My Big Cryptocurrency Pyramid Scheme
“I’m not a bitcoin maxi—I’m a bitcoin mostly.”
I like to say, “I’m not a bitcoin maxi—I’m a bitcoin mostly.”
That’s because cryptocurrencies are part of an evolving ecosystem. The individual technologies evolve, and the entire ecosystem changes, with new properties coming online daily.
So, even though bitcoin maximalists make really important points, they sometimes assume other technologies, even bitcoin, will remain static and that people shouldn’t value the properties of other so-called “shitcoins.”
But this is a conversation among crypto enthusiasts.
For the crypto-curious or completely uninitiated, I flip the script on all the fear, uncertainty, and doubt (FUD) they’ve probably heard. I say my investments are just a big pyramid scheme.
Lemme explain. But first, let’s talk about what the “crypto” industry is not: a pyramid scheme.
Sure, some founders and VCs mint tokens and/or get first dibs on a big stash. This is a form of seigniorage. I don’t love this approach because truly decentralized cryptocurrencies create different and arguably better dynamics that incentivize first movers without creating outsized market power for founders and VCs. Given the tokenomics of minting, certain tokens are perceived as going against a Decentralist ethos. Therefore, you have to decide how important decentralization is to you as a system property and whether you care that some founders might get rich in some measure through seigniorage.
Now, let’s talk about my investment pyramid scheme.
Think about a typical diversified risk portfolio—which is, and pretty much always has been, investor basics. As I see it, you want your crypto portfolio to be set up rather like a pyramid. The less-risky assets lie at the base, with increasingly risky or untested technologies going up to the pyramid's apex. As always, you must do your homework, evaluate risk, and use your best Bayesian reasoning to make this allocation.
For simplicity, divide your pyramid into three sections: base, middle, and apex. Because Bitcoin is the first, most time-tested, and most resilient censorship-resistant token, it carries the least risk. Sure, its scarcity sometimes makes it volatile, but that volatility has decreased over time with increased adoption. As HODLers (those who hold on to their tokens in times of volatility), we have seen Bitcoin rebound and stabilize on more than one occasion.
In the example graphic above, you can see how I arrange my cryptocurrency investment pyramid.
I start with Bitcoin because the tech is time-tested, decentralized, and censorship-resistant. It represents lower risk from my perspective. (However, I might put second-layer bitcoin solutions such as the Lightning Network in the next level because it is a more speculative aspect of the BTC ecosystem.)
As I move up, I invest in tokens with different properties, such as smart contracts, non-fungible tokens, or other capabilities that might trade risk for versatility. I used Ethereum and Cardano as examples that might go into the middle tier of the pyramid.
Finally, at the top are technologies that, while enormously promising, are more speculative. Holochain (HOT), for example, includes mind-blowing computer science that promises the security and decentralization of a blockchain but is built on a completely different species of technology.
Remember, though, this is just a snapshot. As the technologies evolve and get more market testing, you might determine this needs to be reshuffled. Indeed, your calculation of risk–or perhaps your deeper knowledge of each technology–might make your pyramid look different from mine. Otherwise, you can use this great investment pyramid scheme, too, as a general heuristic for your investment portfolio.
In addition to risk and market testing, you might include other dimensions, such as a technology’s potential for subversion. Indeed, at Underthrow.org, we explore innovations that promise not violent overthrow but rather ways to undermine or circumvent unjust authorities or corrupt incumbents.
That’s subversive investing, but that is a conversation that will have to wait for another day.
*Remember, none of the above is financial advice.* This article first appeared at AIER.
I do hold Bitcoin. But according to CoinMarketCap, there exist some 23,000 cryptocurrencies, with a total "value" of over $1 trillion. Even if we ignore all tokens ("value"-based, like the idiotic $690K Nyan Cat gif; utility-based; security-based, and now the so-called endowment-based Texan Token) and accept only coins on their own blockchain as having value, much of this remnant is still problematic. Though it's a "meme coin," Dogecoin runs on its own blockchain, so does it have value as a cryptocoin? What are the "fundamentals" for such coins – a share of South Sea stock (1720) or tulip bulbs (1637)? If the Regression Theorem of von Mises is right (and maybe for Bitcoin it's not), then none of these cryptocurrencies are money and exist only as speculative instruments.