We understand this given the short 13-year history of the underlying blockchain technology and its slow entrance into the general population's daily lives. The broader impressions, of wild trading speculation for quick riches and spectacular busts, reach far into the public consciousness.
In our view, however, the biggest mistake we could make is not having any exposure to explosive growth of the next generation of disruptive internet technology.
Our fund's investment in digital assets of just 0.5% of the fund's total value at the time the investments were made — half of which is in bitcoin and the other half in ether — is motivated by taking a foothold exposure in upcoming disruptive Web3-style foundational layers. The internet is evolving. The current form of internet we all use is based on a trust model dominated by few digital giants with centralized services, servers and software. In the current Web2 model, sites compete for users' attention for monetization of content. Payments are made through traditional payment channels, i.e., credit cards which take their own commissions. Process of monetization requires users to share their privacy data for data mining used to track users' behavior. If the product is free, then the user is the product.
By contrast, Bitcoin and Ethereum are based on a relatively new computing type called the blockchain. It is the foundational layer for Web3 and fundamentally changes the concept of trust. It utilizes peer-to-peer interactions, essentially minimizing the need of centralized platforms, intermediaries and trust authorities. Peer-to-peer interactions fundamentally alter how information flows, with users owning fragments of internet services through the ownership of tokens. Bitcoins and ethers are fungible tokens of exchange, while non-fungibles tokens, or NFTs, give users the ability to own objects, which can be art, photos, identities, land, mortgages, leases, etc. Our fund's investment has only been in the fungible bitcoins and ethers.
In essence, the future Web3 resides in cryptographic tokens, secured in decentralized blockchains that are separate and distinct from the operating models created by the big tech giants. Blockchains need cryptographic tokens to be maintained. The tokens are essentially a byproduct process of adding blocks to the blockchain. Bitcoin and Ethereum are two most popular layer-one blockchains and are maintained by respective tokens, bitcoin and ether. Any Web3 app using these blockchains will need the tokens to operate. This is the reason our pension fund invested directly in these tokens and not derivative investments.
The Web3 future is bright, even if mostly unknown. Similarly in the early 2000s we did not know that one day we would use phone apps to stay in a stranger's house or ride in a stranger's car. We are currently unfamiliar with the Web3 killer apps that have either not been invented yet, or have been invented and aren't popularly known. Simply put, we do not yet know the full potential of Web3.
We do know the development cycle for Web3 is already well underway. Enormous intellectual capital is being poured into the development of Web3.
Just as Dell Inc., Microsoft Corp., Alphabet Inc. and Meta Platforms Inc., formerly known as Facebook, evolved with bootstrap visions, it is reasonable to conclude that blockchain will not be the fad or fluke that some have deemed it. In fact, for those who are looking, Web3 adoption has been more rapid than the adoption of Web2, and we all know the integral place Web2 plays in our day-to-day life.
Given its enormous potential, our pension fund's investment committee believed it prudent to take foothold exposure in Bitcoin and Ethereum. The most conservative Web3 investment is these tokens, the fuel for blockchain. Bitcoin has a market cap of more than $440 billion. Even with its recent drawdown of over 50% year to date (70% from an all-time high), it is still bigger than Walmart Inc.'s $363 billion and Walt Disney Co.'s $192 billion market caps. Together, bitcoin and ethereum represent more than half the market cap of all digital assets.
Since 2011, bitcoin has been declared dead over 450 times in various news articles. Yet, even with recent market downturn, it has been one of the best-performing financial assets from 2011 to July 2022 (its latest crash) with annualized returns of over 254%. The Web3 is still in its infancy. Given its potential, having some exposure to the foundational blockchain protocols is warranted by patient, institutional, long-term investors.