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.

Is Paraguay next in line after El-Salvador to adopt crypto? Every Nation is now addressing Crypto as the world's digital currency, recognized wholly as a way for momentary transit. Of Course, the liberty of Crypto could not come without the euthanization of the worldly aristocracy. While this is a hot topic to debate, we can only see it growing out of the shell as an emerging province for the next stage of the internet we address as web 3.0. To read more about web 3.0 read- Why Web 3.0 needs more users than investors? Just after El Salvador, Paraguay might be the next nation to make a massive Bitcoin announcement, after it passed laws for Crypto Trading and Mining. El Salvador has fully legalized the tender accepting digital currency as a way According to reports, Paraguay is preparing to launch a large project that seems to include Bitcoin and PayPal. We have also learned that following the news stating the fact that Deputy of the Nation Carlos Antonio Rejala Helman indicated earlier this morning on his social media pages that the country would launch a major Bitcoin-related program this week. "As I said a long time ago, our country needs to advance hand in hand with the younger generation," he wrote. The time has come, our time. This week, we begin an important endeavor to showcase Paraguay to the rest of the globe!" Regardless of the lack of current information,

From August to October 2008, an unprecedented series of changes occurred: Bitcoin.org was registered, Lehman Brothers filed for the largest bankruptcy in American history, Bank of America bought Merrill Lynch for $50 billion, the U.S. government established the $700 billion Troubled Asset Relief Program (TARP), and Satoshi Nakamoto published a paper that founded Bitcoin and the basis of blockchain technology.

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.

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

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.

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.

two movements exploded in the blockchain technology space. One was the proliferation of new cryptoassets that supported new public blockchains, like Ethereum. These new public blockchains offered utility outside the realm of Bitcoin. For example, Ethereum’s goal was to serve as a decentralized world computer, whereas Bitcoin aimed to be a decentralized world currency.

The word blockchain was not mentioned once in Satoshi’s 2008 white paper.

Masters’s focus for blockchain technology in financial services is on private blockchains, which are very different from Bitcoin’s blockchain. Pivotal to the current conversation, private blockchains don’t need native assets. Since access to the network is tightly controlled—largely maintaining security through exclusivity—the role of computers supporting the blockchain is different.15 Since these computers don’t have to worry about attack from the outside—they are operating behind a firewall and collaborating with known entities—it removes the need for a native asset that incentivizes the build-out of a robust network of miners.

On the other hand, for Bitcoin to incentivize a self-selecting group of global volunteers, known as miners, to deploy capital into the mining machines that validate and secure bitcoin transactions, there needs to be a native asset that can be paid out to the miners for their work. The native asset builds out support for the service from the bottom up in a truly decentralized manner.

Bitcoin with an uppercase B refers to the software that facilitates the transfer and custody of bitcoin the currency, which starts with a lowercase b. • Bitcoin equals software. • bitcoin equals currency.

Bitcoin’s blockchain is a database that records the flow of its native currency, bitcoin.

Bitcoin’s blockchain is a distributed, cryptographic, and immutable database that uses proof-of-work to keep the ecosystem in sync. Technobabble? Sure. But impenetrable technobabble? No.

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.

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.

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.

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.

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.

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.

In comparing bitcoin to the FANG stocks, we observed that bitcoin had the highest volatility but also the highest returns by far. Interestingly, its Sharpe ratio was not just the highest but significantly so. Bitcoin compensated investors twice as well for the risk they took than Facebook did and 40 percent better than Netflix, its closest contender

The second movement that exploded on the scene questioned whether bitcoin, or any cryptoasset, was necessary to get the value out of blockchain technology.

A private blockchain is typically used to expedite and make existing processes more efficient, thereby rewarding the entities that have crafted the software and maintain the computers. In other words, the value creation is in the cost savings, and the entities that own the computers enjoy these savings.

Public blockchains are not so much databases as they are system architectures spawned from the bottom up to orchestrate the creation of globally decentralized digital services. Over time, miner compensation will shift from the issuance of new bitcoin to transaction fees, and if global adoption is great enough, then transaction fees will be sufficient to sustain miners.

It is common to compare newly created blockchains with Bitcoin’s because Bitcoin’s blockchain is the longest standing point of reference.

Bitcoin has done something arguably more impressive than Uber, Airbnb, and LendingClub. Those companies decentralized services that were easily understandable and had precedent for being peer-to-peer.

Currency originally came about to facilitate trade, allowing society to move past barter and the double coincidence of wants. It has evolved over time to be more convenient, resulting in its present paper state. Inherently, that paper has little value other than the fact that everyone else thinks it has value and the government requires it be accepted to fulfill financial obligations. In that sense, it is a usefully shared representation of value.

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.

While the Thiel Fellowship was an indication of what was to come for Buterin, $100,000 wasn’t enough to sustain his team. To that end, from July 23, 2014, to September 2, 2014, they staged a 42-day presale of ether, the cryptocommodity underlying the Ethereum network.16 Ether was sold at a range of 1,337 to 2,000 ether per bitcoin, with 2,000 ether per bitcoin on offer for the first two weeks of the presale and then declining linearly toward 1,337 ether per bitcoin in the latter half of the sale, creating momentum by incentivizing people to buy in at the beginning. Overseeing the legal and financial nuances around this sale was the newly created Ethereum Foundation headquartered in Zug, Switzerland.

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.

In addition to the 60 million ether sold to the public, roughly 6 million was created to compensate early contributors to Ethereum, and another 6 million for long-term reserves of the Ethereum Foundation. The extra allocation of 12 million ether for the early contributors and Ethereum Foundation has proved problematic for Ethereum over time, as some feel it represented double dipping.

With the money they raised, the Ethereum team was also able to test the network before launch in a way that Satoshi and his small group of supporters were not able to. Starting at the end of 2014 and for the first half of 2015, the Ethereum Foundation encouraged battle testing of its network, both in a grassroots bug bounty program and in formal security audits that involved professional third-party software security firms.

Ethereum’s network with its underlying blockchain went live on July 30, 2015. While much development energy had gone into creating the Ethereum software, this was the first time that miners could get involved because there was finally a blockchain for them to support. Prior to this launch, Ethereum was quite literally suspended in the ether. Now, Ethereum’s decentralization platform was open for business, serving as the hardware and software base for decentralized applications (dApps). These dApps can be thought of as complex smart contracts, and could be created by developers independent of the core Ethereum team, providing leverage to the reach of the technology.

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.

To explain how a dApp works, we’ll use an example from the company Etherisc, which created a dApp for flight insurance to a well-known Ethereum conference. This flight insurance was purchased by 31 of the attendees.23 Figure 5.1 shows a simplified diagram. Using Ethereum, developers can mimic insurance pools with strings of conditional transactions. Open sourcing this process and running it on top of Ethereum’s world computer allows everyday investors to put their capital in an insurance pool to earn returns from the purchasers of insurance premiums that are looking for coverage from certain events. Everyone trusts the system because it runs in the open and is automated by code.

Since the launch of Ethereum, a near endless stream of dApps have been released to run on it, many of which have their own native unit. We refer to many of these dApp native units as cryptotokens, while others refer to them as appcoins. A dApp with its own native cryptotoken will use ether as a cryptocommodity to pay the Ethereum network to process certain dApp transactions. While many dApps use a cryptotoken, the native units of some dApps should be classified as a cryptocommodity layered on top of Ethereum,

The difference boils down to whether a raw digital resource is being provisioned (cryptocommodity) or if the dApp is providing a consumer-facing finished digital good or service (cryptotoken).

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.

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.

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.

Buterin and those involved with The DAO and Ethereum immediately began to address the hack. The situation was problematic, however, because Ethereum was a decentralized world computer that provided the platform for dApps to run on. However, it did not promise to audit and endorse each application.

Cryptoassets have near-zero correlation to other capital market assets. The best explanation for this is that cryptoassets are so new that many capital market investors don’t play in the same asset pools. Therefore, cryptoassets aren’t dancing to the same rhythm of information as traditional capital market assets, at least not yet.

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.

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.

Ripple is a cryptocurrency created in 2004 by Ryan Fugger, a web developer from Vancouver, British Columbia. Work on the project actually began before Satoshi and Bitcoin,21 when Fugger was searching for a way to allow communities to create a system of money out of chains of trust.

Ripple’s technology did several new things. It didn’t have miners. Instead it utilized a consensus algorithm that relied on trusted subnetworks to keep a broader decentralized network of validators in sync. That’s enough to confuse any innovative investor. What’s important to recognize is that Ripple’s consensus algorithm relied on trust of some sort, which was vastly different from Bitcoin’s proof-of-work design that assumed anyone could be a bad actor.

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.

this is where the Ripple team ran into contentious territory, even if the concept was born of good intentions. Since there was no mining process, there was no means to distribute XRP. Instead, 100 billion units of XRP were created and initially held by Ripple Labs (at that time, OpenCoin). While there was, and still is, intent to distribute all this XRP to seed use, as of writing the majority of XRP is still under the control of Ripple Labs.

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.

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.

The most defining feature of Monero is its use of ring signatures, a cryptographic technology that had been evolving since 1991.55 Monero’s ring signatures are best explained in the context of Bitcoin. In Bitcoin, to create a transaction, a known individual signs off on the balance of bitcoin he or she is trying to send. In Monero, a group of individuals signs off on a transaction creating a ring signature, but only one in the group owns that monero.

While many are suspicious of such privacy, it should be noted that it has tremendous benefits for fungibility. Fungibility refers to the fact that any unit of currency is as valuable as another unit of equal denomination. A danger for bitcoin, especially for balances known to have been used for illegal activity, is that if an exchange or other service blacklists that balance, then that balance becomes illiquid and arguably less valuable than other balances of bitcoin. While subtle, losing fungibility could be the demise of a digital and distributed currency, hurting the value of all units, not just the ones used for illegal activity. Fortunately, this is one problem that Monero does not have to deal with.

Dash, however, got off to a rocky start. Instead of a premine, it had what is called an instamine, where 1.9 million coins were created in the first 24 hours. Considering that three years later, in January 2017, there were just north of 7 million coins, this was a significant error that drastically benefited the computers that supported the Dash network in the first 24 hours, notably Duffield himself.

In some ways, cryptocommodities are more tangible in value than cryptocurrencies. For example, the largest cryptocommodity, Ethereum, is a decentralized world computer upon which globally accessible and uncensored applications can be built.

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.

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.

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

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.

Human ingenuity often surfaces when it’s most needed, and now, a new technology is emerging that returns to the decentralized ethos of the original Internet with the potential to revolutionize our computational and transactional infrastructure: blockchain technology. Every second, millions of packets of information are transacted between humans and machines using the Internet, and blockchain technology is forcing us to rethink the costs, security, and ownership of these transactions.

Blockchain technology came from Bitcoin. In other words, Bitcoin is the mother of blockchain technology. Bitcoin, with a capital B, is a platform that carries upon it programmable money, known as bitcoin with a lowercase b. The technological foundation to this platform is a distributed and digital ledger referred to as a blockchain. In January 2009, when Bitcoin was first released, it embodied the first working implementation of a blockchain the world had seen.

Since then, people have downloaded the open-source software that is Bitcoin, studied its blockchain, and released different blockchains that go far beyond Bitcoin. Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.

Many startups are eyeing these middlemen with the oft-flickering thought that has been credited to Amazon’s Jeff Bezos: “Your fat margins are my opportunity.

Our life savings, and that of our heirs, could be entirely intangible, floating in a soup of secure 1s and 0s, the entire system accessed through computers and smartphones.

The native assets historically have been called cryptocurrencies or altcoins, but we prefer the term cryptoassets, which is the term we will use throughout the book.

Microsoft provides Blockchain as a Service (BaaS) for developers within its Azure cloud platform.

Not all of the 800 existing cryptoassets are currencies.

At the risk of overgeneralizing, private blockchains are backed by incumbents in their respective industries, while public blockchains are backed by the disruptors.

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.

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.

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.

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.

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.

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.

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.

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).

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 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.

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.

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.

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.

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).

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.

While many cryptoassets are priced by the dynamics of supply and demand in markets, similar to more traditional C/T assets, for some holders of bitcoin—like holders of gold bars—it is solely a store of value. Other investors use cryptoassets beyond bitcoin in a similar way, holding the asset in the hope that it appreciates over time. Therefore, one could make the case that cryptoassets are like precious metals in that they belong to two superclasses of assets.

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.

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.

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.

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

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

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.

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.

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.

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.

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

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.

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

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

In addition to the developers and miners, there is a third level of governance among the procurers: the companies that offer services that interface between the cryptoasset and the broader public.

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.

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.

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.

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.

China was responsible for over 90 percent of all bitcoin trading volume worldwide, and now the PBoC was placing restrictions on this activity.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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

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.

Another great resource is podcasts, but these generally take time to sift through. I think the best all-around podcast comes from the heavyweights at Andreessen Horowitz (stylized as “a16z”). The a16z podcast has become a true force in understanding any given sector through interviews with thought leaders and great entrepreneurs in their space. I began to develop an interest in the bitcoin blockchain protocol, how it works, and if a blockchain network independent of bitcoin (or any other currency) could really exist in the long-term. Aside from the incredible reporting and research coming out of the CoinDesk news site, there seems to be no better resource than a16z’s interview with the CEO of Chain, Adam Ludwin. In a16z’s “Blockchain vs./ and Bitcoin,” Adam explained what bitcoin is, its limitations, and how blockchain can prosper and create decentralized networks for other financial instruments and stores of value like merchant-issued currency (gift card transfer), airtime on a mobile phone, energy credits on a grid and even tokens for machine-to-machine communication as we enter into the internet-of-things (IoT) and the autonomous vehicle era. The Product Hunt, Rocketship.fm and Accidental Creative podcasts are also not bad places to start.

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.

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

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.

Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation.