Bitcoin Investors Quotes

An intelligent investor sees an opportunity in dip than risk.

Cryptoassets, like gold, are often constructed to be scarce in their supply. Many will be even more scarce than gold and other precious metals. The supply schedule of cryptoassets typically is metered mathematically and set in code at the genesis of the underlying protocol or distributed application.

Standing for decentralized autonomous organization, The DAO was a complex dApp that programmed a decentralized venture capital fund to run on Ethereum. Holders of The DAO would be able to vote on what projects they wanted to support, and if developers raised enough funding from The DAO holders, they would receive the funds necessary to build their projects. Over time, investors in these projects would be rewarded through dividends or appreciation of the service provided.

When investing in cryptocurrencies, one must exercise extreme caution. My capital investment was locked along with all of my returns at a binary investment firm, which was the exact issue I was having. Though I genuinely think there are legitimate businesses you can invest in, the difficulty is how to know for sure before making a decision. It was almost like watching a movie as the whole thing played out for me when I fell for these con artists posing as investors. Before it happened to me, I was unable to believe that such things exist. But when it turned out that I couldn't withdraw my money, I started looking for a way to get it back. Fortunately, through recommendations from others, I was introduced to a recovery agent named Fastfund Recovery. When I discovered that the scammers' website had been taken down, Fastfund Recovery was such a lifesaver; they were able to access it and helped me get my money back. I can't be more grateful. You can catch up with them by email. Fastfundrecovery8(@)gmail com . w/a 18075007554

When reading the white paper, the first question to ask is: What problem does it solve? In other words, is there a reason for this cryptoasset and its associated architecture to exist in a decentralized manner? There are lots of digital services in our world, so does this one have an inherent benefit to being provisioned in a distributed, secure, and egalitarian manner? We call this the decentralization edge. Put bluntly by Vitalik Buterin, “Projects really should make sure they have good answers for ‘why use a blockchain.

It should be of interest to modern Keynesian economists, as well as to the present generation of investors, that although the emperors of Rome frantically tried to “manage” their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them.

The only way attackers can process invalid transactions is if they own over half of the compute power of the network, so it’s critical that no single entity ever exceeds 50 percent ownership. If they do, then they can perform what’s referred to as a 51 percent attack, in which they process invalid transactions. This involves spending money they don’t have and would ruin confidence in the cryptoasset. The best way to prevent this attack from happening is to have so many computers supporting the blockchain in a globally decentralized topography that no single entity could hope to buy enough computers to take majority share.

The case for bitcoin as a cash item on a balance sheet is very compelling for anyone with a time horizon extending beyond four years. Whether or not fiat authorities like it, bitcoin is now in free-market competition with many other assets for the world’s cash balances. It is a competition bitcoin will win or lose in the market, not by the edicts of economists, politicians, or bureaucrats. If it continues to capture a growing share of the world’s cash balances, it continues to succeed. As it stands, bitcoin’s role as cash has a very large total addressable market. The world has around $90 trillion of broad fiat money supply, $90 trillion of sovereign bonds, $40 trillion of corporate bonds, and $10 trillion of gold. Bitcoin could replace all of these assets on balance sheets, which would be a total addressable market cap of $230 trillion. At the time of writing, bitcoin’s market capitalization is around $700 billion, or around 0.3% of its total addressable market. Bitcoin could also take a share of the market capitalization of other semihard assets which people have resorted to using as a form of saving for the future. These include stocks, which are valued at around $90 trillion; global real estate, valued at $280 trillion; and the art market, valued at several trillion dollars. Investors will continue to demand stocks, houses, and works of art, but the current valuations of these assets are likely highly inflated by the need of their holders to use them as stores of value on top of their value as capital or consumer goods. In other words, the flight from inflationary fiat has distorted the U.S. dollar valuations of these assets beyond any sane level. As more and more investors in search of a store of value discover bitcoin’s superior intertemporal salability, it will continue to acquire an increasing share of global cash balances.

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I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper.”21

one of the most powerful use cases of blockchain technology was to inscribe immutable and transparent information that could never be wiped from the face of digital history and that was free for all to see. Satoshi’s choice first to employ this functionality by inscribing a note about bank bailouts made it clear he was keen on never letting us forget the failings of the 2008 financial crisis.

March 2012, a month before Charlie found his investors, the Federal Reserve had held a daylong conference about consumer-payment systems at which there was a lot of grousing about the fact that despite all the technological innovation going on in the world, the infrastructure for moving money around the country was still based on technology from the 1960s and 1970s. The Automated Clearing House, or ACH, which facilitated payments between bank accounts, was created in the 1970s and had not changed much since; this helped explain why bank transfers took at least a day to go through. For most Americans, the easiest and fastest way to send money to a friend or family member was still the old-fashioned paper check. This problem was not just in the United States. A week before New York Tech Day, the Canadian government announced the launch of a new digital currency effort, called Mint Chip, that it hoped would spur innovation in payments.

Such rapid changes in price are almost always fueled by mass speculation and not fundamental growth. Behavior changes slowly, and many of the use cases put forth by cryptoassets will require the mainstream to adapt to these new platforms. Speculators, on the other hand, move quickly.

Cheap credit often fuels asset bubbles, as seen with the housing bubble that led to the financial crisis of 2008. Similarly, cryptoasset bubbles can be created using extreme margin on some exchanges, where investors are effectively gambling with money they don’t have.

When Mt. Gox opened, bitcoin was worth less than $0.10, and just a year later it was worth over $10. While $10 may not sound like much, consider that in the period of a year bitcoin increased 100-fold, meaning that a $100 investment had turned into $10,000.

Historical Ponzi schemes require a central authority to hide the facts and promise a certain annual percent return. Bitcoin has neither. The system is decentralized, and the facts are out in the open. People can sell any time, and they do, and no one is guaranteed any return.

The Ponzi scheme is a specific and easily identifiably structure that isn’t applicable to Bitcoin but could be to some phony cryptoassets. While a truly innovative cryptoasset and its associated architecture requires a heroic coding effort from talented developers, because the software is open source, it can be downloaded and duplicated. From there, a new cryptoasset can be issued wrapped in slick marketing.

Millions of dollars poured into OneCoin, whose technology ran counter to the values of the cryptoasset community: its software was not open source (perhaps out of fear that developers would see the holes in its design), and it was not based on a public ledger, so no transactions could be tracked.

A new cryptoasset called OneCoin was met with much interest due to its promise of providing a guaranteed return to investors.

The swift action revealed the strength of a self-policing, open-source community in pursuit of the truth.

smell tests” are easy to begin with. First, do a quick Google search for “Is _______ a scam?” If nothing pops up, then check to see if the project’s code is open source.

As markets mature over time, there is more regulation on what information asset issuers must provide and by whom that information must be verified and audited. With cryptoassets, however, these standards are not yet in place.

Cryptoassets that have small network values are particularly susceptible to the cornering of their markets.

Cornering is also important to consider in crowdsales, especially if the founding team has given itself a significant chunk of the assets. While crowdsales will be further detailed in Chapter 16, the key takeaway for now is that if the founding team gives themselves too much of the assets outstanding, then they have immense power over the market price of the cryptoasset and this is potentially concerning.

A number of cryptoasset-based projects focus on social networks, such as Steemit4 and Yours,5 the latter of which uses litecoin. While we admire these projects, we also ask: Will these networks and their associated assets gain traction with competitors like Reddit and Facebook?

Any cryptoasset worth its mustard has an origination white paper. A white paper is a document that’s often used in business to outline a proposal, typically written by a thought leader or someone knowledgeable on a topic. As it relates to cryptoassets, a white paper is the stake in the ground, outlining the problem the asset addresses, where the asset stands in the competitive landscape, and what the technical details are.

Similarly, a cryptoasset service called Swarm City6 (formerly Arcade City) aims to decentralize Uber, which is already a highly efficient service. What edge will the decentralized Swarm City have over the centralized Uber?

Utility value refers to the use of the cryptoasset to gain access to the digital resource its architecture provisions and is dictated by supply and demand characteristics. For bitcoin, its utility is that it can safely, quickly, and efficiently transfer value to anyone, anywhere in the world.

anywhere in the world. The innovative investor might say: “OK, I understand that bitcoin can have utility as MoIP, just as Skype has utility as VoIP, but how does that translate to bitcoin being worth $1,000 a coin?” Bitcoin’s utility value can be determined by assessing how much bitcoin is necessary for it to serve the Internet economy it supports.

The velocity of money is the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period.

The velocity of a currency is calculated by dividing the Gross Domestic Product (GDP) for a certain period by the total money supply. For example, if the GDP is $20 trillion, but there are only $5 trillion worth of dollars available, then that money needs to turn over four times, or have a velocity of four, in order to meet demand on any given year. Currently, the velocity of the USD is a little north of 5.

For bitcoin, instead of looking at the “domestically produced goods and services” it will purchase in a period, the innovative investor must look at the internationally produced goods and services it will purchase. The global remittances market—currently dominated by companies that provide the ability for people to send money to one another internationally—is an easily graspable example of a service within which bitcoin could be used.

After a valuation analysis is done, or at the very least current value is contemplated, the best thing the innovative investor can do is to know and understand the cryptoasset developers and surrounding community.

In getting to know the community better, consider a few key points. How committed is the developer team, and what is their background? Have they worked on a previous cryptoasset and in that process refined their ideas so that they now want to launch another?

As much as these comments about premines and instamines can sound black and white, the reality is there may be appropriate reasons for different issuance models. Issuance models are evolving as developers sort through the cryptoeconomics of releasing cryptoassets to support decentralized networks.

a cryptoasset is in its early days and it’s not growing, then its future is likely not going to be bright.

One of the most important, but often overlooked, indicators of a cryptoasset’s ongoing health is the support of the underlying security system. For proof-of-work based systems, such as Bitcoin, Ethereum,1 Litecoin, Monero, and many more, security is a function of the number of miners and their combined compute (or hashing) power.

miners are purely economically rational individuals—mercenaries of compute power—and their profit is largely driven by the value of the cryptoasset as well as by transaction fees. Therefore, the more the price goes up, and the more transactions are processed, the more likely new computers will be added to help support and secure the network.2 In turn, the greater hardware support there is for the network, the more people will trust in its security, thereby driving more people to buy and use the asset.

more hash rate signifies more computers are being added to support the network, which signifies greater security. This typically only happens if the value of the cryptoasset and its associated transactions are increasing, because miners are profit-driven individuals. While hash rate often follows price, sometimes price can follow hash rate. This happens in situations where miners expect good things of the asset in the future, and therefore proactively connect machines to help secure the network.

As of March 2017, a Bitcoin mining machine that produced 14 terahash per second (TH/s) could be bought for $2,300. The idea of TH/s can be thought of as similar to a personal computer’s clock speed, which is often measured in gigahertz (GHz), and similarly represents the number of times a machine can execute instructions per second. It would take 286,000 of the aforementioned 14 TH/s machines to produce 4,000,000 TH/s, which was the hash rate of the Bitcoin network at the time. Hence, Bitcoin’s network could be re-created with a $660 million spend, which would give an attacker control of 50 percent of the network. Yes, 50 percent, because if the hash rate started at 100, and an attacker bought enough to re-create it (100), then the hash rate would double to 200, at which point the attacker has a 50 percent share.

because Ethereum is supported by GPUs and not ASICs, the machines can more easily be constructed piecemeal by a hobbyist on a budget.

hash rate is important, but so too is its decentralization. After all, if the hash rate is extremely high but 75 percent of it is controlled by a single entity, then that is not a decentralized system. It is actually a highly centralized system and therefore vulnerable to the whims of that one entity.

William Mougayar, author of The Business Blockchain, has written extensively about how to identify and evaluate new blockchain ventures and sums up the importance of developers succinctly: “Before users can trust the protocol, they need to trust the people who created it.

Developers have their own network effect: the more smart developers there are working on a project, the more useful and intriguing that project becomes to other developers. These developers are then drawn to the project, and a positively reinforcing flywheel is created.

CryptoCompare has sought to amalgamate developer activity and metrics to make it easier to compare the different cryptoassets. Figure 13.9 is a graph with a metric CryptoCompare has created called Code Repository Points,12 which they explain as follows: “Code Repository points are awarded as follows: 1 for a star, 2 for a fork (somebody trying to create a copy or just play with the code), and 3 for each subscriber.

Similar in difficulty to assessing developer support is assessing company support for a cryptoasset. Websites like SpendBitcoins.com16 inform visitors how many places accept a specific cryptoasset; a metric important for cryptocurrencies but not so much for cryptocommodities and cryptotokens.

CoinDesk provides some of this information as seen in Figure 13.13. Though, as we will address in Chapter 16 on ICOs, the trend in this space is moving away from venture funding and toward crowdfunding.

As a cryptoasset gains greater legitimacy and support, an increasing number of exchanges carry

As a cryptoasset gains greater legitimacy and support, an increasing number of exchanges carry it. As mentioned in Chapter 9, the last exchanges to add a cryptoasset are the most regulated exchanges, such as Bitstamp, GDAX, and Gemini. These exchanges have strong brands and relations with regulators that they need to protect, so they won’t support a cryptoasset until it has undergone thorough technological and market-based vetting.

Another good proxy for the increased acceptance of a cryptoasset and its growing offering by highly regulated exchanges is the amount of fiat currency used to purchase it.

Consider too, the number of addresses on a blockchain. For Bitcoin, an address is where bitcoin is sent, and therefore the more addresses, the more locations that are holding bitcoin. However, a company like Coinbase may have only a handful of addresses, which serve to store bitcoin for millions of users.

One valuation method we’re considering is to calibrate how much the market is willing to pay for the transactional utility of a blockchain. To gain this information, we divide the network value of a cryptoasset by its daily transaction volume. If the network value has outpaced the transactional volume of that asset, then this ratio will grow larger, which could imply the price of the asset has outpaced its utility. We call this the crypto “PE ratio,” taking inspiration from the common ratio used for equities. For cryptoassets we put forth that the denominator of valuation should be transaction volumes, not earnings, as these are not companies with cash flows.

it appears that bitcoin has a comfortable base when its network value is 50 times its daily transactional volume.

We believe smart contracts are better thought of as conditional transactions because they refer to logic written in code that has “IF this, THEN that” conditions.

In his blog post, Buterin mentions colored coins. These involve the marking of an address in Bitcoin with information beyond just the balance of bitcoin in that address. Further identifiers could also be appended to the address, such as information that represented ownership of a house. In transferring that bitcoin in that address to another address, so too went the marker of information about house ownership. In this sense, by sending bitcoin, the transaction also signified the transaction of property rights to a house. There are several regulatory authorities that need to recognize that transfer for this example to become an everyday reality, but the point is to show how all kinds of value can be transmitted through Bitcoin’s blockchain

Counterparty is a cryptocommodity that runs atop Bitcoin, and was launched in January 2014 with a similar intent as Ethereum. It has a fixed supply of 2.6 million units of its native asset, XCP, which were all created upon launch. As described on Counterparty’s website, “Counterparty enables anyone to write specific digital agreements, or programs known as Smart Contracts, and execute them on the Bitcoin blockchain.”7 Since Bitcoin allows for small amounts of data to be transmitted in transactions and stored on Bitcoin’s blockchain, it becomes the system of record for Counterparty’s more flexible functionality. Since Counterparty relies upon Bitcoin, it does not have its own mining ecosystem.

The reason Bitcoin developers haven’t added extra functionality and flexibility directly into its software is that they have prioritized security over complexity. The more complex transactions become, the more vectors there are to exploit and attack these transactions, which can affect the network as a whole. With a focus on being a decentralized global currency, Bitcoin developers have decided bitcoin transactions don’t need all the bells and whistles. Instead, other developers can either find ways to build atop Bitcoin’s limited functionality, turning to Bitcoin’s blockchain as a system of record and means of security (e.g., Counterparty), or build an entirely different blockchain system (e.g., Ethereum).

What is more interesting about Ethereum, however, is that the Ethereum protocol moves far beyond just currency. Protocols around decentralized file storage, decentralized computation and decentralized prediction markets, among dozens of other such concepts, have the potential to substantially increase the efficiency of the computational industry, and provide a massive boost to other peer-to-peer protocols by adding for the first time an economic layer.

By having no affiliation with “coin” in its name, Ethereum was moving beyond the idea of currency into the realm of cryptocommodities. While Bitcoin is mostly used to send monetary value between people, Ethereum could be used to send information between programs. It would do so by building a decentralized world computer with a Turing complete programming language.11 Developers could write programs, or applications, that would run on top of this decentralized world computer. Just as Apple builds the hardware and operating system that allows developers to build applications on top, Ethereum was promising to do the same in a distributed and global system. Ether, the native unit, would come into play as follows: Ether is a necessary element—a fuel—for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources).

Miners of Ethereum would be processing transactions that could transfer not just ether but also information among programs. Just as Bitcoin miners were compensated for supporting the network by earning bitcoin, so too would Ethereum miners by earning ether, and the process would be supported by a similar proof-of-work consensus mechanism.

from the people wagering on the outcome of events. The problem with a decentralized prediction market is that there’s no centralized authority on the outcome of events. Augur uses REP to reward people who report truthfully and penalize those who lie.

The company Augur seeks to provide a platform that allows users to wager on the results of any event, creating a market for people to test their predictions.

The Code Book: The Science of Secrecy from Ancient Egypt to Quantum Cryptography by Simon Singh.

While The DAO may have been a disaster, the concept of a decentralized autonomous organization is generalizable past this single instance. The innovative investor should expect to see similar concepts coming to market over the years with their own cryptotokens and should know that not all DAOs or dApps with cryptotokens are similarly shaky.

Augur is one of the clearest uses of cryptotokens, and its potential success could set the stage for even more implementations of crypotokens in the future.

2017 has been the year of ICOs. According to Bloomberg , ICOs have raised over $1.6 billion in 2017 alone. The explosion of ICOs is a result of the ease with which Ethereum permits the creation of new coins. With little more than an idea and a white paper, you can set up an Ethereum-based ICO and raise millions of dollars, circumventing the old-school fundraising channels of venture capital or seed funding from institutional investors.

It is clear that Gibraltar sees an opportunity and is making a play for itself as a virtual currency hub. Albert Isola, Gibraltar’s Minister for Financial Services and Gaming, said, “We continue to work with the private sector and our regulator on an appropriate regulatory environment for operators in the digital currency space, and the launch of this ETI on our stock exchange demonstrates our ability to be innovative and deliver speed to market.

Despite the relative youth of venture capital, many cryptoasset firms are now turning the model on its head. The disruptors are in danger of being disrupted. For the innovative investor, it’s key to realize that cryptoassets are not only making it easier for driven entrepreneurs to raise money, they’re also creating opportunities for the average investor to get into the earliest rounds of what could be the next Facebook or Uber. Welcome to the colliding worlds of crowdfunding and cryptoassets.

a blog titled, “Fat Protocols.” Monegro’s thesis is as follows: The Web is supported by protocols like the transmission control protocol/Internet protocol (TCP/IP), the hypertext transfer protocol (HTTP), and simple mail transfer protocol (SMTP), all of which have become standards for routing information around the Internet. However, these protocols are commoditized, in that while they form the backbone of our Internet, they are poorly monetized. Instead, what is monetized is the applications on top of the protocols. These applications have turned into mega-corporations, such as Facebook and Amazon, which rely on the base protocols of the Web and yet capture the vast majority of the value.

protocol layer must be directly monetized for the applications on it to work. Bitcoin is a good example. The protocol is Bitcoin itself, which is monetized via the native asset of bitcoin. All the applications like Coinbase, OpenBazaar, and Purse.io rely on Bitcoin, which drives up the value of bitcoin. In other words, within a blockchain ecosystem, for the applications to have any value, the protocol needs to store value, so the more that applications derive value from the protocol, the more the value of the protocol layer grows. Given many applications will be built on these protocols, a protocol should grow to be larger in monetary value than any single application atop it, which is the inverse of the value creation of the Internet.

the protocols themselves are not companies. They don’t have income statements, cash flows, or shareholders they report to. The creation of these foundations is intended to help the protocol by providing some level of structure and organization, but the protocol’s value does not depend on the foundation. Furthermore, as open-source software projects, anyone with the proper merits can join the protocol development team. These protocols have no need for the capital markets because they create self-reinforcing economic ecosystems. The more people use the protocol, the more valuable the native assets within it become, drawing more people to use the protocol, creating a self-reinforcing positive feedback loop. Often, core protocol developers will also work for a company that provides application(s) that use the protocol, and that is a way for the protocol developers to get paid over the long term. They can also benefit from holding the native asset since inception.

It’s best practice that an ICO also have a minimum and maximum amount that it plans to raise. The minimum is to ensure the development team will have enough to make a viable product, and the maximum is to keep the speculation of crowds in check.

The Howey Test is the result of the 1946 U.S. Supreme Court case, SEC v Howey Co, which investigated whether a convoluted scheme to sell and then lease tracts of land qualified as an “investment contract,” also known as a security. The Howey Test determines whether something should be classified as a security, even if it is referred to differently in an offering to avoid regulatory action

If an asset meets the following criteria, it will likely be considered a security: 1. It is an investment of money.25 2.   The investment of money is in a common enterprise. 3.   There is an expectation of profits from the investment

require restructuring of the current cryptoasset landscape. While most ICOs meet the first two conditions, the third condition is up for interpretation. Do investors buy into an ICO as an “expectation of profit,” or do they buy into an ICO to gain access to the ultimate utility that will be provided by the blockchain architecture? While the distinction may seem small, it can make all the difference.

produced a document called, “A Securities Law Framework for Blockchain Tokens.”26 It is especially important for the team behind an ICO to utilize this document in conjunction with a lawyer to determine if a cryptoasset sale falls under SEC jurisdiction

the majority of companies in the financial services space have opted for blockchain implementations void of cryptoassets. It is increasingly common for these implementations to be referred to as distributed ledger technology (DLT), which differentiates them from the blockchains of Bitcoin, Ethereum, and beyond.

Christensen outlines: Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use. Disruptive technologies like cryptoassets initially gain traction because they’re “cheaper, simpler, smaller.” This early traction occurs on the fringe, not in the mainstream, which allows incumbents like Mr. Dimon to dismiss them. But cheaper, simpler, smaller things rarely stay on the fringe, and the shift to mainstream can be swift, catching the incumbents off guard.

Ripple has been a popular startup for incumbents to work with, and some of them are creating projects that utilize its native asset, XRP. Incumbents such as Bank of America, RBC, Santander, BMO, CIBC, ATB Financial, and more use Ripple’s blockchain-based technology to achieve faster and more secure financial transactions. 15 If realized, these efforts could not only reward the companies that utilize Ripple but also potentially benefit Ripple’s own cryptoasset, XRP, which can be used as a bridge currency to help settlements on the Ripple network.

One of the more interesting recent consortiums was the Enterprise Ethereum Alliance. It went public in late February 2017, and its founding members include Accenture, BNY Mellon, CME Group, JPMorgan, Microsoft, Thomson Reuters, and UBS. 25 What is most interesting about this alliance is that it aims to marry private industry and Ethereum’s public blockchain. While the consortium will work on software outside of Ethereum’s public blockchain, the intent is for all software to remain interoperable in case companies want to utilize Ethereum’s open network in the future.

key feature that needs to be reinforced from Christensen’s quote is the need to “set up an autonomous organization.” Just setting up an innovation lab within a company is not a guarantee of success. These labs must be allowed to function as autonomous organizations, without the tunnel vision of existing business and profit models.

bitcoin and issued guidance on its tax treatment with IRS Notice 2014-21. Without detailing the fine print of the ruling,27 the basic message was that although bitcoin may be called a virtual currency, for tax purposes the IRS would treat it as property. For example, stocks, bonds, and real estate are also considered property.

IRS Notice 2014-21, which provides a bit more information on tax guidance related to bitcoin and virtual currency, we find an attempt at further clarification: Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.29 In this case, bitcoin is considered a “convertible” virtual currency.

some cryptoassets are commodities, this could open them up to different tax treatment than if they were considered solely as property. Commodities fall under the 60/40 tax ruling, meaning 60 percent of the gains on a commodity transaction are treated as long-term capital gains and 40 percent are treated as short-term capital gains. This is different from taxing stocks where profitably selling an equity after 12 months is classified as a long-term capital gain with a current tax rate cap of 15 percent. Selling prior to 12 months would be considered a short-term gain with the tax ramification based on an investor’s income bracket.

We’re in a Goldilocks period for cryptoassets, where the infrastructure and regulation has matured considerably, but most of Wall Street and institutional investors have yet to enter the fray.

Starting at the end of 2014 and for the first half of 2015, the Ethereum Foundation encouraged battle testing of its network,

Unlike most databases that rigidly control who can access the information within, any computer in the world can access Bitcoin’s blockchain. This feature of Bitcoin’s blockchain is integral to bitcoin as a global currency.

Every transaction recorded in Bitcoin’s blockchain must be cryptographically verified to ensure that people trying to send bitcoin actually own the bitcoin they’re trying to send. Cryptography also applies to how groups of transactions are added to Bitcoin’s blockchain. Transactions are not added one at a time, but instead in “blocks” that are “chained” together, hence the term blockchain.

The combination of globally distributed computers that can cryptographically verify transactions and the building of Bitcoin’s blockchain leads to an immutable database, meaning the computers building Bitcoin’s blockchain can only do so in an append only fashion. Append only means that information can only be added to Bitcoin’s blockchain over time but cannot be deleted—an audit trail etched in digital granite. Once information is confirmed in Bitcoin’s blockchain, it’s permanent and cannot be erased. Immutability is a rare feature in a digital world where things can easily be erased, and it will likely become an increasingly valuable attribute for Bitcoin over time.

Proof-of-work (PoW) ties together the concepts of a distributed, cryptographic, and immutable database, and is how the distributed computers agree on which group of transactions will be appended to Bitcoin’s blockchain next.

The computers—or miners as they’re called—use PoW to compete with one another to get the privilege to add blocks of transactions to Bitcoin’s blockchain, which is how transactions are confirmed. Each time miners add a block, they get paid in bitcoin for doing so, which is why they choose to compete in the first place.

Competition for a financial reward is also what keeps Bitcoin’s blockchain secure. If any ill-motivated actors wanted to change Bitcoin’s blockchain, they would need to compete with all the other miners distributed globally who have in total invested hundreds of millions of dollars into the machinery necessary to perform PoW. The miners compete by searching for the solution to a cryptographic puzzle that will allow them to add a block of transactions to Bitcoin’s blockchain.

The solution to this cryptographic puzzle involves combining four variables: the time, a summary of the proposed transactions, the identity of the previous block, and a variable called the nonce.

The nonce is a random number that when combined with the other three variables via what is called a cryptographic hash function results in an output that fits a difficult criteria. The difficulty of meeting this criteria is defined by a parameter that is adjusted dynamically so that one miner finds a solution to this mathematical puzzle roughly every 10 minutes.

The most important part of the PoW process is that one of the four variables is the identity of the previous block, which includes when that block was created, its set of transactions, the identity of the block before that, and the block’s nonce. If innovative investors keep following this logic, they will realize that this links every single block in Bitcoin’s blockchain together. As a result, no information in any past block, even if it was created years ago, can be changed without changing all of the blocks after it. Such a change would be rejected by the distributed set of miners, and this property is what makes Bitcoin’s blockchain and the transactions therein immutable.

Miners are economically rewarded for creating a new block with a transaction that grants them newly minted bitcoin, called a coinbase transaction, as well as fees for each transaction. The coinbase transaction is also what slowly releases new bitcoin into the money supply, but more on that later.

In the concluding paragraph of his foundational paper, Satoshi wrote: “We have proposed a system for electronic transactions without relying on trust.

Governments are good at cutting off the heads of centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”24 It’s clear from this quote that Satoshi was not creating Bitcoin to slip seamlessly into the existing governmental and financial system, but instead to be an alternative system free of top-down control, governed by the decentralized masses.

Nine days after this poignant inscription, the first ever transaction using bitcoin took place between Satoshi Nakamoto and Hal Finney, an early advocate and Bitcoin developer. Nine months later the first exchange rate would be set for bitcoin, valuing it at eight one-hundredths of a cent per coin, or 1,309 bitcoin to the dollar.29 A dollar invested then would be worth over $1 million by the start of 2017, underscoring the viral growth that the innovation was poised to enjoy.

After the network had been up and running for over a month, Satoshi wrote of Bitcoin, “It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust … I think this is the first time we’re trying a decentralized, non-trust-based system.