We understand this given the short 13-year history of the underlying blockchain technology and its slow entry into the daily lives of the general population. The wider impressions, of wild business speculation for quick riches and spectacular busts, reach far into the public consciousness.
In our view, however, the biggest mistake we could make is not being exposed to the explosive growth of the next generation of disruptive Internet technologies.
Our fund’s investment in digital assets of just 0.5% of the total fund value at the time the investments were made – half of which is in bitcoin and the other half in ether – is driven by taking footing in the next disruptive layered Web3 style foundation. The Internet is evolving. The current form of the Internet that we all use is based on a trust model dominated by a few digital giants with centralized services, servers and software. In the current Web2 model, sites compete for user attention for content monetization. Payments are made through traditional payment channels, i.e. credit cards that charge their own fees. The monetization process requires users to share their privacy data for data mining used to track user behavior. If the product is free, then the user is the product.
In contrast, Bitcoin and Ethereum are based on a relatively new type of computing called blockchain. It is the fundamental layer for Web3 and fundamentally changes the concept of trust. It uses peer-to-peer interactions, essentially minimizing the need for centralized platforms, intermediaries, and trusted authorities. Peer interactions fundamentally change the way information flows, with users owning fragments of internet services through token ownership. Bitcoin and ether are fungible exchange tokens, while non-fungible tokens, or NFTs, give users the ability to own items, which can be artwork, photos, identities, land , mortgages, leases, etc. Our fund’s investment has only been in fungible bitcoins and ethers.
Essentially, the future Web3 resides in cryptographic tokens, secured in decentralized blockchains that are separate and distinct from the operating models created by big tech giants. Blockchains need cryptographic tokens to be maintained. Tokens are basically a derivative process of adding blocks to the blockchain. Bitcoin and Ethereum are the two most popular layer 1 blockchains and are backed by respective tokens, bitcoin and ether. Any Web3 application using these blockchains will need the tokens to function. This is the reason why our pension fund invested directly in these tokens and not in derivative investments.
The future of Web3 is bright, if largely unknown. Likewise, in the early 2000s, little did we know that one day we would use phone apps to stay in a stranger’s house or get into a stranger’s car. We currently don’t know about Web3 killer apps that haven’t been invented yet or that have been invented and not known to the general public. Simply put, we don’t yet know the full potential of Web3.
We know that the Web3 development cycle is already well under way. A huge intellectual capital is invested in the development of Web3.
As Dell Inc., Microsoft Corp., Alphabet Inc. and Meta Platforms Inc., formerly known as Facebook, have evolved with seed visions, it is reasonable to conclude that blockchain will not be the fad or chance that some l have considered. In fact, for those looking, the adoption of Web3 has been faster than the adoption of Web2, and we all know the essential place Web2 plays in our daily lives.
Given its enormous potential, our pension fund’s investment committee felt it was prudent to gain exposure to Bitcoin and Ethereum. The most conservative Web3 investment is in these tokens, the fuel of the blockchain. Bitcoin has a market cap of over $440 billion. Even with its recent decline of more than 50% year-to-date (70% from an all-time high), it’s still bigger than Walmart Inc.’s $363 billion and Walt Disney Co.market caps of $192 billion. Together, Bitcoin and Ethereum account for more than half of the market capitalization of all digital assets.
Since 2011, bitcoin has been declared dead over 450 times in various news articles. Yet even with the recent market downturn, it was one of the best performing financial assets from 2011 to July 2022 (its last crash) with annualized returns of over 254%. Web3 is still in its infancy. Given its potential, some exposure to fundamental blockchain protocols is warranted by patient, institutional, and long-term investors.