Bitcoin Investors Quotes

An intelligent investor sees an opportunity in dip than risk.

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

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

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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.

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

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

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

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.

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.

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.

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.

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.

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.