Trees... and long-term investing
March 24th, 2022
Inspired by Böhm-Bawerk’s Jahresringe
Inspired by Böhm-Bawerk’s Jahresringe

The figure above captivated me while reading The Dao of Capital, a poignant name for a reader in the crypto space (and no, it is not about DAOs). The image is inspired by one shown in the book, which is subsequently devised from the original ideas of Eugen von Böhm-Bawerk, a notable Austrian economist and later Minister of Finance. It is used to illustrate his metaphor of a tree’s growth as representative of an economy. A crosscut analysis of a large tree trunk reveals several rings in a pattern of concentric circles. Every ring represents a year of the tree’s growth and resource allocation. The key concept here is that the tree in Figure 2 above will be weaker than the tree in Figure 1.

Why does this matter? Well, the image boils down to the concept of investing. There are two types of trees above, which are argued to be economies. Both have several layers of annual rings, representing invested capital. The outer most layer becomes finished goods, bark, as it sheds off to consumption. The difference, as one can see, is that Figure 1 has more rings than Figure 2, and Figure 2 has a big outer layer compared to Figure 1. As an economy, Figure 1 chose to invest capital throughout different maturity classes in a patient and less-direct manner. Every year a ring is added, but not everything is put into that ring as energy and resources must be saved for future rings. Figure 2, on the other hand, chose to put a lot into more short-term rings. Ring 1 in Figure 2 had the most invested in it and it will get much faster to becoming a fruit of investment than any other ring in both trees. However, the size of Figure 2’s trunk will be smaller than Figure 1 over the long term.

Confused or bored? I could understand that, but there is actually something very valuable behind all this.

Trees and Crypto Projects

So, why is Figure 2’s trunk smaller over time? Well, investments, capital, resources, all things needed to grow a ring of wood, have tradeoffs. A tree, just like a founding team, can allocate capital and resources to get results (bark) in the short, medium, and long term. To get more immediate results, they can deploy a lot into shorter-term objectives. To get longer term results, they need to be more thoughtful, work longer and harder for less in the short-term, and suffer the loss of certain benefits. This is a very tough tradeoff, especially in an environment where people playing on different time horizons are making a lot of money and getting a lot of attention right now. Some protocol or project is reaping the chunky layers of bark now, raising big funding, having high token inflation, speaking large on Twitter, etc. It is psychologically and strategically hard to operate in that environment. Add the fact that these markets are emerging and changing fast, and it kind of seems to make sense that one should spend and attract as much attention now to take advantage as a first mover.

However, note which trunk is larger… that of Figure 1. Additionally, it is the sturdier one as well. Intermediate rings act to reinforce each other, and this is an important point to note as it conveys that these rings have value, even though they are not the bark to be consumed yet. If you believe that your project truly can change the world, why would you try and direct resources to getting immediate results? Why kill the golden goose in the short to medium term, when with patience and hard work (and less benefits now), you can have a stream of golden eggs in the future? I would like to note that the question is a lot harder in the real world than it seems and I am understanding of objections to it in this volatile space and environment. That being said, the trunk in Figure 1 is larger though.

Let’s bring in a Web2 analogy. In my opinion, examples of Figure 1 are companies like Amazon. Bezos and his team were playing a different game — invest all profits in business lines (to the disdain of Wall Street quarterly earnings fans), lose money on experiments to make money in the future, take big bets and try new things, think about investments now yielding fruit in 5 years. These are snippets of the thinking style that was fomented there, and I believe it played a huge part in the company’s success.

The King of Books, Jeff Bezos in 1997
The King of Books, Jeff Bezos in 1997

Bolstering the tree analogy is the concept of compounding. Böhm-Bawerk also stated that capital structures are cumulative. Investments / capital allocation before leads to what comes after. Play the long-term game and the work and small wins will reinforce over time to become something much stronger and greater. Compounding is an easy word to throw around, but one much harder to achieve as it requires discipline and focus.

Going back to crypto, the projects that will really go about changing the world, the projects that have staying power and will generate tremendous value, are those that invest and allocate resources with long-term goals in mind. These days, nearly any project can launch a token, throw out a bunch of emissions for APY, have a couple of quick v1s, and achieve some form of market cap. When this ring becomes bark, however, what happens then? Other teams will build some things and create some value in the space, but then the vesting is up and it is time to go somewhere else. Rings 4 and 5 were the fattest and became bark. And then there will be those teams, contributors, and communities that will build for Rings 17, 23, 37… these projects will become protocols, which will become crucial infrastructure, which will touch our lives in many ways. These are the trees to watch, and ironically, will sometimes be trees that are ignored, disregarded, or objected against because lack of immediate results.

I’ll end by saying that it takes a lot of courage to grow a 5, 10, 30-year tree, even more so in an environment like crypto. A handful (relative to the eventual sample size) will do it though, and while time ticks on, their trunk will get larger and sturdier, outgrowing the forrest.

Disclosure: This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. Please always do your own research.Disclosure: This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. It does not represent any views from where the author is working — all views, opinions, and arguments are the author’s. Please always do your own research.

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