Journal of Financial Planning: December 2024
Ivory Johnson, CFP®, ChFC, is the founder of Delancey Wealth Management, LLC (www.delanceywealth.com). He has a B.S. in finance from Penn State University, has been certified by the Digital Asset Council for Financial Professionals, and is a member of the CNBC Financial Advisor Council.
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Thomas Friedman once wrote in The World is Flat that “when I was growing up, my parents told me, ‘Finish your dinner. People in China and India are starving.’ I tell my daughters, ‘Finish your homework. People in India and China are starving for your job.’” He spoke to something Austrian economist Joseph Schumpeter called creative destruction, where old business models are replaced with more innovative structures. In this case, and more specifically, competition was hiding in plain sight.
Change is a difficult pill to swallow for those of us who spent our careers dancing with the girl that brought us to so many fabulous parties, but a funny thing happened when WorldCom and several other high-profile telecom interests went bankrupt during the early 2000s. Companies in India and China purchased fiber optic lines on the cheap when insolvent businesses drove down the price with excess capacity,1 and in the process, gave foreign companies access to high-speed information that allowed them discount services to U.S. employers. Outsourcing didn’t happen in a vacuum any more than boardrooms were the sole root for this increasingly sharp thorn on the side of American workers. Instead, our international competitors saw a window of opportunity born out of greed and incompetence and jumped through it to escape the 1997 Asian Financial Crisis.
So much of the discussion about crypto has focused on bitcoin, and for good reasons. Uncle Sam spends $3 billion a day, or $1 trillion a year,2 just to pay the interest on his debt. There is but so much money in the global infrastructure to support America’s immense deficit spending, the demand for Treasury bonds constrained by the supply of money required to purchase them, so the Federal Reserve fills the void by manufacturing liquidity to make payroll. Bitcoin is a conversation about scarcity and benefits from the sins of the father because there is an algorithmic certainty that there will never be more than 21 million bitcoins produced, unlike the dollar that is debased at the whims of unelected officials now charged with keeping the government afloat.
Understanding Crypto Infrastructure
All digital assets, however, trade on a blockchain with different pros and cons. Bitcoin might be the OG of crypto, but there are other coins known as altcoins that have different use cases ranging from commerce to international transactions. For the sake of this discussion, a blockchain is a decentralized digital ledger that records transactions across a network of computers. The role of these computers, known as nodes, is to ensure security, transparency, and something called immutability, which means these transactions cannot be changed unless the nodes reach a consensus. Each entry in said ledger is called a block, and they are linked in chronological order.
Blockchains, therefore, are a more efficient database that is decentralized because the nodes verify the transaction and eliminate the need for a central authority. These are business tools slated to increase efficiency while the native coins that share their namesake are the avenue investors use to potentially profit from the benefits of the blockchain. The most notable altcoins are Ethereum, Solana, and Ripple, which all trade on different blockchains.
Bitcoin’s blockchain operates on a proof of work (POW) basis that requires network participants, or miners, to solve complex mathematical puzzles to validate a transaction and create a new block. These puzzles are computationally difficult and demand significant resources to solve. Once completed, the solution is presented to the network for verification, and if correct, the block containing the transaction is validated. This is considered the most secure of all blockchains because tampering with a block would require redoing the work for that block and obtaining majority consensus.
Speed is the price users pay for security in a POW blockchain, as miners are currently paid 3.25 bitcoin for every block they validate, and the more miners that join the network, the more difficult the puzzles become. For example, the average time to mine a bitcoin block is approximately 10 minutes.3 Bitcoin, therefore, is essentially a commodity that hangs its hat on being a scarcity trade. Investors own gold because it is considered a store of value that dulls the debasement of fiat currency but, like bitcoin, is not used for everyday transactions or in the pursuit of commerce.
Comparing Altcoins
Ethereum
The Ethereum blockchain uses proof of stake (POS), and the native coin that represents the blockchain is technically called ether (not Ethereum). In this instance, a user initiates a transaction that is broadcast to the Ethereum network. The transaction is placed in a waiting area until it is recognized by a validator and added to a block. The biggest difference is that validators, as opposed to miners, are randomly selected and are responsible for proposing new blocks and must pledge a certain amount of ether as collateral that can be confiscated if a fraudulent transaction is validated. Other validators in turn attest to the validity of the transaction in the block to ensure there is no double spending or lack of funds from the sender. Validators are paid with newly minted ether and transaction fees. Unlike bitcoin, however, there is a constant increase in the supply of the native coin.
This blockchain is more energy efficient and allows the Ethereum network to process transactions faster and more efficiently. It is a different animal from bitcoin because Ethereum has more use cases in the form of smart contracts that are executed on its blockchain. These are self-executing programs that enforce the terms of a contract when certain conditions are met without the need for intermediaries in the form of lawyers and banks. The execution of smart contracts is autonomous and immutable to ensure the contract is final and no party can tamper with it. These are transparent transactions because all participants have access to the terms of the contract and can verify the execution. Finally, these contracts run on a blockchain and benefit from the security afforded by this new technology.
Think of a smart contract as a vending machine: you put $1 in a machine and a Snickers bar comes out without anyone handing it to you or charging a fee. Real-world examples of a smart contract could be the purchase of real estate. Right now, the purchaser of a house would have to submit their tax returns, a credit report, proof of employment, and evidence of sufficient assets to consummate the transaction. The seller would need an inspection, existing mortgage balance, and proof of title. Imagine a world where all this information was stored on a blockchain and, with the permission of the buyers and sellers, became available for use in the proposed transaction. Instead of the month-long back-and-forth process of buying a house, it would be completely automated in minutes without your personal information being exposed to so many different people.
The programs being built on the Ethereum blockchain are all about innovation. They can streamline voter registration, verify identities, and count votes in real time, leading to faster and more reliable election results. Insurance companies can process claims faster and reduce fraud. Smart contracts allow patient data to be stored securely on a blockchain, where medical records can only be accessed with the patient’s private key. The same process investors use to purchase equities in an effort to participate in artificial intelligence can be applied to an evaluation of different blockchains that serve as a platform for DeFi and a dApp, or decentralized applications, that rely on smart contracts to execute its functions. In that sense, you can buy Nvidia or Ethereum—same approach, different investment.
Solana
Solana is a competitor of Ethereum’s use case for dApps and smart contracts. It doesn’t use POS, which reduces Ethereum’s speed to 10–30 transactions per second (TPS), but instead applies proof of history (POH) that increases the speed to 65,000 TPS, depending on who you ask. Proof of history establishes a verifiable and cryptographically secure passage of time between events on the blockchain, providing a way to keep track of time in a decentralized system so transactions can be ordered and time-stamped efficiently. In layman’s terms, each piece of data in the sequence is dependent on the previous one and creates a measurement of time that generates a chain of events that links everything together for a provable timeline of activity.
By relying on time stamps and not stakeholders or miners, the time to validate a transaction is dramatically reduced. As a result, Solana can process more transactions without compromising security because POH is used in conjunction with POS, although POH does the heavy lifting of time stamping the transactions. The speed of Solana allows it to employ parallel processing, which increases scalability and allows multiple smart contracts to run at the same time across different CPUs as long as they don’t interact with the same data.
Solana, therefore, is billed as a faster, stronger Ethereum that, in some circles, is projected to become the blockchain that can accommodate high frequency trading on Wall Street.4 The reason you would buy Solana instead of Ethereum, therefore, is the same justification any investor would make to choose Microsoft over Alphabet: which will gain more market share and make the most money?
Ripple
Ripple is the company behind the XRP ledger used for fast and efficient cross-border payments. Banks and financial institutions use RippleNet to settle international transactions in real time without the delays and costs associated with legacy systems like SWIFT. Investors will buy XRP to act on their thesis that it will supplant SWIFT and become more valuable.
The Altcoin Universe
It’s important to note that altcoins regularly create more supply of their coins and are not a store of value like bitcoin. As of this writing, there are over 2.4 million different coins5 with a total market cap of more than $2 trillion and most of them resemble the penny stocks that, back in the good old days, would reside on pink sheets with lots of red ink. Sure, you might get rich overnight with a meme coin, but the most successful investors will buy things that have a use case, whether it’s a store of value or an application that will disrupt the real estate industry and put the average mortgage broker, closer, title search firm, and real estate lawyer out of work.
Every profession is forced to restate its value proposition from time to time to stay relevant. The skills we brought to the table 10 or 15 years ago will no longer suffice. Technology now demands a level of agility many of us could not have imagined when life was simple and business suits were cool. The securities we employed and the way we got paid looks nothing like they do today, and one could make the case that ignoring the digital asset space because it is unfamiliar—something that is as uncomfortable as DocuSign must have initially felt for the over-50 crowd—will determine who prospers and who misses an opportunity to evolve into the next iteration of this thing we call wealth management.
As it currently stands, ether and bitcoin are the only coins that have a spot ETF, which can be purchased in a traditional investment account, while every other digital asset requires an account with a crypto exchange such as Coinbase, Binance, or Gemini. Onramp Invest, however, does offer an RIA solution that allows advisers to buy coins on a fee-based platform with Gemini as the custodian. Yes, it’s clunky, but it’s also what we would expect in the early days of adviser adoption.
Most importantly, crypto currencies are as real as sky miles, a digital asset you can exchange for a service even if you can’t physically touch it. These instruments do not have balance sheets, there is no EBITDA or P/E ratios. Stomp your feet all you want and demand a dividend discount model and CAPM; you won’t find it. This is a story of innovation that will create winners and losers, bulls, bears, and pigs, and if we’re on the right side of things, a seamless transition into something new.
Endnotes
- Dreazen, Yochi J. 2002, September 26. “Wildly Optimistic Data Drove Telecoms to Build Fiber Glut.” Wall Street Journal. www.wsj.com/articles/SB1032982764442483713.
- Cox, Jeff. 2024, September 12. “Interest Payments on the National Debt Top $1 Trillion as Deficit Swells.” CNBC. www.cnbc.com/2024/09/12/interest-payments-on-the-national-debt-top-1-trillion-as-deficit-swells.html.
- Coinbase. n.d. “Bitcoin block reward, block size, block time: what’s the difference?” www.coinbase.com/learn/crypto-basics/bitcoin-block-reward-block-size-block-time-whats-the-difference.
- Pal, Raoul (host). 2024, May 3. “Solana: The Big Crypto Bet ft. Raoul Pal & Joe McCann.” Real Vision [podcast]. www.realvision.com/podcast/realvision/episode/4282f8a6-05c8-11ef-ba3e-af3ed06818b6.
- Daly, Lyle. 2024, August 19. “How Many Cryptocurrencies Are There?” The Motley Fool. www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/how-many-cryptocurrencies-are-there/.
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“Crypto’s Emerging Influence on the Banking System,” Ivory Johnson, September 2023