The final module, the final part of the course, has to do with the winners and losers. Before I do that, I need to talk about investing and DeFi. This is not a course about investing. This is a course about learning about the potential of this space and the mechanics of the space. But nevertheless, investing is important. We need people to invest. Investors might be buying a token and speculating, they might be actually investing in a company that is developing a protocol for the decentralized finance space. Investing is important and it really can't be ignored. I've got a number of points here. The first one is that this is no longer a niche space. This is mainstream asset class. If you think of the overall capitalization of the crypto complex, it is competitive with the largest stocks, like Apple and Microsoft. It's hard to make the case that in a diversified global portfolio, you wouldn't have stocks like that in your portfolio. If that's the case, it's really hard to make the case that you should ignore investments and crypto, but it is complex. This is a new technology, and let me go through a few insights. I say crypto, but crypto is not just one thing. If I was a speculator, there are very little reason for me to invest in a stablecoin because that's just linked to the US dollar. Maybe there's a reason to invest in a stablecoin and to get a savings rate associated with it. That's more like interest. In terms of gain or appreciation, it doesn't make as much sense to treat a stablecoin like you would treat a share of Facebook. Number 2, cryptos are difficult to value. We haven't actually talked about valuation. Stablecoins are easy to value, but how do you value something like Bitcoin or Ethereum? There's huge disagreement. Some people do this calculation for Bitcoins. Bitcoins is a new gold. Gold exists and if you add it all up, it's about ten trillion dollars. Twenty one million Bitcoin, has 400,000 a Bitcoin. Other people say, it's worth zero. It's a huge amount of disagreement. Ethereum actually, there's something happening in the Ethereum. You get a service out of Ethereum. You can run a program like AWS. You can run a program, but these are not easy to value. For investing, you need to take that into account, that there's widespread dispersion and terms of expectation. Number 3, you usually understand what you're investing in. I buy some Apple shares. I know their products. I've got an iPhone, might have a Mac, I know what they're doing in terms of iTunes and TV. I understand their business or to a large degree, but it's really challenging to understand in the space. Of course, you are multiple steps ahead of the average, given that you've got to this spot in the course. It is challenging. You need to understand. My students, we invest for educational purposes and portfolios of DeFi and no investment can be made unless the students completely understand what they're investing in. We have a number of funds running. I like this. That's a good lesson for you too. You need to understand exactly what you're investing in. Just don't join the bandwagon. Number 4 is not that much history. With stocks we've got data for the S&P from 1871. For gold, we've got millennia of data. The quality data in the space is from 2013. If you're doing quantitative analysis, it's very challenging because there's so little data. Number 5, a story is usually told that goes something like this, these cryptos are algorithmic, the money supply is algorithmic so is a reward given for new blocks in Ethereum and in Bitcoin, and that reward has nothing to do with the amount of money in the world or any country, money supply. It has nothing to do with the GDP of any particular country, it is just purely algorithmic. You would think that, well, that opens the possibility that these cryptos could be a great hedge, let's say for unexpected inflation. Will be where? Even though there's limited history, we can look back a little bit and look at consequential events. March 2020 there was essentially a panic in financial markets over the COVID-19 crisis. What happened in those markets? The stock market drops by 35 percent. Gold, the supposed safe-haven drops by over 12 percent. What happens to these cryptos that are theoretically just an algorithm not linked to any money, not linked to the stock market, not linked to GDP? Well, crypto is plunged by over 50 percent. What's happening here? What do I learn from that? It's just one event, but it's an important event. This was an event that we call in finance a risk-off event. Which means that you perceive the risk as increasing, you need to reduce the risk of your portfolio. How do you do that? You dump your stocks and you buy the safest thing possible, and that's a treasury bond. The price is that their treasury bond went up. You also dump other speculative assets like gold and cryptos. The lesson here is I think pretty simple, that it's naive to think that there's no correlation between the cryptos and other financial assets. There is a correlation. If you think that you should invest in these purely as a hedge, then you're likely going to be disappointed. They could be a partial hedge, but nevertheless. Even to play this a little further when the markets shifted after March and thought, well, maybe this COVID-19 isn't as bad as we thought there's vaccines on the way, what happened to the markets? Well, the stock market goes to an all-time high. Gold goes to its third-highest level in history. We know what happened to cryptos. Bitcoin rose to its all-time high. Again, the point I'm making is that there is correlation, you need to take that into account. What are the other insights here? I believe that too much attention in the media is paid to Bitcoin. It's maybe because people just don't understand the opportunities in the DeFi space. For investors and for people like you who are informed on DeFi, this presents a lot of opportunity. DeFi in particular in my opinion is a growth area and provides opportunities given it's difficult to understand. For those that understand it, they can figure out what looks good and what doesn't look good. Another point is something I've mentioned a number of times in the course, that this is a new technology and you have to expect that with any new technology, there will be people trying to take advantage of you. I don't know how many times I was asked to be an advisor to some new coin and when I started to ask them, well, why do you want to launch this coin? What is the usefulness of actually launching this coin? The answer was, "Well, we think it's going to go up in value." That's not a good reason. What is the coin actually doing? It needs to have a story, a narrative, whereby it adds value someway. So there's going to be a lot of people out there with a new technology, sometimes it's described as the wild west. Maybe that's a useful analogy. The buyer needs to be aware. If you think about what happens in terms of investment, you need to think about it in a number of different ways. One is you to speculate on the crypto so you hope it goes up in value. Maybe you take a lever position. If it does, you make a lot of money. If it doesn't, then you lose everything that you put up. There's also investment in governance tokens. These tokens we've talked a lot about, and these tokens for the main protocols have done really well. That's another approach where you look at a protocol, you like it, you think that it can expand and then you invest in a governance token. You actually become part of the governance and it's in your best interest to contribute because when you do and the value of the protocol becomes higher, then you will benefit from that. Another thing is you could go and invest in equity of certain DeFi startups. That might be difficult for a retail investor to actually do. But there's a number of initiatives to make what we call private equity, more available to the general investor. This is another possibility. Then the last way to invest is something we've talked about in terms of yield farming. That is basically, you can actually take a fairly low risk. Change your dollars into a token like USDC and instead of having those dollars sitting at a bank earning nothing or potentially losing, you can deploy the same amount of capital to a trusted, or let's say a high reputation protocol and earn a return that is much greater than a bank. These are the many different ways that you can think of using the space in terms of investing capital.
