Framing | Tuition vs Investment

This series has mostly been addressing Web3 from a vantage point of hope, appreciation about emerging technology, and what it might mean for the future of collaboration, governance, real estate, etc. We have not actually written much on basic cryptocurrencies as our focus and interest in the space is not primarily financial. There is no avoiding the fact, however, that blockchain technology uses tokenization, and cryptocurrencies are, for many, a financial investment opportunity. We have taken the approach of pioneers or settlers braving the frontier but there is no shortage of speculators, traders, and investors in the space. Both groups have had to spend and invest real dollars to engage in the space and both groups felt the pain this last week.

While what follows will be a bit of a reflection on the week's events in terms of cryptocurrencies as a financial investment and asset class, we wanted to begin by offering a frame that has been helpful to us as we have been learning to navigate the Web3 space. When we frame the space as an arena for investment we are tempted to take the posture of speculators, traders, or even sometimes gamblers. We are not gonna wag our finger about any of those approaches to the space, we are simply going to say that, for most of us, that approach can be quite taxing emotionally. While gains and losses are a natural eventuality of engaging in a tokenized ecosystem, which is what an economy basically is, we have found it far less unnerving when we approach the space as students.

Students pay tuition and with any dollars we invested into the space, we have considered it tuition money that is being spent on an education. We are investing in our familiarity and knowledge of the ecosystem, we are investing in learning the tools and pitfalls, we are investing in our ability to share our findings with readers like you, and what we have found is, each dollar spent “as tuition”  to buy an education does not return void. We are getting exactly what we set out to get. Then occasionally we get a bonus! Sometimes tokens increase in value, sometimes crypto pays early adopters as we saw with the Ethereum Name Service airdrop. Whether framed as investment or tuition, there have been a lot of lessons being learned this week among traders and settlers alike.

It’s been an absolute bloodbath in the cryptocurrency markets this week!

It isn’t just Ethereum BTW, Bitcoin, Solana, and basically every other cryptocurrency saw a pretty heavy dip this week. Of course it wasn’t just cryptocurrencies either, the stock markets have been seeing a pretty brutal selloff over the course of the week as well. There has been some pretty significant financial losses on just about every market and many have sustained substantial losses.

One very notable loss this week stands apart from all of the other dips in the markets. The complete crash of the Terra Luna stablecoin ecosystem. Briefly, Terra Luna is a two coin ecosystem that algorithmically pegs the trade value at a dollar for UST. Algo-stable coins are not like many other stable coins that are literally tied to US Dollars in a bank account somewhere. Many coins will mint stable coins that can be spent, borrowed, and traded all the while being backed by USD in the bank. One dollar in the account allows one stable coin that is pegged to the dollar to be minted. UST does not work that way. It is pegged but not backed. While stable coins are often seen as a way for crypto holders to flee to safety during a particularly volatile market, and while they are also often incentivized to do so by some very appealing interest rates, this week Terra Luna demonstrated a major vulnerability of algorithmically stabilized coins as the system completely crashed and in what seemed like a blink of an eye, lost 50+ billion in capital loss. In their efforts to stabilize they were forced to sell off substantial amounts of BTC which contributed to the plummeting Bitcoin price as well. There was a cascading effect of loss and panic and there was a very large price paid by many to learn this lesson about algo-stablecoins like UST.  While is is beyond the scope or ability of this article to fully flesh all of this out, Bankless released a very informative episode to help folks understand what was happening.

While it has been a rough week throughout the financial world and particularly in the crypto space, it’s sometimes helpful to zoom out and look at the macro trends of this relatively new alternative monetary system. It has been comparatively volatile and it has also been pretty consistently up and to the right when you pan back. Of course it is, as many have experienced this week, a risky place, a new frontier, and seriously not for the faint of heart. If you engage in the space as an investor you might see huge swings in your portfolio. Our advice is, be careful, only use money you can afford to lose, and approach the space as a student with tuition money rather than fancying yourself the wolf of wall street only to find out you were a sheep that had been fattened for the slaughter.

Budget tuition and invest in education. It’s just the smarter way to engage and far more fun and rewarding that way. And who knows, that might just pay dividends too.