Recent Lecture — Digital Assets: Innovation, Opportunity, and Nonsense
Recently, I gave a lecture at a graduate program focused on innovation, technological disruption, and the impact on global industries and investment opportunities. My lecture focused on digital assets and attempted to draw distinctions between disruptive and substantial opportunities and hype, nonsense, and unsustainable business models. This is a quiz given to the students that reflects the main points raised in this lecture. For fun, I am including it here because it makes a series of fundamental points that I think are especially important, and the true-false construct conveys those points with clarity.
1. A closed-loop business has a set of unique product offerings but is an open platform available not only to customers but accessible to third parties or even competitors.
False. A closed-loop is only available to that company’s customers and is not open source.
2. A currency needs to be simultaneously a store of value, a medium of exchange, as well as a stable and well-understood value that is fixed for any reasonable duration.
True. A currency must have a stable predictable value and be a generally accepted medium of exchange
3. NFT contracts and other smart contracts on a decentralized digital platform are easily enforced if one party does not fulfil the terms of the agreement.
False. Contractual law is still uncertain about the enforcement of NFT and other digital contracts. They may be legally enforceable, but it is challenging and undetermined at this point.
4. Decentralized Finance enables digital ownership in a product or service to be distributed and exchanged to anyone anywhere on a decentralized blockchain platform.
True. A blockchain-based decentralized platform enables access to any product in a digital format from anywhere that has access to that decentralized digital platform.
5. Cryptocurrency, such as bitcoin and ether, represents a fundamental disruption to the finance industry and the exchange of value via a new form of global currency.
False. While it enables a digital settlement for goods and services or contractual payments, it is not an assumed exchange of fair value on a globally accepted basis. Its appeal is limited.
6. Extreme and frequent volatility, with no prospect of diminishing soon, will keep cryptocurrency from being adopted as a truly global currency replacing centrally bank-managed currencies such as the dollar and the euro.
True. While these cryptocurrencies may be an interesting speculative investment, they are not a stable store of value and will not replace central bank-managed currencies.
7. The blockchain software platform represents a disruptive form of sharing verifiable and inviolate data and information for a variety of information ranging from supply chains to smart contracts to financial securities.
True. Blockchain-based businesses and services enable verifiable tracking and inviolate data for users. It can be a truly disruptive technological innovation for industry.
8. Typically, the initial innovator within any industry is the one who creates a sustainable competitive advantage.
False. Innovation is not a business model. Quite typically the innovators do not establish a sustainable competitive advantage and therefore aren’t necessarily the surviving companies.
9. Governments and central banks are not needed for financial infrastructure, verifiable systems, property rights, and legal enforcement of contracts.
False. Governments enforce contracts, property rights, and legal rights. Central banks stabilize currency and enable predictable value and the verifiable exchange of goods and services for that value.
10. Formulas and well-known algorithms, such as the Black Scholes option pricing model, are good analytical tools, especially during the most extreme and volatile times in financial markets.
False. While these analytical tools can be good within a normal distribution, during the most extreme and volatile times these analytical tools tend to fail. One of the fundamental drivers of the 2008 financial crisis was the fact that these analytical tools had failed to value options and other derivatives properly.
11. Certain assets have inherent value, and their price is independent of supply and demand dynamics.
False. All prices are determined by the intersection of supply and demand. Essentially, there is really no such thing as inherent value of any asset. It is simply an agreed-upon value where supply meets demand.
12. Successful investing is predicting the future from a wide range of factors and being able to hone many influential qualities to the handful of metrics that make a difference and influence the outcome.
True. Unique opportunities come to those who understand the truly influential characteristics and metrics that influence any investment over the longer term. It is effectively predicting the future a little better than most.
13. Management and its ability to create effective teams that are creative and innovative, but maintain commercial discipline are the keys to superior performance in a successful business.
True. This is “The X Factor.” More than any other single factor, it determines success for extraordinary companies. Another way of saying this is no company is extraordinary without it.
14. Fast and slow thinking are indistinguishable, and the different systems of thinking are interchangeable when making important business decisions.
False. “Slow thinking” is the essential characteristic of successful investing and decision-making. Fast thinking is reactive and quick (like meme stock nonsense and Twitter knuckleheads). It has no place when making important decisions.