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“New capital creation drove the recreation of the world.”

— Josh Rosenthal on the Renaissance

Crypto's Best Use Case: Speculation

Crypto currently has three use cases: store of value (Bitcoin), retail eurodollars (stablecoins) and speculation (everything else).

Whether or not that represents a good return on the countless investment dollars and developer hours that have been poured into the industry over the past decade is a matter of opinion.

If you’re inclined to think not, then you’re probably also inclined to think that the most recent crypto rally is unearned and therefore unsustainable.

I get that. 

I expected it would take some new utility for people to get excited about crypto again, but it did not — we went from crypto winter to crypto summer in seemingly no time flat, and for no particular reason other than an ETF (which isn’t even crypto).

That might mean that token prices are already back in bubble territory: Only time will tell.

Even if so, however, that would not mean that crypto itself is a bubble — in fact, I’d argue just the opposite.

Crypto’s ability to go from one bubble to the next in so short a time with so little reason is, to me, a good sign — I take it as evidence that crypto's indisputable use case (speculation) has found product market fit.

How big of a market might that be? 

The ongoing willingness of investors to pay sky-high prices for crypto tokens suggests there is a lot of investment capital that is not being served by traditional finance.

I’m guessing that’s a function of 1) geography — much of the world does not have access to US stock markets (where all the good stuff is listed) and 2) regulation — most investors are barred from investing in high/risk, high/reward startups (good luck getting in on the next Google).

Crypto is meeting this demand by creating a borderless, permissionless capital market — a new kind of market in which anyone can invest and anyone can offer an investment.

Both sides of that market appear to be bigger than anyone would have guessed.

Crypto’s one use case?

Josh Rosenthal wants you to know that permissionless capital markets are more than just a new kind of casino.

He defines crypto as a meeting of “generative tech” (the creation of new things, users and markets) and “participatory capital formation” (individuals pooling money in new ways to create new types of businesses).

DePIN is the crypto form of capital formation that Rosenthal seems most excited about, but there are others: ICOs, IEOs, IDOs, liquidity mining, airdrops, NFT mints and points programs are all new ways for builders to raise capital and investors to invest in early-stage projects.

Unfortunately, those are also all ways for fraudsters to raise capital and investors to lose their investments — but that is typical of nascent financial markets, so not, on its own, a reason to dismiss this one.

Instead, we should probably judge a new capital market not by how well it serves investors (the buyers), but by how well it serves builders (the sellers).

The sellers are being well served — founders are raising capital by selling tokens at valuations many multiples above what they’d get from selling conventional equity.

Better yet: Those founders are not selling equity, but pseudo-equity, which doesn’t give investors a claim on future profits or any other enforceable rights.

That makes crypto the best imaginable capital market for one side of the capital-raising equation.

How well it works out for the other side is TBD, but when the sellers are as well served as they are in crypto, it seems unlikely to work out well for the buyers.

Markets are not a zero-sum game, of course — things can work out for both buyers and sellers in a mutually beneficial way, but it doesn’t feel like we’re anywhere close to that happy state of equilibrium just yet. 

That does not, however, mean that nothing good will come of it: Even unbalanced markets can have happy outcomes.

As with railroads and the internet, a rolling series of investment bubbles may be productive for society as a whole, even if most investors get wiped out along the way.

Josh Rosenthal is thinking even bigger, however, arguing that cryptocurrency has the potential to be as impactful as the Renaissance.

(Yes, he means the Renaissance, the one from the 16th century.)

Historian turned investor Rosenthal explains that the Renaissance changed the world primarily because a novel way to raise capital (“ledger-based capitalism”) gave birth to a middle class that was empowered to overthrow the old, monarchical order.

Crypto (another ledger-based innovation!) could be similarly revolutionary, he thinks, thanks to its ability to “solve cold start problems” through “participatory capital formation.”

That remains to be seen, of course, so I’m going to stick with my opening assertion that crypto currently has three use cases — but I get why Rosenthal says it has just one:

“The use case for crypto is capitalism.”

― Byron Gilliam

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In today's episode Jason is joined by Kyle Samani of Multicoin Capital and Dmitriy Berenzon of Archetype for an in-depth debate on the emerging decentralized physical infrastructure industry.

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Bitcoin’s Next Frontier: Institutional Demand in the World of Options and Futures Trading

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