Web3’s tokens of crypto appreciation

As we all know now, currency has three functions: store of value, unit of account and medium of exchange. The proponents of crypto have so far alighted their future on the “store of value” leg of the stool. This has not worked out well.

The basic argument is that crypto would operate something like gold, only better. Because unlike fiat currency, it’s impossible for governments to increase the quantity of currency in circulation and thereby degrade it – investing in crypto would protect investors from inflation.

But it just hasn’t worked. We now have record levels of inflation around the world and the price of Bitcoin, for example, is struggling to hold above $20,000. It’s half the value it was at the start of the year, and less than a third its peak value at the precise time it should be showing its, er, metal.

It’s worth noting that the gold price hasn’t been great either, and the same charge that it’s not showing its metal in the face of record inflation could be laid at its door too. But it has done better than Bitcoin, and gold is down about 10% year to date.

What has happened here is simple: mountains – truly mountains – of cash have discovered the bond market. With interest rates at zero or less, bond markets in developed countries had their advantages, but were not particularly scintillating. Now, however, with interest rates rising and well above zero, the technically riskless bond market is making a comeback. For existing bond holders, rising interest rates are bad, but for new investors, there is at least a little yield there.

Until the start of this year, some of the cash that was trying to find some place, any place, to make a return outside of big tech, was finding its way into crypto. But, sadly for crypto, there are new possibilities. 

So rule out that “store of value” leg – at least for now. What about something else?

Well – and this is kinda complicated – there is Web3. 

Web3 will be a new iteration of web which incorporates concepts like decentralisation, blockchain and token-based economics.

I think the most interesting take on this topic, like so many others, is Matt Levine’s “Money Stuff” column on Bloomberg, where he sets out the case. The bottom line is that every product on the web will simultaneously be an investment opportunity, he writes.

That got your attention, didn’t it?

How this will work is that every time you sign up for a Web3 social network or chat room or trading venue, you will get some project tokens. If the project, or the chat room or whatever, takes off, those tokens will appreciate in value. It’s as though you are a shareholder in the web utilities you use. Imagine getting paid actual money to stare endlessly at your Insta account.

Levine says the good part of this idea is that it solves what is known as the “cold-start” issue that bedevils network businesses. Social networks only work if there are other people on the network, but once they work, they work brilliantly. But networks are not very useful for the first users, because they are not networking with anyone. Stands to reason, right?

Free tokens might help this problem because in the “bootstrapping phase”, you might not be getting much utility out of the network, but you will be getting free tokens, which might be worth something someday precisely because you signed on early.

This has actually been used before by a company called Helium. In February this year, the New York Times wrote about Helium under the headline, “Maybe there’s a use case for crypto after all.”