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.

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 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.

commodities are wide-ranging and most commonly thought of as raw material building blocks that serve as inputs into finished products. For example, oil, wheat, and copper are all common commodities. However, to assume that a commodity must be physical ignores the overarching “offline to online” transition occurring in every sector of the economy. In an increasingly digital world, it only makes sense that we have digital commodities, such as compute power, storage capacity, and network bandwidth. While compute, storage, and bandwidth are not yet widely referred to as commodities, they are building blocks that are arguably just as important as our physical commodities, and when provisioned via a blockchain network, they are most clearly defined as cryptocommodities.

Historically, cryptoassets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of cryptoassets as currencies, but rather most are either digital commodities (cryptocommodities), provisioning raw digital resources, or digital tokens (cryptotokens), provisioning finished digital goods and services.

However, when we step back and take a longer-term perspective, bitcoin’s supply trajectory looks anything but linear (see Figure 4.2). In fact, by the end of the 2020s it will approach a horizontal asymptote, with annual supply inflation less than 0.5 percent. In other words, Satoshi rewarded early adopters with the most new bitcoin to get sufficient support, and in so doing created a big enough base of monetary liquidity for the network to use. He understood that if bitcoin was a success over time its dollar value would increase, and therefore he could decrease the rate of issuance while still rewarding its supporters.

We also refer to these as bitcoin’s digital siblings. As of March 2017, there were over 800 cryptoassets with a fascinating family tree, accruing to a total network value1 of over $24 billion.

For the first four years of Bitcoin’s life, a coinbase transaction would issue 50 bitcoin to the lucky miner. The difficulty of this proof-of-work process was recalibrated automatically every two weeks with the goal of keeping the amount of time between blocks at an average of 10 minutes.10 In other words, 50 new bitcoin were released every 10 minutes, and the degree of difficulty was increased or decreased by the Bitcoin software to keep that output time frame intact. In the first year of bitcoin running, 300 bitcoin were released per hour (60 minutes, 10 minutes per block, 50 bitcoin released per block), 7,200 bitcoin per day, and 2.6 million bitcoin per year. Based on our evolutionary past, a key driver for humans to recognize something as valuable is its scarcity. Satoshi knew that he couldn’t issue bitcoin at a rate of 2.6 million per year forever, because it would end up with no scarcity value. Therefore, he decided that every 210,000 blocks—which at one block per 10 minutes takes four years—his program would cut in half the amount of bitcoin issued in coinbase transactions.11 This event is known as a “block reward halving” or “halving” for short.

Long term, the thinking is that bitcoin will become so entrenched within the global economy that new bitcoin will not need to be issued to continue to gain support. At that point, miners will be compensated for processing transactions and securing the network through fees on high transaction volumes.

Beyond cryptocurrencies and cryptocommodities—and also provisioned via blockchain networks—are “finished-product” digital goods and services like media, social networks, games, and more, which are orchestrated by cryptotokens.

When bitcoin was launched, it had zero value in the sense that it could be used to purchase nothing. The earliest adopters and supporters subjectively valued bitcoin because it was a fascinating computer science and game theory experiment. As the utility of Bitcoin’s blockchain proved itself a reliable facilitator of Money-over-Internet-Protocol (MoIP),8 use cases began to be built using bitcoin, some of which now include facilitating e-commerce, remittances, and international business-to-business payments.

What people didn’t realize, including Wall Street executives, was how deep and interrelated the risks CMOs posed were. Part of the problem was that CMOs were complex financial instruments supported by outdated financial architecture that blended analog and digital systems. The lack of seamless digital documentation made quantifying the risk and understanding exactly what CMOs were composed of difficult, if not impossible.

what’s now clear is that Satoshi was designing a technology that if existent would have likely ameliorated the toxic opacity of CMOs. Due to the distributed transparency and immutable audit log of a blockchain, each loan issued and packaged into different CMOs could have been documented on a single blockchain. This would have allowed any purchaser to view a coherent record of CMO ownership and the status of each mortgage within. Unfortunately, in 2008 multiple disparate systems—which were expensive and therefore poorly reconciled—held the system together by digital strings.

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.

the developers are not the only ones in charge of procuring a cryptoasset; they only provide the code. The people who own and maintain the computers that run the code—the miners—also have a say in the development of the code because they have to download new software updates. The developers can’t force miners to update software.

Then there are the trading markets, which trade 24/7, 365 days a year. These global and eternally open markets also differentiate cryptoassets from the other assets discussed herein.

Similarly, when bitcoin, the first cryptoasset and therefore the crypto- analogue to the Dutch East India Company, was “issued” through the mining process, there was no market to transact or trade bitcoin. For much of 2009, there were hardly any bitcoin transactions, even though a new batch of 50 bitcoin was minted every 10 minutes. It wasn’t until October 2009 that the first recorded transaction of bitcoin for the U.S. dollar took place: 5,050 bitcoin for $5.02, paid via PayPal.3 This transaction was sent from one of Bitcoin’s earliest proselytizers, Martti Malmi, to an individual using the name NewLibertyStandard, who was trying to set up the world’s first consistent place of exchange between bitcoin and the U.S. dollar.

Over time, we expect increasing correlations (once again, either negative or positive) between cryptoassets and other asset classes, as overlap between the entities using these investments increases. The transition from an emerging asset class to a mature asset class involves being accepted by the broader capital markets.

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.

We now have tens of exchanges globally trading hundreds of millions to billions of dollars daily.

On January 6, 2017, the day after bitcoin hit an all-time high trading volume of $11 billion in one day and crossed the $1000-a-coin mark for the second time in its life, the People’s Bank of China (PBoC) announced it was investigating bitcoin trading on Chinese exchanges.

Grayscale Investments offers the largest capital markets vehicle with bitcoin exposure, clocking in at north of $200 million or roughly 1 percent of all bitcoin outstanding as of March 2017. Grayscale was established in 2013 by its parent company, Digital Currency Group (DCG).

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).

Theoretically, a better chip for mining is the graphical processing unit (GPU). As its name implies, GPUs are used to generate the graphics that appear on screens, but they are now also widely used for machine learning applications. GPUs are massively parallel processing units, meaning they can run similar calculations in parallel because they have hundreds or thousands of mini-processing units, as opposed to CPUs that have just a handful of processing units.

While the strength of Bitcoin’s mining network is legendary, most other cryptoassets are less daunting. If so inclined, mining within networks such as Ethereum, Zcash, and others is still open to enthusiastic and dedicated hobbyists, and none of these networks is dominated by ASICs (yet).

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.

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.

On August 18, 2008, Bitcoin.org, the home website for information on Bitcoin, was registered

Bitcoin, litecoin, monero, dash, and zcash fulfill the three definitions of a currency: serving as a means of exchange, store of value, and unit of account.

However, as we’ve seen, many other cryptoassets function as digital commodities, or cryptocommodities. These cryptocommodities include ether, storj, sia, and golem. Meanwhile, there are myriad cryptotokens for end-user-specific applications, such as augur, steem, singularDTV, or gamecredits.

It wouldn’t be until the summer of 2010 that a formidable place of exchange would come into existence

On January 5, 2017, bitcoin trading activity clocked in at over $11 billion and bitcoin broke through $1,000 a coin for the second time in its history

From these trends, we can infer that this declining volatility is a result of increased market maturity.

The computers involved in Bitcoin’s mining process take four pieces of data: a hash of the transactions for that block, the hash (identifier) of the previous block,3 the time, and a random number called the nonce. Different computers on the network take these four variables and increment the nonce, perhaps starting with a nonce equal to 0, then going to 1, then to 2, hoping that by changing this one variable the hash output will meet the necessary requirement of the number of starting zeros. The more nonces the miner can test, the more chances the miner will find a golden hash that meets the requirement. The rate at which new nonces can be tested is called the hash rate; it is the number of times per second a computer can run these four variables through a hash function and derive a new hash.

granddaddy of them all appeared: application-specific integrated circuits (ASICs). As the name implies, ASICs are application-specific, meaning that the physical hardware must be designed and manufactured with the application in mind. CPUs, GPUs, and FPGAs can all be bought generically and, with proper engineering, be applied to a specific purpose after the purchase. The physical layout of ASICs, on the other hand, needs to be etched into the chip at the semiconductor fabrication factory.

The most regulated exchanges, such as Bitstamp, GDAX, and Gemini, offer the fewest cryptoassets because they wait to ensure an asset is past a certain level of maturity before adding it to their platform. Other exchanges, such as Poloniex or Bittrex, add assets much earlier in their lives, so more aggressive or adventurous traders tend to use these platforms.

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.

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

In Figure 9.1, we see that there are five exchanges where placing a trade for 100 bitcoin (at the time, worth about $100,000) would not move the price more than 1 percent—and this was only for U.S. dollar-denominated order books. As can be seen in the upper-right tab, one can compare order books for different currency pairs, like the yuan, yen, euro, and so on.

Balancing the diversity of exchanges and trading pairs is important for the robustness of any asset, including cryptoassets. Learning from bitcoin’s reliance on too few currencies and exchanges early in its young life, we can now follow the trading pair diversity of other cryptoassets, especially with regard to fiat currency pairs. Fiat currency pairs are particularly important for cryptoassets because they require significant integration with preexisting financial infrastructures.

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

While we expect to see bitcoin become increasingly correlated—either positively or negatively—with other broadly used asset classes, as new cryptoassets are born, they will likely have a low to zero correlation with the broader capital markets. At best, what they will show is some form of correlation with bitcoin, as it is of the same asset class.

The mining process for bitcoin is a continual cycle of hashing a few pieces of data together in pursuit of an output that meets a predetermined difficulty level, mainly the number of 0s that the output starts with. We call this output the golden hash. Recall that a hash function takes data—for example the text in this sentence—and hashes it into a fixed-length string of alphanumeric digits. While the output of a hash function is always of fixed length, the characters within it are unpredictable, and therefore changing one piece of data in the input can drastically change the output. It’s called a golden hash because it bestows the privilege of that miner’s block of transactions being appended to Bitcoin’s blockchain. As a reward, that miner gets paid in a coinbase transaction, which is the first transaction in the block. Currently, that transaction delivers 12.5 bitcoin to the lucky miner.

Cold storage, on the other hand, means the machine that stores the cryptoasset is not connected to the Internet. In this case, a hacker would have to physically steal the machine to gain access to the cryptoassets. Some methods require that the machine storing the cryptoasset has never touched the Internet. Not once. While that sounds extreme, it is a best practice for firms that store large amounts of cryptoassets. It is not necessary for all but the most security-conscious investor.

Cold storage, on the other hand, means the machine that stores the cryptoasset is not connected to the Internet. In this case, a hacker would have to physically steal the machine to gain access to the cryptoassets. Some methods require that the machine storing the cryptoasset has never touched the Internet. Not once. While that sounds extreme, it is a best practice for firms that store large amounts of cryptoassets. It is not necessary for all but the most security-conscious investor. What does it even mean to store a cryptoasset? This refers to storage of the private key that allows the holder to send the cryptoasset to another holder of a private key. A private key is just a string of digits that unlocks a digital safe. The private key allows for the holder of that key to mathematically prove to the network that the holder is the owner of the cryptoasset and can do with it as he or she likes.24 That digital key can be placed in a hot wallet or in cold storage, and there are a variety of services that provide for such storage.

Paying to use Ethereum’s world computer—also known as the Ethereum Virtual Machine (EVM)—is reminiscent of when schools and libraries had shared computers that students could use.

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.

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

Currency, a somewhat more controversial asset class, also has a unique governance profile. First, a central bank controls its distribution, while the people of the country, global businesses, and international creditors often dictate the exchange rate and use of the currency (though a controlling nation can manipulate these arenas). Regulatory bodies vary by nation, and there are international regulatory bodies like the International Monetary Fund if the currency of a nation hits choppy water.

Cryptoassets adhere to a twenty-first century model of governance unique from all other asset classes and largely inspired by the open source software movement. The procurers of the asset and associated use cases are three pronged. First, a group of talented software developers decide to create the blockchain protocol or distributed application that utilizes a native asset. These developers adhere to an open contributor model, which means that over time any new developer can earn his or her way onto the development team through merit.

Bitcoin provides for a maximum of 21 million units by 2140, and it gets there by cutting the rate of supply inflation every four years.

Over time, next to zero bitcoin will be issued, but the aim is for the network to be so big by then that all contributors get paid a sufficient amount via transaction fees, just like Visa or MasterCard.

Speculative value is driven by people trying to predict how widely used a particular cryptoasset will be in the future. It’s similar to newly publicly traded companies, where much of the market capitalization of the company is based on what investors expect from it in the future. As a result, the multiple of sales at which the company is valued is much greater than the multiple of sales that a more mature company will trade at. For example, a young, fast-growing company with $100 million in revenue may be worth $1 billion, whereas a much older company that is hardly growing may have $500 million in sales and also be worth $1 billion.

Speculative value diminishes as a cryptoasset matures because there is less speculation regarding the future markets the cryptoasset will penetrate. This means people will understand more clearly what demand for the asset will look like going forward.

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.

Ethereum’s ether provides a study on how exchanges adding a cryptoasset can increase the diversity of the trading pairs used to buy the asset. If our hypothesis on the importance of fiat currencies in cryptoasset trading holds, then as an asset grows in maturity and legitimacy, it should have more diversity in its trading pairs, with particularly strong growth in fiat currencies being used to buy the asset.

As the use of bitcoin and cryptoasset exchanges have grown, there has also been the growth of insurance plans for exchanges. One such insurer is Mitsui Sumitomo Insurance, which offers loss protection to a number of exchanges.

While exchanges, by default, will store the assets they trade, that is not always the safest place to store the asset long-term. Cryptoassets are stored in either a hot wallet or cold storage. The hot in hot wallet refers to the connection to the Internet. A wallet is hot when it can be directly accessed through the Internet or is on a machine that has an Internet connection.

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.

With cryptoassets, much of the speculative value can be derived from the development team. People will have more faith that a cryptoasset will be widely adopted if it is crafted by a talented and focused development team. Furthermore, if the development team has a grand vision for the widespread use of the cryptoasset, then that can increase the speculative value of the asset.

As each cryptoasset matures, it will converge on its utility value. Right now, bitcoin is the furthest along the transition from speculative price support to utility price support because it has been around the longest and people are using it regularly for its intended utility use cases. For example, in 2016, $100,000 of bitcoin was transacted every minute, which creates real demand for the utility of the asset beyond its trading demand.

For example, in 1602 when the United Dutch Chartered East India Company (Dutch East India Company, for short) became the first company to issue stock,1 the shares were extremely illiquid. When first issued, no stock market even existed, and purchasers were expected to hold on to the shares for 21 years, the length of time granted to the company by the Netherlands’ charter over trade in Asia. However, some investors wanted to sell their shares, perhaps to pay down debts, and so an informal market for the stock (the very first stock market) developed in the Amsterdam East India House. As more joint-stock equity companies were founded, this informal location grew, and was later formalized as the Amsterdam Stock Exchange, the oldest “modern” securities exchange in the world.2 Despite the structure of the shares of the Dutch East India Company not changing much, their market liquidity and trading volumes changed considerably.

In December 2013, trading volumes averaged $60 million, whereas in December 2016 they averaged $4.1 billion.

Just as countries are governed, so too are assets. Typically, there are three layers of governance for assets of all kinds: the procurers of the asset, the people holding the asset, and a regulatory body or multiple regulatory bodies to oversee the behavior of the procurers and the holders. For example, a typical equity has the management of the underlying company, the shareholders of the company, and the SEC as a regulatory overseer.

Ethereum initially planned to issue 18 million ether each year in perpetuity. The thinking was that as the underlying base of ether grew, these 18 million units would become an increasingly small percentage of the monetary base. As a result, the rate of supply inflation would ultimately converge on 0 percent. The Ethereum team is currently rethinking that issuance strategy due to an intended change in its consensus mechanism. Choosing to change the issuance schedule of a cryptoasset from the plan at time of launch is more the exception than the norm, though since the asset class is still young we are not surprised by such experimentation.

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.

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).

Outside of proof-of-work, other consensus mechanisms exist, such as proof-of-stake (PoS). Proof-of-stake can be thought of as an alternative form of mining, one that doesn’t require lots of hardware and electricity, but instead requires people to put their reputation and assets at risk to help validate transactions.

Outside of proof-of-work, other consensus mechanisms exist, such as proof-of-stake (PoS). Proof-of-stake can be thought of as an alternative form of mining, one that doesn’t require lots of hardware and electricity, but instead requires people to put their reputation and assets at risk to help validate transactions. Logistically, proof-of-stake requires transaction validators to “stake” a balance of the cryptoasset and then attest to the validity of transactions in blocks. If validators are lying or otherwise deceiving the network, they will lose their staked assets. As the name implies, in “proving they have something at stake,” the validators are incentivized to be honest.

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

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?

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.

with a new cryptocurrency, it’s always important to understand how it’s being distributed and to whom (we’ll discuss this further in Chapter 12). If the core community feels the distribution is unfair, that may forever plague the growth of the cryptocurrency.

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

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.

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.

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?

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.

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.

Remember that by dividing the absolute returns9 by the volatility, we can calibrate the returns for the risk taken. The higher the Sharpe ratio, the more the asset is compensating investors for the risk.

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?

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.

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.

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

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.

Ripple also used trusted gateways as endpoints for users, and these gateways could take deposits and redeem debts in all kinds of asset pairs, including traditional fiat currency. This built off Fugger’s original chains of trust but on a global multi-asset scale. Routing a transaction through Ripple’s network was like sending a packet of information through the Internet, pinging amid connected servers.

While Litecoin, Ripple, and Dogecoin all added elements to the mix of what it meant to be a cryptocurrency, they did not provide the privacy that many early Bitcoin advocates yearned for. It is a common misconception, even for Bitcoin, that it is an anonymous payment network. Bitcoin transactions are pseudonymous, and since every transaction can be seen by any third party, there is a wealth of information for anyone who would like to pinpoint who the participants are. Inarguably, someone who wants to use a currency for illegal activity is better off using cash than bitcoin. With every transaction, bitcoin leaves an indelible digital mark in Bitcoin’s blockchain.

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.

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.