May 31, 2022

So you have $100. What can you invest in? Part II: Making Assets

Defi

9 min read

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In 1736, Franklin’s Pennsylvania Gazette printed an apology for its irregular appearence because its printer was “with the Press, labouring for the publick Good, to make Money more plentiful.” The press was busy printing money. — John Kenneth Galbraith

Perhaps the most interesting development in fintech has been the ability to make assets. Often, people feel as if they have missed big opportunities — real estate in the 70s, Microsoft in the 80s, Amazon in the 90s, Google, Apple, and so forth. The opportunity to invest early in assets that show remarkable increase has traditionally been rare. However, the ability to make assets at little to no cost means the opportunity to experience dramatic asset value increases is nearly universally available. Indeed, this development is so strange that it is often overlooked. Again, much of the focus has been on the technology underlying these new digital assets rather than the strangeness of being able to create them. Traditionally, one did not go to an investment broker and say, “I want to make an asset.” You could buy real estate, stocks, bonds or even art but investors didn’t create these assets. Fintech has made it possible not only to buy but to create digital assets that have market value. And for many small investors, these opportunities might just be greater than the traditional approach of buying assets.

Mining

https://commons.wikimedia.org/wiki/File:RIAN_archive_159553_Moscow%27s_Goznak_Printing_Factory.jpg

Many digital currencies can be “mined”. Much of the press has covered the technology of mining — which is quite complex — while ignoring the innovative financial element; you can create assets! (In this case, currencies). If you set up a print shop for US Dollars at home, you will get in significant amounts of trouble. However, if you set a mining computer at home and produce coins you are contributing to the whole cryptocurrency ecosystem and the coins are your payment for helping out. You truly can print money at home. Actually, blockchain networks really, really want you to print money at home. How great is that?

Pretty great. But can anyone do it? Does it not require huge investments in capital to get started? Can you do it with no more than $100 to spare? Yes and no. If you already have a computer then the theoretical cost of mining is simply the power you will use to mine. So depending on the power of your computer and the cost of electricity where you live, it might indeed be profitable to mine. Some currencies, like Bitcoin, take so much processing power that trying to mine it at home is hopeless (unless your home includes a massive array of super-powerful computers).

However, there are dozens of different cryptocurrencies that can still be mined with a reasonably powerful PC, including Ethereum. Cryptoload and other sites list which coins they think are most profitable for small scale miners. One of the easiest ways to get started is to join a mining pool. These pools are essentially mining cooperatives that treat all the member’s computers as one big mining machine and then split the value of any mined coins between users based on the computer power they have contributed. Assuming one has a computer, the cost to start is $0. Generally the pool will have an overhead fee so there is a cost deducted from the coins that are mined before they are distributed. One could even think of this as leveraging the capital value of your existing computer–a sunk cost since you already have the computer–to create an asset.

You can also set yourself up as a solo miner. In this scenario you simply download the required software directly to your computer and begin mining. There are tutorials that help you work through the process of configuring your computer for mining. While it is not exactly plug-and-play, with a little work you can begin solo mining for free. Predicting the returns on mining is quite tricky, particularly for small computers and off-beat coins like Shiba Inu. The efficiency of the software, the speed of computers, and the value of any coins mined are all highly variable. Yet, with effectively 0 cost of entry, a real opportunity exists for exploration and potential profit. Again, you are being invited to print money at home. That, ladies and gentleman, is definitely a significant financial innovation.

NFTs

New technology has made it possible to make digital goods that are verifiably unique and hence, like a painting by Monet, may gain value, in part, through scarcity. Non-fungible-tokens, NFTs, can be any digital good that is tokenized. Once it becomes a token, it can be sold on digital markets. What this means is that, in theory, anyone can create a work of art or other digital goods and turn it into a marketable asset. Significantly, the market for NFTs is growing rapidly and last quarter exceeded $14 billion in sales. Like mining, you are being invited to create assets.

Now you might say that anyone can create art in the analog world and sell it so how is this an investment opportunity rather than simply another outlet for art? In a narrow sense this is true. However, NFTs represent a real shift in the nature of digital goods. For instance, many NFT marketplaces give the creator the option of earning a percentage of any resale of a piece of art. What this means is that if the market value for one of your pieces increases, you would benefit from resale value. Unlike most of the history of art, the artist has an ongoing stake in their creation; it continues to exist as an asset for them. Indeed, the value extends to any intellectual good that can be digitized and hence opens a wide range of opportunities to invest in creating NFTs.

But can you participate with $100? Indeed you can. Currently, the most popular NFT marketplace, OpenSea, is hosted on the Ethereum network. Creating NFTs is free, but you pay a one time fee for setting up an account. The fee is variable depending on the Ethereum network gas fees, but having $100 in ETH should be enough to get you started, but just barely. After that, OpenSea takes 2.5% of each sale. Considering commercial galleries generally take 50% of a sale and often having hanging charges for shows, this is a refreshing rate. Other popular Ethereum based platforms are Rarible, SuperRare, Nifty Gateway, Foundation, and MakersPlace. Non-Ethereum marketplaces built on Solana, Tezos and Binance Smart Chain are also growing. The entire NFT ecosystem is evolving rapidly. While NFTs are highly speculative, the low cost of entry provides an opportunity for new participants to create potentially valuable assets with very low risk.

Play-to-Earn

Another new frontier opened for investing is play-to-earn games. The notion of making money off of the economic ecosystems of games is at least 20 years old. Traditional games like World of Warcraft, Eve-Online, and Elder Scrolls try to prevent players from buying and selling game assets, characters and gold for real world money. Play-to-earn games flip this around. They want you to earn assets in the game that can be sold for real world money. One of the most interesting applications of fintech has been the stunning rise in popularity of these types of games. (A note: the world of play-to-earn games is a very recent development and undergoing rapid evolution. The market space may look completely different in a year.)

One of the most popular play-to-earn games at the moment is Axie-Infinity. With 1.8 million daily players, it is by any measure a hit. However, it is Axie’s economy that sets it apart from traditional popular games. Currently, the Axie market place is doing about $25 million a day in trading volume — totalling more than $500 million in October of 2021. These volumes come from players trading with other players. “Axies” are characters that one can train, fight, and breed to produce more and better Axies which can then be sold to other players. There are also items and land that can be bought, won, and sold. So while one is playing, one is adding value to or creating new assets that can then be sold. The most popular play-to-earn games all follow this basic outline.

Can one play with $100? Well, that depends, and there are many variables. Let’s consider two of the most popular games — Axie-infinity and Gods Unchained. Axie Infinity requires a player to start with three Axies. At current market rates, this would cost somewhere between $600-$1000 so, seemingly, well beyond our $100 limit. However, Axie Infinity also has a scholarship system where you can be sponsored to play in exchange for part of the earnings you generate. In this way, one can start with $0. Axie Infinity is a high-value game with land parcels selling regularly in excess of $20,000. On the other extreme, a game like Gods Unchained is free to play. One can earn rewards without spending any money at all, though special rewards and advantages can be accessed by spending a few dollars in their newly opened market. However, the potential rewards on Gods Unchained are much smaller than Axie Infinity. There are many other games that fall somewhere in between these two extremes as far as cost to play and potential rewards. Nonetheless, the possibility of making a return is certainly there.

You can rightly ask if this isn’t more like a job than an investment — you are spending time to generate potential returns. The differences here are, on the one hand, you don’t know what your returns will be — they could be nothing or you could lose money. On the other hand, you can think of these games as more like the stock options corporate executives receive in their compensation packages. Rather than taking money, they receive assets that they hope will be worth more than if they had simply been paid in currency; assets whose value they in fact may be able to influence directly. If one plays Gods Unchained for a while and creates a powerful card, this is an asset that will potentially gain in value over the next year. Further, the in-game currencies are often traded on crypto markets so even the ‘pay’ is potentially an asset that may accrue value over time if the game continues to grow in popularity. As with NFTs, play-to-earn games are new and blur the lines between gaming, work, and investing. Given the global popularity of games and the long history of game economies generating value in the real world, it seems the world of play-to-earn is likely to grow significantly in the coming years. Whether any particular game succeeds is hard to predict, but fintech is currently transforming the computer gaming landscape.

Mining, NFTS and play-to-earn are all stunning innovations brought on by the combination of new technology and a re-thinking of financial models. Where fintech transformed traditional investing, one can justly argue that fintech has also opened up a new frontier in investing and speculation. It is one thing to be able to invest on the ground-floor of new opportunities, it’s quite another to be able to make the ground-floor itself. In this case, the hype has, if anything, been exceeded.

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