One of the common questions asked is what is a better investment, HP or HBD? The fact this question is asked is a good thing. First, it shows Hive offers multiple options of investment. Second, there is a gamification element of strategically choosing between the two, all while everybody is given a fair and transparent opportunity to choose. In this post I would like to explore potential answers for this question. Discussing the Hive economics and relationship between various assets within the network economy may have benefits as well. Hive is a complex blockchain, and solutions it offers may even seem magical. This post is intended for larger audience beyond Hive as well for future reference. If covering the basics bore you please skip towards the middle/end of the post.
Hive blockchain is possible due to its native coin Hive. There is a necessity for a native coin to make a network decentralized, and economical benefits are just the positive side-effect. There is a need for an incentive mechanism to attract participants of the network and grow it. Bitcoin solves the incentives to run the network in a decentralized manner by providing miner rewards and allowing transaction fees. Hive as DPOS rewards witnesses or block producers with Hive coins for running the nodes. Instead of rewarding liquid Hive, witnesses received producer rewards in Hive Power. In value Hive and Hive Power are same. Except HP is locked up and not is not immediately available to sell. It only takes 13 weeks to fully power down the HP and convert to liquid Hive. Since conversion is made on weekly basis, we don't have to wait full 13 weeks to get some of the funds in liquid.
Hive as a liquid coin is useful. All Hive wallets come with awesome features like security, complete ownership, fast and free transfers. Hive itself can be great choice for payment systems, international transactions, conducting business, building communities, etc. There are communities who pay in Hive already. It is easy, it is convenient. Very easy transfer of value system in decentralized fashion. Nobody can confiscate the funds, delete the wallets, or steal the funds. All the owners need to do is be responsible for keeping private keys secure and not leaking anywhere. Multi-compartment wallets with dedicated keys make using Hive accounts/wallets more secure. For example posting keys are used for social activities, and active keys can be used for financial activities. Since a lot of activities on Hive are social, posting keys are used all the time. Exposing the posting key by accident or due to hacks or falling for phishing scams won't put funds in the wallet at risk.
So, yes Hive as a transfer of value coin is great. But it is better as Hive Power. As the name suggests converting Hive into Hive Power or in other words powering up, unlocks the true power of Hive. Unlike liquid Hive, HP gives its owners influence in the governance of the network, picking the witnesses that make up the consensus, social credit to convey ideas for the benefit of the chain and the network. Along with governance influence Hive Power gives its owners opportunity for financial gains. Immediate financial benefit for HP is HP starts earning some interest from overall Hive inflation. I believe it is around 2-3%. Correct me if I a wrong please.
Hive Power also gives an ability for owners to participate in rewards distribution for content creation activities. We all know this process as curating, or simply clicking upvote buttons for posts and comments. Clicking downvote buttons also influence the rewards distribution. Most common use is for upvotes. Ever since EIP was implemented, curators and authors share content rewards 50/50. If I am earning 10 Hive in curation rewards, that means authors are receiving 10 Hive as well. This is another way Hive Power can bring financial gains for its owners. There are accounts that choose not to participate in this activity for various reasons, but most do.
One of the ways to figure out the curation APR is using the tool developed by LeoFinance, hivestats.io. Hivestats is great to see recent rewards earned, but also we can see curation APR for an account. My curation rewards seems to be 8.98%. This number is usually 8-10%. Considering that the same amount is given out as rewards to authors, we can conclude HP has an APR of about 20%. If my curation APR is 9%, multiply this by 2, we get 18. Adding 2% from HP interest, we get 20%. It can be a little lower or a little higher.
Of course we don't get to keep all of 20%, as some of it is distributed to authors. We still get to keep at least 10%. The 10% distributed to the authors is our investment in the network itself. Most HP owners do not hold HP for the curation rewards or interest rewards. In general the strategy of this investment is: Hive is a revolutionary idea. It has great technology, awesome community, solves many of web2's problems. Once discovered by masses this will be huge. In other words the HP owners are long term investors who believe the benefits Hive offers will make the underlying coin Hive appreciate in price exponentially. Many of the long term investors wouldn't even consider selling their Hive for $1. At the current price, Hive going to $1 would mean 4x gains. That is not small. By comparison, 10%, 20%, 30% gains become negligible. Sharing rewards with authors is a small price to pay for the growth of the network. After all future gains and losses depend on the growth of the network. Of course there many other ways participants of the network contribute to the growth of the network. But that is a topic for another time. Bottomline is HP does earn about 20% is used in rewards distribution. Only some of it is reinvested back into the network.
The third native asset of the Hive blockchain is HBD or Hive Dollars. HBD stands for Hive Backed Dollars. As the name suggests it HBD is a stablecoin pegged to US dollars and is backed by Hive. This means 1 HBD holds a value of 1 USD. HBD can either be sold in the internal market or external exchanges or converted to $1 worth of Hive at any given time. Conversion is not as simple and quick. There are more details to it. But general idea is HBD can be converted to $1 worth of Hive, hence HBD holds the same value as USD. I know this is an oversimplification of what HBD is. But that's what it is. Perhaps I won't be able to convert 100 HBD to exactly 100 USD anytime I choose, but I am confident I can achieve this if I am not in a rush.
Hive Dollars use the same awesome feature of the Hive wallet: secure, complete ownership, fast and free transfers, etc. Hive Dollars are also liquid just like Hive coins. Hive Dollars may actually be a better fit for businesses, merchants, transfer of value, payments, gifts, payroll, etc. Because Hive Dollars have the same financial value as USD, it makes it easier for parties to agree on the value being exchanged. Utilizing Hive Dollars is like using the latest technology and all of its benefits while engaging with something that is familiar to all around the world. While Hive builds the future of the web and finance, Hive Dollars work as bridge to and from traditional web and financial systems.
HBD is a great as a medium of exchange, not necessarily as an investment. It is great as a personal bank. The ownership wallets provide gives the full control of the funds to the owners, and not the banks or other financial institutions who can block accounts, go bankrupt, or lose the funds in other ways. In addition to all of these awesome benefits, HBD can be used as an investment asset as well. That is thanks to Hive blockchains generous interests paid just for holding the HBD in the Savings. In addition to liquid wallet-compartment, Hive accounts/wallets have Savings-compartment. Just like checking and savings accounts banks offer, Hive's liquid and savings accounts function in similar fashion. Liquid is for daily use, savings is to save money that is not immediately needed. Savings also provide extra layer of security. Hive and HBD in savings is almost liquid. It only takes 3 days to move funds from Savings to liquid. By keeping HBD in Savings, owners get the benefit of earning 20% APR.
Unlike earning for HP, APR for HBD in Savings is not coded into the blockchain. Consensus witnesses decide what the current APR is. Each witness has parameter for APR that they can set to any value they deem is good the blockchain at any given time. Median of the APR from all consensus witnesses is registered as the current APR. While currently consensus is at 20% APR, this may change in the future. I think it is a good thing as well. Since HBD's value depends on USD. How USD doing overall in traditional economy matters. When inflation was high and USD has been losing its purchasing power, it made perfect sense to offer 20% APR for HBD. This way holding HBD would negate the purchasing power loss for HBD hodlers.
Now the question is which investment is better: Hive Power or Hive Dollars. There is no objective answer to this question. It is a question every individual owners who participates in Hive needs to decided for themselves. This adds an interesting layer of gamification in the network. Owners would have to constantly reevaluate their investment strategies. The simplest explanation of the differences in these two types of investments would be the analogy of stocks and bonds. While Hive Power may produce lower APR and is a riskier investment, it has no limit for the potential gains. Hive potentially can become $100 in price. Hive Dollars are capped at exactly $1. The only gains for Hive Dollars is 20% APR. It too has risks, but risks are so low, it is almost inconceivable that owners would lose significant portions of their original investment. Nothing is without risks. There are always risks. Question is how to determine our risk tolerance and balance rewards expectations.
My strategy is very simple. Hive Power is the main investment. Hive Dollars is a hedge. I go with 90/10 rule or goal. I would prefer to keep 90% of holding in Hive Power and 10% in Hive Dollars. If I didn't believe in the potential of this technology and the network, there would be no reason to be her or hold any Hive or Hive Power. Even if HP went to zero tomorrow, the journey itself and the effort to bring decentralized solutions to the web and being part of it is an invaluable experience. It is unlikely Hive would go to zero. Now if it did gravitate towards it for some reason, then the hedge strategy in HBD would become super useful. This would give an opportunity to obtain more Hive Power at low cost. But if all went as planned, and Hive keeps steady and continues to grow and appreciate in value, Hive Dollars would still be there earning passive 20% APR. By the way, if Hive were to go to zero, HBD would go to zero as well.
I would like to leave you with a final thought experiment I shared two years ago in my Case For A Hundred Dollar Hive when Hive was paying 12% APR for HBD in Savings.
12% annual interest rate on a stable coin that is pegged to USD, one of the strongest fiats in the world and the world reserve currency is not a small thing. Now consider I am an investment fund manager with $10 billion dollars under my control, and I want to allocate 10% of my funds to very low risk but high return asset like receiving 12% compounding interest annually. That means I have $1 billion dollars to invest in HBD. But the entire Hive network is billion dollars worth and it only has $24 million HBDs in circulating supply. Where am I going to get $1 billion dollars worth of HBD.
I know the secret that nobody knows, I can buy as many Hive coins as I want or are available in the market and immediately convert them to HBDs. Of course this would require a certain strategy, not to move the Hive prices too high too quick. Since I am only interested in HBD, what price I buy Hive doesn't matter. I will be converting every purchased Hive into HBD. So each USD worth of investment will retain its value in HBD. In fact, if planned my strategy properly I will end up buying my initial HBDs at lower prices and make quick profits from the beginning.
By the time I get to the point of spending all of $1 billion to buy Hive and convert to HBD, price of Hive will go so high that its market cap will be in tens of billions of dollars already. Once my colleagues get the word of what I am doing, they will find out this is a good strategy for them as well. They will allocate some of their funds too. And soon enough one Hive coin will be worth $100 and perhaps keep goin up higher, because many more fund managers would want to be in action as well.
It is not easy to imagine $100 Hive at this time. But it is within realm of possibilities. Of course, there are many other ways Hive can reach those high, not only via HBD. It obvious to me that Hive, Hive Power, and Hive Dollars play important roles in the success of Hive and benefits it bring to the world. I think we have been on the right path with making HBD stronger. I am sure we can do more, and am confident HBD and Hive will keep getting better.