Don’t ignore the competition

Cryptocurrency investors usually only look at the investable landscape.  They ignore those projects that are hard (or impossible) to invest in.  This is a big mistake when considering an investment in a competitive industry.

++ When I talk to cryptocurrency investors, they often defend an investment by saying, “great team, great technology, real use case.”  I then ask, “who are their competitors and why do you think that this team will be the winner?”  Usually…silence.  Sometimes, the person will respond by naming other competitors with an exchange listed cryptocurrency or an upcoming ICO.  Never do they respond with competitors that have no cryptocurrency.

++ Consider Ripple (XRP).  XRP has numerous competitors with no tradeable cryptocurrency like R3 and Digital Assets Group.  To decide if XRP is a good buy, you have to look at the competitive landscape and decide why you think XRP is likely to beat out the competition.

++ Civic (CVC) is another example.  Great project, great team, but they have at least a dozen serious competitors, some of which may have greater traction.  CVC may be a great bet on the blockchain identity use case, but we can only conclude that after comparing Civic to its long list of competitors.

++ It’s important to remember that most cryptocurrency is open source, and so the value is based primarily on network effects.  When looking at new projects that don’t yet have meaningful network effects, we’re mostly betting on the team’s ability to quickly establish a first mover advantage in a particular use case.  Making that call requires evaluating the level of traction the competition has achieved.

About Ari Paul

Ari Paul is co-founder and CIO of BlockTower Capital. He was previously a portfolio manager for the University of Chicago's $8 billion endowment, and a derivatives market maker and proprietary trader for Susquehanna International Group (SIG). Ari earned a BA in political science from the University of Pennsylvania, and an MBA from the University of Chicago with concentrations in economics, entrepreneurship, strategic management, and econometrics & statistics. Ari is a CFA charterholder.
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6 Responses to Don’t ignore the competition

  1. John says:

    Interesting analysis. What are your thoughts about https://monetas.net/ (no tradeable cryptocurrency competitor)?

    Like

  2. amacai says:

    A good reminder at a time most need to hear it. Thanks Ari for highlighting the need to look at the not so obvious competition. I’ve enjoyed following you on Twitter.

    Like

  3. James says:

    Someone who thinks straight!

    Like

  4. Chuma says:

    This is similar to IOTA’s potential competition from Filament that no one talks about.

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    • Ari is talking about off-chain competition. I think Filecoin/Storj/Siacoin are also examples. They compete with the likes of OneDrive, Amazon S3, Dropbox on a commodity market; storage space. Most data storage does not require decentralisation, definitely not an “offer your available storage” market for day to day consumers. All your holiday pictures are probably better off on Dropbox or OneDrive. Large companies with highly confidential data are better off with on premise storage, or are even required to.

      A niche could be vendor independent encrypted data, safely backed up with high availability, facilitating a piracy use case. As decentralised storage make it more difficult for governments to seize operations or close down the network. Similar to torrents.

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  5. Anyone know of a good objective measure of network effect that can be used to compare various possible crypto investments?

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