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Picks & Shovels of the Metaverse

I ventured into financial markets in the most millennial way possible. In Pakistan, there’s no culture of investing in equity markets and since interest is frowned upon, not many investors dabble with money markets, saving accounts, or term deposits either. Hence, with lack of knowledge on equity markets, my first investment happened to be in Bitcoin.

In the next few years I started investing in many other cryptoassets and lost a lot of money. I learnt some expensive and painful lessons. My number one lesson being; the first and foremost goal of any investment is preservation of capital. The secondary goal is the return on investment.

After learning that lesson, I started analyzing most investments from the “picks and shovels” point of view, especially in up and coming technologies and disruptive innovations.

Instead of buying Cardano, or Stellar Luman, or Dogecoin, I realized I could be investing in $BNB, or most recently $COIN. This way I wouldn’t have to worry about which asset would do well as all trading activity on all cryptoassets generates a fee for Binance & Coinbase. Sure my return could be lower, but so is my risk. $BNB ended up generating a 60x return for me despite being a “safe bet” which is an order of magnitude larger than most unsafe bets in the cryptospace.

Most recently, NFTs have shook the world by the storm. But they are extremely difficult to value. They are also quite illiquid as they are non-fungible in nature. Part of illiquidity is solved by fractionalized art platforms like Fractional.Art as you can now buy small fungible pieces of a non-fungible art. The most recent example being Feisty Doge NFT (NFD) which is fractionalized ownership of photo of a Shiba dog and is trading at $51 million dollars at the time of writing, thanks to fractionalization and liquidity.

NFT space, for now, has fewer bluechip pick-and-shovel style opportunities. The largest NFT marketplace OpenSea doesn’t have a governance token, hence it’s not possible to get exposure to it. It’s also not a public company yet so you can not get exposure via equity market either. Smaller NFT platforms have governance tokens, but are priced way higher than the market share that they have e.g $RARE or $RARI.

There are also play-to-earn games in the NFT space. Since P2E games require players to buy NFTs in order to play the game, there’s a barrier to entry especially for those who can’t afford to buy at all. To solve this, guilds have been formed which lend their NFTs to scholar gamers who then play the games to earn, and share revenues with the guild. In this case, by betting on the guilds, you can also bet on the entire P2E gaming industry pick-and-shovel style. The largest guild right now is $YGG, but that also seems to be over-valued to me on current FDV relative to the number of scholars they have at the moment.

NFTs have also already spread across sports. With $CHZ powering sports fan tokens and collectibles for clubs like Paris Saint-Germain ($PSG) or Barcelona ($BAR), it can also serve as a pick-and-shovel bet on the sports NFT space.

For now, I’m merely observing the pick-and-shovels of this space as I’m confident there will be multi-bagger winners in the NFT space.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

My Draft Crypto Portfolio Outperformed The Markets By A Lot

Two weeks ago I wrote about 10 crypto assets that are in my watchlist or portoflio. I wanted to see how they have performed since I’ve written that blog post.

Here’s the two week performance below.

AssetPrice on 28th JulyPrice on 11th Aug% Gains
BTC$39,851$45,64414.53%
ETH$2,307$3,16036.97%
SOL$28.33$41.1245.14%
AXS$47.75$74.8956.83%
FTT$31.32$49.5058.05%
PERP$9.96$15.6457.02%
RUNE$4.10$7.1373.90%
MKR$2,705$3,41826.36%
LUNA$9.55$16.5673.40%
STX$1.16$1.4726.72%

If you allocated $1,000 to this draft portfolio on 28th July and allocated $100 to each of the listed assets, your returns would have looked like this

AssetValue on 28th JulyValue on 11th Aug
BTC$100$114.54
ETH$100$136.97
SOL$100$145.15
AXS$100$156.84
FTT$100$158.05
PERP$100$157.03
RUNE$100$173.90
MKR$100$126.36
LUNA$100$173.40
STX$100$126.72
Total$1000$1,468

This would have yielded a cumulative return of 46.80% on your entire portfolio in 2 weeks. If you had a Bitcoin only portfolio you would have generated 14.53% return while if you had an ETH only portfolio your return would have been 36.97%. If you had a 50/50 BTC/ETH portfolio, your returns would have been 25.70%.

In addition, if you had a way of mirroring the entire market, the crypto market has grown from 1.527 trillion dollars to 1.885 trillion dollars. This index would have yielded you 23.44% returns.

Luckily, my draft portfolio above outperformed BTC, ETH, BTC&ETH as well as CMC Index portfolio.

User Equity

Mercury – a bank built for startups, recently published their crowdfund campaign primarily with a goal to allow the customers of the bank to own equity and financial upside in the success of the bank.

Mercury acquires >60% of their customers with word of mouth or referral from their existing customers. As customers become owners of the bank, they are far more likely to refer other startups to bank with Mercury. Hence it is fair to say that Mercury has, in a way, delegated part of the job of customer acquisition to their customers which is very fascinating for me.

I’ve previously seen this model a lot in the crypto & DeFi space. For example anyone who ever traded even once on a decentralized exchange Uniswap was airdropped the Uniswap governance token.

Or if you’re a market maker or liquidity provider on PancakeSwap, you are rewarded with the CAKE governance/equity token.

While any business is only successful as long as it has customers or users, yet for centuries, we hadn’t seen an economic model which rewarded the customers with the financial upside of the success of the business.

We started to see a little bit of it in the past few years. For example content creators on YouTube have an economic incentive to create content and publish on YouTube. However, their financial upside is limited to the revenue generated by their content alone. In addition, the viewers of the content have no financial upside. Even though, both are users of the platform and make it successful.

On the contrary, with Uniswap, even the traders and not just market makers earned governance tokens for simply trading on the platform.

With this new customer/user equity model, users can have financial upside across the entire product and hence they have an economic incentive to work towards the success of the business.