Why I’m Investing in CryptoKitties (Yes, CryptoKitties)

I was speaking at a blockchain group a few weeks ago, and all people could talk about were CryptoKitties.

“Can you believe people are paying $100,000 for a virtual cat?”

“They’ve hit $12 million in sales.”

“There’s a guy who’s making a full-time living trading CryptoKitties.”

In the math-oriented, male-oriented world of crypto investing, something as silly and frivolous as digital cats seems unbelievable and, frankly, kind of sacrilegious.

But 2018 will be the year of CryptoKitties. I’m predicting this will become an enormous fad, on the level of Beanie Babies or Pokemon Go, with a huge rise and a huge crash. In ten years, we will all say, “Remember CryptoKitties?”, smiling wistfully.

That said, CryptoKitties plays an enormously important part of the emerging world of altcoins, and this is exactly why it will take off like a cat confronted by a cucumber.

What Are CryptoKitties?

CryptoKitties are virtual cats, in the same way that Tamagotchis (remember those?) were virtual pets. But they are built on Ethereum, the blockchain technology that powers many of today’s altcoins and digital assets.

That sounds really dry, but look how they market CryptoKitties on their website:

Several things about this are brilliant, and worthy of a closer look, even for “sophisticated” investors.


My Eleven-Year-Old Was Instantly Charmed

First, they are making the blockchain accessible. Something in the human brain is hardwired to love cats, and they have taken this highly geeky, theoretical concept of the blockchain, and made it adorable. CryptoKitties is a blockchain/cat mashup.

My eleven-year-old, looking at the site, instantly wanted one. Who wouldn’t? Your own virtual cat, which you can buy and sell? Never mind there is a highly sophisticated 256-bit integer hashing algorithm going on behind the scenes to create a simulated genetic phenotype. All we can see is: breedable digital cats!

This is how we get blockchain to the masses. In this sense, CryptoKitties plays an important role: making this geeky stuff accessible to ordinary kids and adults. The kids are perhaps most important, since they’re the ones who will be living in the world of New Finance – but I expect plenty of stay-at-home moms to cash in on the CryptoKitties craze, just as they did with Beanie Babies.

Like Beanie Babies, I expect CryptoKitties to be a white-hot comet that flares up quickly, then drops to the earth, dark and silent. But during that brief, glorious period, the blockchain will enter the public consciousness. People will understand.

But CryptoKitties will sell for many times the valuation of Beanie Babies, because:

  • People won’t feel like they’re paying with real money;
  • The extreme hype cycle around cryptocurrencies;
  • The rapid increase in ether value (which will further fuel the valuation of CryptoKitties).


The Concept of a CryptoCollectible

There’s something else kind of genius about the CryptoKitties idea, which is the concept of a non-fungible token, or as they call it, a “cryptocollectible.”

When I saw that word, my head exploded.

To understand why this is such a big deal, consider the economic concept of fungibility, where units are interchangeable. If you have a dollar bill and I have a dollar bill, we can trade them: all dollar bills are equal.

Most altcoins and cryptocurrencies have been fungible: one bitcoin, for instance, is equal to every other bitcoin. But CryptoKitties are a non-fungible token, which means each one is unique.

Do you understand the genius of the term “cryptocollectible” from a marketing perspective? They’ve created a whole new category: expect crazy collections of copycat CryptoKitties.


Solving the Scalability Problem

Finally, CryptoKitties are forcing the Ethereum technology to improve. There are already so many new cats being bred and born that it is slowing down the Ethereum network.

In the early days of the Web, we had individual web servers that would sometimes get a massive surge of traffic and collapse under the weight of the requests. Eventually we developed “virtual servers” that could instantly scale for huge bursts of traffic. Not only did they solve the problem, virtual servers cost a fraction of dedicated machines.

CryptoKitties are forcing the Ethereum team to address scalability issues, in a way all the Initial Coin Offerings built on Ethereum have not. It gives you a sense of the CryptoKitties phenomenon to think that this is the application that’s slowing everything down.

I’m a believer that the world rewards those who are delivering the most value, and CryptoKitties are delivering enormous value in making the blockchain accessible, creating a new category of token, and forcing Ethereum to scale. That makes it worth a lot indeed.

When I say that I’m investing in CryptoKitties, I don’t mean that I’m putting my 401(k) into virtual cats. But will I spend a couple of bucks to buy a cat, and see what it’s all about? Absolutely. I will start meow.

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