Managing Capital
In theory, earning income isn't necessarily categorized as managing capital, since the latter implies one has already acquired the capital to manage.
But from a broader perspective and noticing this trend where the value of labor is gradually declining in monetary terms, managing capital could also encompass the acquisition of assets that generate returns beyond one's immediate labor input.
It's hearing Chris Burniske from Placeholder Ventures mention that we live in a capitalism-driven world that I'm reminded of how fundamental capital management is in financial prosperity.
This was coming from the backdrop that crypto in general has become a distribution mechanism for capital through new financial primitives and ownership models.
Now, when participants acquire this capital, what are the optimal strategies for growth and preservation? Or is it even possible to create standardized approaches in such a rapidly evolving space?
For myself, I have an intuitive or rather a basic understanding of capital management principles, but it's also a struggle because the cryptocurrency landscape introduced new paradigms that aren't easily understandable at face value.
The Evolution of Capital Management
Historically, capital management was reserved for the wealthy few who had significant assets to allocate across various investment vehicles.
The common individual's primary concern was exchanging labor for income, and perhaps minimal engagement in capital markets through employer-sponsored retirement plans.
The boundaries have blurred between the past and the present thanks to technological advancements that have both democratized access to financial markets and also created entirely new asset classes.
Arguably, cryptocurrencies represent the most significant innovation in this regard through enabling direct participation in network growth and value accrual with minimal barriers to entry.
Crypto as a Capital Distribution Mechanism
When Burniske speaks of living in capitalism, I think he also highlighted an important truth, which is that ownership of productive capital is a crucial aspect of wealth creation in today's economy.
In this context, productive capital means assets that generate ongoing income or appreciate in value without requiring proportional labor input.
The crypto ecosystem has pioneered novel distribution mechanisms with ownership elements embedded in them:
- Proof-of-work mining rewards.
- Token offerings (ICOs, IDOs, IEOs)
- Governance token distributions
- Protocol revenue sharing
- Airdrops to early adopters
- DeFi yield opportunities.
By far, protocol revenue sharing is my favourite, simply because it's actual value creation within an ecosystem rather than speculative positioning. Airdrops for early adopters is largely unpredictable.
But generally, each represents a method by which value flows to participants/contributors.
The Declining Value of Labor
Depending on how you view it, this troubling trend of the gradual erosion of labor's value relative to capital ownership has been an inevitable consequence of technological advancement.
Automation, artificial intelligence, and other technological forces have made sure that the returns of pure labor input continues to diminish for many segments of the workforce.
Of course, this isn't the main purpose for the creation of these innovations, it merely happens as an effect of the natural evolution toward systems that minimize friction.
When labor alone can no longer ensure financial security, the ability to acquire and effectively manage capital becomes the second—no, the only—viable path toward long-term financial independence.
Capital Management in the Crypto Space
Now, for those of us who have acquired crypto assets, be it through purchase, labor, or participation in network activities, the question of sustainable management has already crossed our minds, multiple times.
Also, I think for the most part crypto asset management remains largely experimental compared to traditional asset classes with decades of established practices.
On a broad view, some key considerations for effective crypto capital management could include:
Risk Management: Balancing exposure across different layers of the crypto ecosystem (Layer 1 blockchains, Layer 2 solutions, applications, etc.)
Yield Generation: Evaluating opportunities for capital productivity through staking, lending, liquidity provision, and other DeFi mechanisms.
Temporal Allocation: Determining time horizons for different positions, from short-term tactical trades to multi-year or decade-long thesis investments.
Security Practices: Implementing robust custody solutions to protect against technical and operational risks.
I view each of them as a skill in itself to develop and master through deliberate practice and continuous education. Spending more focus on risk management and temporal allocations given the current environment seems prudent.
I think as this space continues to reach maturation, an increasingly sophisticated landscape for capital management will also ensue. Crypto is inherently complex, in my view and sophistication is usually a byproduct of it.
Hopefully, it'll still more or less remain accessible to individuals without traditional financial backgrounds or significant starting capital to participate meaningfully and capture upside this new financial paradigm offers.
Thanks for reading!! Share your thoughts below on the comments.