In today’s Exponential Investor:

  • The four speculative horsemen
  • The power of decentralised finance
  • Community and crypto: a potent combination for investors

Bitcoin is in a bear market.

At the time of writing it’s down 25% from its recent highs.

Source: Koyfin 

If you aren’t a crypto investor (or if you are, and are just used to the volatility) then why should you care?

I tend to see bitcoin as one of a number of bellwethers for the broader financial markets.

Along with Tesla, the ARK Innovation exchange-traded fund (ETF – a passive investment vehicle which, in this case, invests in “disruptive innovation”), and SoftBank, bitcoin has seen its price explode since early 2020, as investors have been worked up into a broad-based speculative frenzy.

Now, all four of these bellwethers have seen their price fall significantly. In the case of SoftBank, its share price has more than halved since May this year.

However, if you want to understand what’s going on in the world of crypto, you shouldn’t just look at the bitcoin price (as I’m often guilty of doing).

For example, some football clubs are now issuing club crypto tokens and selling them to fans. According to analysis by the BBC, sales of club tokens have amounted to around $300 million so far.

Twenty-four clubs, including eight of those the Premier League, have issued tokens.

Meanwhile, trouble is brewing in the alt-coin universe,.

Solana, known as the “Ethereum killer” due to its smart-contract capabilities (a digital contract written into code that executes once pre-specified conditions are met), had risen 17,500% this year.

However, it has also fallen about 30% from its peak back on 6 November, and it has been particularly hard-hit after the network was the target of a cyber-attack last week.

But the really interesting story is about a crypto network called Badger DAO…

The power of decentralised finance

Whatever your views on bitcoin’s price, it’s important to remember that we’re witnessing the technological disruption of traditional finance.

But wherever you look, people are developing complex technological solutions, using blockchain technology, in order to improve financial transactions.

Using bitcoin as a form of payment is one means of doing this. But I’d argue that “decentralised finance” has even more potential.

At the moment, you and I could transact by physically handing one another cash. Or if our banks had a relationship that allowed them to exchange funds on our behalf, then we could send money via our phones.

Here’s the key point: we are dependent on banks.

You might have heard about crypto replacing banks or helping to cut out intermediaries. That’s decentralised finance, or DeFi. DeFi is the term for peer-to-peer financial services in the crypto space.

Badger DAO, a decentralised autonomous organisation (DAO), is one of the leading examples of DeFi. Badger tokens are based on the Ethereum blockchain and aims to facilitate the use of bitcoin in DeFi.

Even though bitcoin is by far the largest cryptocurrency, it was difficult to borrow, lend, or “yield farm” (a crypto terms for generating interest on an asset) using DeFi. Badger DAO was created to address this shortcoming.  

Badger takes bitcoin and securitises them (i.e. it chops them up and replicates them) so that they can be used to generate yield in the DeFi system.

But earlier this month, Badger DAO’s website was hacked. The hackers made off with $120 million before the network could respond.

In response to the hack, Badger DAO issued this message:

You have taken funds that do not belong to you, but we are willing to work with you and compensate you for identifying this vulnerability in the systems. We are providing you with a direct line of communication to discuss a peaceful resolution without involving any outside parties. Contact us to discuss further and do the right thing on behalf of the community.

This is a really interesting response. Rather than approach the hackers in an adversarial manner, Badger DAO’s developers are looking to reconcile with them and use the event as a chance to improve the system.

And incredibly, after a large hack earlier in the year, the strategy of asking nicely for the money back actually worked!

When a platform called Poly Network was hacked, it lost around $600 million. The company posted a public letter to the hacker, appealing to their goodwill. And after a few public conversations online, the hackers eventually returned the funds.

Bitcoin has created more than just wealth. It is a flag around which many have gathered, which preaches a new financial doctrine: the concept of community.

It captures the feeling in societies across the globe that “we are all in this together” in the face of some an elite class of politicians and bankers, and their corruption and inflationary policies.

I find this so, so interesting. And I wonder if this tactic – appealing to hackers on the basis of community – will work again, this time for Badger DAO.

A rare opportunity in a powerful megatrend

The development of a powerful community around a breakthrough new technology is an incredibly powerful force. It reminds me of what we’re seeing in the energy transition. Early adopters are years ahead of the mainstream in terms of understanding and adoption.

As investors, keeping up with new technologies – and their potential impact – could be potentially lucrative.

By getting involved in the early stages of the financial revolution.

That’s why I’m always keen to hear Sam Volkering’s views on the world of crypto. As Southbank Investment Research’s resident expert on the topic, he knows a thing or two about how crypto and DAOs are set to reshape our financial system.

And later this week, Sam will be broadcasting a special update. He’ll be discussing a megatrend he has his eye on, and how investors can get involved.

If you’re keen to hear exactly how…

Sign up here.

All the best,

Kit Winder
Co-editor, Exponential Investor