Cryptocurrencies are together now worth almost as much as Apple. People are “buying” digital art at Christie’s with non-fungible tokens (NFTs). How the enterprise should play in this space is about as simple – and necessary – as joining Clubhouse.
Valuation — Again
There are at least two ways to calculate valuation. The first makes accountants and finance professionals smile with traditional metrics, like price-to-earnings ratios, price-to-book ratios, debt to equity rations, cash flow, etc. (Of course, there are traditionalists who challenge these metrics.) Then there are the speculators who believe “the story” around future market share, first mover advantage, technology differentiation, “whole new categories” and everything else that justifies a crazy valuation when the traditionalists’ heads explode.
Enter cryptocurrency. How should it be valued? As of this writing, the total value of all cryptocurrencies is somewhere in the $2T range. Are they worth it? Or is there something else going on? Yes – as more and more major vendors accept crypto (especially, almost exclusively, Bitcoin), it becomes more popular, and as acceptance grows, trading cryptocurrency becomes more than a fun pastime. Like Bitcoin mining, it’s now a business. Arguably, Tesla and PayPal (and now NSTs) changed the crypto game – with more to follow, especially in a world of fast followers.
Now explain non-fungible tokens (NFTs). Tom Brady thinks there’s a future here. Beeple’s (Mike Winkelmann’s) art is making a killing – via Christie’s. Do you have an old Babe ruth baseball card? How about the Mona Lisa? Or some digital thing of value that you might want to create and sell? The valuation calculation here? Clearly the 2nd path (as heads explode again).
Who else wins? Blockchain, which has been struggling for applications beyond cryptocurrency. While well-suited for all sorts of transactions – like contracts (beyond NFT transfers) and voting – it’s still pretty much locked in crypto world, until now. NFTs rely upon blockchain for authenticity and security and then, for payment, which at Christie’s is Ether.
Here are some thoughts about what the immediate future holds for cryptocurrency, NFTs and blockchain:
- Cryptocurrency will grow in value because it will grow in popularity. More companies will accept and trade cryptocurrency and investors like Fidelity (which) enable(s) investors to participate in the cryptocurrency market via ETFs and other investment vehicles.
- Bitcoin will remain the most popular and traded currency for the foreseeable future but others will join the marketplace. Bitcoin is so expensive there’s a perception that it’s already over-valued (though that perception has been with us for years). Candidates? Ether, of course, but look for a possible rebound by Litecoin, Monero and Polkadot, and other currencies that offer NFT blockchain and marketplace services.
- When it gets big and popular enough, regulators, encouraged by bankers, will respond more aggressively than they have. But regulating crypto will inevitably reduce to playing Whack-a-Mole where valuations, transactions and exchanges will continue to be scrutinized as moving targets. There’s a lurking major threat here, if and when cryptocurrencies become widely used. If that happens we can expect regulators to get extremely aggressive. The same is true of NFTs, though here too “regulation” is ill-defined.
- The use of NFTs will continue to grow. Even tiny pieces of horrendously valuable things (or things just perceived to be valuable) are attractive to many investor classes. No real regulation here (yet), just the old stand-by, “buyer beware,” until there’s a major event that rocks the whole valuation model. (Don’t worry: Tom Brady will be fine.)
- NFTs will be used to acquire interest in more digital than physical assets because new digital assets can be created faster than physical ones and “creators” will default to what’s easiest and where the valuations can potentially rise the fastest. That said, there’s nothing stopping those who own some of the most valuable physical assets from monetizing them.
- Blockchain will continue, though slowly, to find additional application areas. Healthcare looks like an especially good opportunity – and voting is waiting in the wings, though given how politically charged voting is in the US, it’s likely to grow much faster outside the US (though, incredibly perhaps, “over the past two years, West Virginia, Denver and Utah County, Utah have all used blockchain-based mobile apps to allow military members and their families living overseas to cast absentee ballots using an iPhone.”
The Enterprise Play
So what should companies do about these trends? First, if they’re in the markets where major players are accepting Bitcoin, they should seriously consider accepting it themselves. Actually or perceptively failing to participate here could be brand threatening. (“What’s taking Uber so long?,” for example). Even as fast followers, the risk is reduced, and if it all crashes and burns then companies can always just stop. Cryptocurrency investments? Much tougher decision, in spite of what Tesla recently did. The speculative nature of crypto is a serious threat to its investment desirability. On the other hand, everyone knows how much money buy-and-hold crypto investors have made over the past ten years.
Next, they should evaluate their portfolios for digital asset monetization. How about patents? Better yet, what about “art” uniquely created by smart (machine learning) algorithms? Mario Cart character logos? (What’s Wario worth?) What other digital assets might they have? What physical assets might be monetized? Christie’s – always a legitimate partner – can help here, or visit one of the new NFT marketplaces. What else? Re-evaluate the company’s attitude about new business models enabled by new technologies – now and forever.
Most importantly, as with any new emerging technology-enabled business model, companies should pilot NFTs with cryptocurrency and blockchain. Start with creating a digital wallet and fill it with some Ether, the cryptocurrency that many NFT marketplaces use (because they use the Ethereum blockchain). There are a number of sites that sell cryptocurrency, including Ether. Some of the more popular sites are Coinbase and now PayPal. Once a company has purchased some Ether they can proceed to OpenSea (or other NFT marketplaces, like Rarible or SuperRare), which is where lots of digital things are for sale. Companies can buy some things on OpenSea (with their Ether) – and then sell them – all in the spirit of learning how it all works. They can then browse their own portfolios for something to sell, or consider creating something they can sell.