid progress, I can’t quite picture Bitcoin becoming the currency of choice for Starbucks and everyday transactions. People will continue to wear shiny things. Gold bugs will be gold bugs. But Bitcoin will drive interest as a hedge from all corners of the investment arena.
Cryptocurrencies… the hardest of the four to categorize
There are over 5,000 cryptocurrencies, and 95 percent will likely never see the first page of CoinMarketCap. If you can’t clearly answer what your preferred cryptocurrency will replace or stand as an improvement to in modern technology, then it probably isn’t worth holding for the long term. If 90 percent of these coins fail, 500 are left to succeed. And that still seems like a wild overestimation. Perhaps they somehow become analogous to websites on the internet, each offering a unique service. But it’s still a stretch.
What Would Buffet Say?
Warren Buffet’s advice can help make sense of everything above. A golden rule of his was to only invest in the things he understood. For this space, following this rule does not mean reciting the white paper by memory; it means clearly envisioning a practical way in which new technology can both fit into society and provide a positive outcome for people.