Ethereum will pass Bitcoin in 2018: my cryptocurrency investment portfolio

In the last few days, many have asked about my investment strategy and portfolio mix after writing 95Percent’s: Blockchain Technology.

After much deliberation, in this post, I’ve decided to share my holdings with you. Perhaps more importantly, I’ve decided to also share my underlying philosophy. As a reminder, I know nothing. None of this should be construed as investment advice, and you should do your own research before making any investments. I would be financially okay if I lost all of my invested money: you should make sure you could survive a total loss before investing any funds.

But enough of that, how should you approach investing in cryptocurrencies? First, I advocate creating your own investment tenets. Tenets are also a crucial aspect of the product management process. I recommend creating tenets before diving into any business, project or problem.

Why do we write tenets?

Tenets are used to make hard decisions
Each tenet expresses the conflict arising from two (or more) competing philosophies
Each tenet ultimately demonstrates preference for one philosophy over others

Most people have their own philosophies and preferences, but they don’t write them down. Writing them out is crucial because it crystalizes your thinking. Tenets are helpful when times are good and indispensable when things get tough. You should debate your tenets heavily with family, friends, and yourself. Below I share five of my cryptocurrency investment tenets:

Jason’s Cryptocurrency Tenets [January 2018]

1. I will prioritize platform investments (think Ethereum) over application investments (think Dash). Strong infrastructure scales and changes the world. Successful applications are hard to predict and are not stable over time. Platforms better withstand changing customer needs.
2. I will choose cryptocurrencies with user adoption and strong focus on user adoption over cryptocurrencies with the latest tech or prettiest whitepapers.
3. I will take the super-long term view. I will prioritize cryptocurrency that have the potential to be trillion dollar businesses and will stay away from currencies with more barriers to widespread adoption. If a cryptocurrency is unlikely to ever be used en masse, I won’t buy it. I investment in fundamentals not merely public opinion.
4. I will greatly value signals in the market, especially signals from entities with inside information and large investment positions — potentially over even my own analysis.
5. I value cryptocurrencies that demonstrate the ability to change direction, pivot quickly and make decisions over cryptocurrencies that emphasize status quo, tradition, and moving wisely but slowly. I recognize this is partly a function of team structure and leadership.

After painstakingly working through my tenets, I’ve researched many of the cryptocoins available today. Based on my personal investment philosophy and this research, I’ve made several investments over the last month. Here’s my positions as of January 11th 2018:

Jason’s Cryptocurrency Portfolio* as of January 11th 2018:
Ethereum: 50%
Stellar: 20%
Neo: 20%
Request Network: 10%

*I’ve rounded these numbers to make them prettier.

Ethereum: 50%
As we wrote in Blockchain Technology: “Blockchain technology creates information networks. The fundamental rule of networks is that when a new person joins any network, the network becomes exponentially more valuable. As a corollary, each time another person joins a widely-used network, it becomes exponentially harder for competing networks to offer similar value to people. You use Facebook because all of your friends are on the platform. You are less likely to use a new social network because few of your friends would be on it. As a result, networks tend to produce winner-takes-all markets. Facebook, WeChat and a few other businesses, for example, dominate the social networking space. We expect a similar winner-take-all outcome for blockchain technology. So far, founders have created many hundreds of digital coins. They will create thousands more over the next few years. We expect a handful of these digital coins to successfully walk out onto the global stage, while the vast majority of these coins will ultimately become valueless.”

Amazon is a platform. Facebook is a platform. Platforms dominate the internet. As we’ve seen from Ethereum’s creation of the Initial Coin Offering (ICO) platform, platform coins will dominate the blockchain coin as well. We’ll see many cryptocoins repositioning themselves as platform coins, especially starting in the second half of 2018 and into 2019 when many smaller, more niche coins start to flame out. Based on my research, Ethereum is currently best positioned to win the platform war. Pure and simple. I may change my view in the next few months or quarters but for now Ethereum gets the majority of my money.

Stellar: 20%
Stellar is a platform that wants to make it really easy for companies to ICO (versus using Ethereum). Stellar is ultra-focused on this use case, but that’s okay, because this use case is massive.
Again, per Blockchain Technology, “[blockchain] technology can also make physical-world assets more liquid (easier to sell and buy) by making them more reducible. In other words, the blockchain better facilitates ownership of assets across multiple people… while mega-companies (e.g., Amazon, AirBnB) have successfully built their own digital marketplaces in the past, blockchain provides the available-to-all, trust-building, low-cost financial infrastructure via smart contracts, secure transactions, and an authoritative ledger to [almost anyone]…Unlike crowd-funding sites like Kickstarter, where early backers receive nothing but a product or service, ICOs let entities actually own part of meaningful ideas.”

The tokenization of assets via blockchain is going to change the world. So far, this use case is the only one Ethereum has proved it can solve and I find it possible that Stellar eats some of Ethereum’s pie: I am watching Stellar carefully. Stellar focuses on usability (think: MVP) instead of extensibility (think: useless features). The founder started Mt. GOX and built the initial framework for Ripple. Stellar is backed by Stripe and has support from top advisors in tech.

Neo: 20%
Over the last decade, China has made it clear that they want to build their own solutions to world problems. I expect this trend to continue into the blockchain world, and expect at least a duopoly platform paradigm (at least one major smart contract platform for the West, and at least one smart contract platform for the East).

Request Network: 10%
Request Network is a platform specifically focused on the payments space (built on top of Ethereum). While the sized of the tokenization of assets space (e.g. ICO) is almost incalculable, the payments space remains enormous. Request Network is a big team bet. As a product leader, I value team organization a lot. I’ve studied the core developers of many of the top blockchain coins, and find that most projects are being run relatively poorly compared to more traditional software development projects today (partly a function of decentralization of blockchain teams). Many teams don’t have updated visions or project plans and as a result miss deadlines and seem to be prioritizing things no one wants. Request Network strikes me as agile, able to pivot quickly, and ruthlessly focused on user growth and customer experience. (I love the bi-weekly updates.). I also immensely value their time in YCombinator, the top startup incubator in the world.

Like the pre-blockchain startup world, real-life customer feedback is everything. I want a team desperate to get their coin to market. From there, they can interact with real customers and then make technical changes that are likely to lead to meaningful improvements for real customers.

Mainstream cryptocoins I am NOT invested in:

Bitcoin
In my opinion, a huge milestone for blockchain technology will be to move away from the Bitcoin Hegemony. Right now, the cryptocurrency market as whole is psychologically entwined with Bitcoin. When Bitcoin plummets, the market plummets, although we’ve seen signs of change in the last few weeks. In 2018, I predict that Ethereum (or another platform) will surpass Bitcoin. The cryptocurrency market will finally detangle itself from Bitcoin.

I don’t find pro-Bitcoin arguments particularly strong. Initially, Bitcoin initially saw a lot of success helping entities perform discreet transactions (think: Silk Road). Currently, though, Bitcoin isn’t particularly helpful in the payments space (slow, expensive, and unfocused): the digital currency is unlikely to scale to widespread user adoption for payments. Bitcoin also can’t help with ICOs: it is not a platform. Perhaps most concerning, from a development perspective Bitcoin moves slowly, has divided leadership, and doesn’t practice user-driven development (at least compared to other digital coins). Proponents cite these characteristics as advantages and argue that Bitcoin is a store of value.

We flesh out the digital coin role as a store of value in Blockchain Technology: “Blockchain technology also has potential to provide a new independent store of value. Today, the classic independent store of value, gold, is partly valuable because humans have decided to value it independently of nation states (e.g., Canada) or nation alliances (e.g., the European Union) unlike other mainstream currencies (e.g., the United States dollar is closely tied to the success of the United States of America). Gold is generally inversely correlated with the US dollar: in other words, gold acts as a hedge against the current global financial system. Because gold is difficult to store — heavy, relatively insecure — digital blockchain-currencies represent an attractive alternative. If digital currencies become more stable over time (currently, they are extremely volatile), they may one day augment or supplement assets such as gold.”

The problem is that no one uses Bitcoin as a stable store of value today. Additionally, Bitcoin is relatively uncorrelated with the US dollar, so it doesn’t act as a particularly useful hedge. Ultimately, I think digital coins will be strong store of values, but this is far, far down the road. At that point, I find that other cryptocoins are just as likely or more likely to act as global store of values compared to Bitcoin.

I further argued that the bigger and more immediate store of value opportunity is “helping entities buy into the global financial system in the first place. In developing countries, for example, many entities are eager to shift local, unstable currencies to stable currencies such as the US dollar to better protect their wealth. Like the US dollar today, the blockchain-backed currencies that facilitate world transactions tomorrow will also naturally act as a store of value. Entities will invest in these currencies as they do the US dollar today. As a result, the same blockchain-based currencies that gain mainstream adoption for payments are also likely to gain mainstream adoption as stores of value.” We will be forever indebted to Bitcoin but 2018 will mark Ethereum passing Bitcoin, the marketing falling, and then ultimately rebounding stronger than before. The age of the Blockchain Platform is beginning.

Privacy-centric cryptocoin
While, private, fully-anonymous transactions are a large blockchain use case, coins emphasizing privacy will struggle to gain mass adoption in the long-term. I expect privacy-centric coins to bear the brunt of initial government scrutiny and regulation. I choose to make my investments on the more public side of the blockchain movement. That said, Monero would be my current pick in the privacy-centric digital coin space.

Ripple
As we wrote in Blockchain Technology: “in the short-term, partial blockchain solutions [like Ripple] will become common. Already, financial institutions are creating their own private blockchain networks and producing digital coin. Participating institutions act as nodes in the blockchain, and have visibility into all transaction on the shared digital ledger.”
I like Ripple, and particularly the focus on getting customers. Like many others, however, I am concerned about the difference between the highly-valuable Ripple Payment Protocol and XRP as an investment vehicle. I also see in-house blockchain development from large institutions as meaningful competition.
Thanks