Utility is a red herring, look for organic store of value
This article was first tweeted in short form on 9th Jan 2019.
Store of value properties is what gives crypto networks value, utility is overrated for the purposes of investment appreciation. Utility is a red herring for investors.
In the case of Bitcoin, its real utility is really just a bucket, it's a bucket to store value. Make no mistake that the majority of asset value in the world is derived from players parking value into an asset for storage. Whether that be a house, a lump of gold, or even, to a lesser extent, stocks.
To hit this home in crypto... the rise of ETH was NOT from utility. It was NOT from users buying ETH to get Gas to fuel smart contracts. It was from ICO token treasuries parking their funds in ETH as a store of value.
Unfortunately for ETH, the ERC20 contract that opened the pathway for ETH as a store of value was inorganic. It forced ETH as the token to raise funds. It seemed good to keep funds in ETH as ICO mania pushed values up as more and more projects parked their treasuries in ETH. Easy up equals easy down. Treasuries bailed ETH cascading it down.
Despite being a red herring, utility attracts usage. In a way, through the eyes of the investor, this utility is merely marketing exposure. It opens an opportunity for the network to be used as a store of value. But without solid store of value properties in the network, the network won't sustain high long term capital appreciation apart from short term noob fueled bubbles. Or what we saw with ETH.
What gives a network good properties for store of value? I like Murad Mahmudov's prioritised framework of:
(2) Credibility of fixed monetary policy
(3) Liquidity / Lindy Effect / Infrastructure / Ecosystem
(4) Governance / Adaptability / Community / Game Theoretic Robustness
I can rewrite this as:
(1) don't break on me
(2) don't cheat me in the future
(3) bring more money in
(4) look after the above
(1) (2) and (4) are often discussed. (3) is not deeply studied enough, these network effects are key.
No other crypto-asset has the liquidity, Lindy Effect and infrastructure close to Bitcoin. Ethereum is a clear second, but fails on (2).
Many projects try to bootstrap (3) by employing market makers to stimulate liquidity. They also market the impression of a growing ecosystem with MOUs of partnerships. This is all hot air. Look for organic growth, it's the hard yards that matter.
For example, an investor should be careful regarding organic liquidity versus inorganic liquidity. The former is a sign that real people are using the asset as a store of value, organic liquidity is a by-product of people entering and exiting the asset. A good way to check this is comparing on-chain volumes. Real entries and exits are reflected on the blockchain, market makers do not clear funds onto the chain. If the liquidity is organic, then it means you can exit when it's time to reallocate capital to other buckets. If it's inorganic, the market maker may quit and you're left high and dry.
(1) (2) and (4) are usually objective, (3) is often faked. Look deeply into (3) and make sure the network effects are true and here to stay. Look for organic store of value properties.