We are going to take a deep dive into exploring the concept of utility in relation to cryptocurrency investing. How do you assess and identify the most useful cryptocurrency projects out there? How do you determine whether a project is useful or useless?
One quick and easy way to assess the usefulness of something is to think about whether it solves a problem, whether it resolves a pain point that someone might have with something. For example, bed is allowing us to rest well and wake up in good mood with good energy.
You do not want to find crypto project that is just a little bit helpful, but you want to find one that solves something known as a “hair on fire” problem. The basic idea behind the “hair on fire” problem is when you have a problem that causes enormous pain for somebody that he is ready to pay whatever price to solve it.
This kind of solution leads to very little resistance. It’s hard to sell someone on something that they don’t really want or need. For instance, if I were to try and sell you on this external recorder right now, it’d probably be a tough sell for me because you might think, “What do I need this for? I’m not making YouTube videos.” However, if your head were literally on fire right now, and I had a bucket of water, that would be an easy sell. You’d be trying to take it off my hands because it’s such a massive, literal pain point for you.
Warning: Don’t be like Dave Letterman that cold not see the importance of Internet when Bill Gates was explaining to him why the Internet is a big thing
If you are not innovator or early adopter yourself, you need to find one, preferably who is into cryptocurrencies, and ask him why is this such a big deal? I understand that today this is nothing special, but why will it be? Just because it is not important now, it does not need that it will not be in the future. Ofc if it needs to be important today, but even more so in the future.
When it comes to cryptocurrency investing, if you want to find something that you can be confident is useful, you want to be solving what’s known as a “hair on fire” problem – an enormous problem that people have, and ideally a large number of them. Essentially, the formula for this is a huge amount of pain plus a huge number of people equals something very useful.
Essentially, you don’t want to look at crypto projects that solve problems that aren’t severe, interesting problems. You want to look at crypto projects that solve important problems, and the best way to think about an important problem is that it has to be a “hair on fire” problem. Somebody has to be desperate because it’s so much easier to sell something if someone’s desperate for a solution.
The result of this meme – solve a “hair on fire” problem – is that Y Combinator today have equity in startups worth $150 billion. This little, tiny idea of solving a “hair on fire” problem has captured insane value.
This is a really good meme, a really powerful idea. A lot of my ideas come from obsessively studying Venture Capital for a decade, and it works for them. There’s no reason it wouldn’t work in other parts of technology.
If you identify something that is solving “hair on fire” problem, you might be onto a winner.
Examples of ‘“hair on fire”’ Problems
You are now probably thinking, “I don’t know what kind of “hair on fire” problems are out there that cryptocurrencies could address.”
The big one is censorship-resistant money. Essentially, if you think about how much of a surveillance state the whole world is pretty much wrapped in these days, people view and judge your actions and the way you use your money. Think of the amount of discrimination that people in certain professions face like webcam models and sex workers. If they use services like PayPal, it is a matter of time when their account will be blocked and funds frozen. So, there’s an enormous demand out there for censorship-resistant money.
Another one is inflation-proof money. Crypto could potentially solve this. There are many countries in the world right now that are dealing with currency crises, the most extreme and dramatic of which is probably Venezuela. So, one problem cryptocurrencies could solve is allowing the Venezuelan people to store their value, store their savings in at least a disinflationary or deflationary currency, opposed to their highly inflationary bolivar.
There’s also a huge demand for private transactions online. You’ve got the dark market, which is pretty much all the naughty or questionable stuff in the world, estimated to be about a two trillion dollar market.
The darknet, which is the internet’s hidden side, is growing, and there will be a demand for private online transactions to avoid being tracked by the state or others. This creates a huge market for cryptocurrencies to address the issue of uncomfortable wealth.
Unfortunately, if you keep your money in a bank account, the bank or the state can seize it whenever they like. If you don’t believe this, or if you think it’s conspiratorial or worrying, ask the people of Cyprus about the Cypriot bail-in. You can Google international remittances to learn more about people around the world who typically get ripped off by companies that charge extortionate fees.
Cryptocurrencies could be a very successful and convenient workaround for those people, making it much cheaper for them to use cryptocurrencies than these services. If we think of fleeing tyrannical governments or any kind of crisis, cryptocurrencies are also a good way to take your wealth with you. You can’t take your real estate or gold bars with you, but you can easilly write some words on piece of paper or upload zipped file with password on cloud, i.e., the seed phrase. It’s a great solution for people in such situations.
Another important problem is that of the unbanked. I heard this statistic from Andreas Antonopoulos that there are currently about two billion people in the world who don’t have their own bank account. This means they not only don’t have a place to easily store their money, but they also don’t have access to conventional banking services. It’s very difficult for them to get something like a simple loan.
These are some of the hair-on-fire problems that affect literally millions, if not billions, of people in the world right now, and I believe that cryptocurrencies could help solve them.
But Remember To Ask This ONE Question
Let’s say that you identified a big problem, and you think you’ve potentially found a cryptocurrency that could resolve that. But there is one more key question, or one key factor to figure out, and that is: does this crypto that claims to solve this big “hair on fire” problem for people actually require a blockchain?
This is a really important question to ask because the thing to understand about blockchains (and this is going to apply to most cryptocurrencies as a whole because they use blockchain technology) is that blockchains actually really, really suck. All they essentially are big, enormously inefficient, really expensive, really slow databases. For 99% of tasks out there, a simple centralized database would be the way better option.
Because blockchains suck so much, the only times when blockchains are really justified is when you require censorship resistance. Because this is the one thing blockchains can offer that a standard centralized, let’s say, MySQL, simply cannot offer.
Whenever you have any kind of crypto that claims to solve a big problem, you have to ask yourself: Does this actually require censorship resistance, and thus actually require a blockchain? Because if it doesn’t, you need to stay away from it for the simple reason of having blockchain is because it enables immutability because of decentralized architecture.
Upon hearing that, you might be wondering, “Well, why is crypto and blockchain appear be the solution for everything? Everyone is representing blokchain as silver bullet that does everything better. Why is everything blockchain, like supply chain and healthcare? Why is it always brought up?”
And the simple answer is hype which allows cash grab or taking money from inexperienced investors. Because blockchain is a bit of a hot buzzword right now. It is an easy way of raising a huge amount of money. But actually, in more cases than not, blockchain is a terrible idea for implementing whatever business model anyone is thinking of.
Once again, the only reason you should ever have a blockchain in the first place is for censorship resistance. And if it doesn’t need that, then you should be highly, highly skeptical, to say the least, because there’s a half-decent chance that someone is trying to rip you off and take your precious money from you.
So just be incredibly mindful of that. Once again, identify a problem that people are having, ideally a “hair on fire” problem, and then ask yourself: does this thing actually require a blockchain? Does it require censorship resistance? If the answer is yes, great, carry on, proceed. If the answer is no, then, skip it. Don’t even try to go further into technology because it is in vain.
Maybe some day decentralized blockchains will be de facto way how Internet works, but until then, stay away from bad tech.
Regarding utility, there are three things worth asking. First, what problem is this cryptocurrency actually solving or claiming to solve?
Second, is this problem a big enough problem – “hair on fire” type of problem? If so, great! There’s potentially a large amount of value it can capture from doing so. It can serve a lot of people, and it’ll be easy to sell because there won’t be much resistance there if it is solving a big pain point for people.
And third, does this thing actually require a blockchain to do so, or in other words, does it require censorship resistance? If the answer is yes to all those things, great! You’re potentially onto a winner, and you can move on to adoption. Otherwise, you might want to be very, very skeptical at least.