“Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond” by Chris Burniske & Jack Tatar is a well organized book on the investing side of “bitcoin and beyond”. It breaks down the complex topic into digestible chunks of “What”, “How”, and “Why”.
Below is the summary of each of its chapters:
The introduction sets the stage by comparing crypto assets against the likes of internet, electricity etc.
- “Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.”
- “At the end of 2016, a list of the top 50 included: Bitcoin, Ethereum, Ripple, Litecoin, Monero, Ethereum Classic, Dash, MaidSafeCoin, NEM, Augur, Steem, Iconomi, Dogecoin, Factom, Waves, Stellar Lumens, DigixDAO, Zcash, Lisk, Xenixcoin, E-Dinar Coin, Swiscoin, GameCredits, Ardor, BitShares, LoMoCoin, Bytecoin, Emercoin, AntShares, Gulden, Golem, Tether, ShadowCash, Xaurum, Storjcoin, Stratis, Nxt, Peercoin, I/O Coin, Rubycoin, Bitcrystals, SingularDTV, Counterparty, Agoras Tokens, Siacoin, YbCoin, BitcoinDark, SysCoin, PotCoin, and Global Currency Reserve.”
- Author’s suggest that they attempt to write “The Intelligent Investor” equivalent for crypto assets.
Part 1 – What? Understanding the Foundations of Cryptoassets
Chapter 1 – Bitcoin and the Financial Crisis of 2008
The chapter explains the events leading upto the creation of Bitcoin (the platform) and bitcoin (the currency). Coincidentally, the creation of Bitcoin occurred around the same time as the Financial Crisis of 2008.
- “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.”
- Authors put forward an argument that the financial crisis could have been prevented with the use of blockchain (an underlying technology enabling Bitcoin).
- “You will not find a solution to political problems in cryptography … but we can win a major battle in the arms race and gain a new territory of freedom for several years. 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.” Satoshi (unidentified founder of Bitcoin), wrote to his email list suggesting that he created Bitcoin as an alternative system to government’s top-down control.
- “Such decentralized autonomy was foundational to the early days of the Internet as well, where each node on the network was an autonomous agent that corresponded with other agents through shared protocols.” Authors hint how “decentralization” was the key to success of the internet. AOL’s centralized internet lost against the decentralized internet. Is decentralization of the financial system (or currency) comparable to the internet?
Chapter 2 – The Basics of Bitcoin and Blockchain Technology
- Bitcoin (with capital B) represents the software side of anything related to “Bitcoin”.
- bitcoin (with lower b) represents the currency.
- Blockchain (mostly) represents Bitcoin’s blockchain or an alterations of the original.
- “In July 2016, researchers from the London School of Economics and Political Science, Deutsche Bundesbank (Germany’s central bank), and the University of Wisconsin at Madison released the paper ‘The Evolution of the Bitcoin Economy.’” The paper concludes that “The result of this work shows that the Bitcoin economy, rather than being a fleeting and frivolous pursuit, has grown and matured over the few years that it has been operational, with distinct patterns of behavior among its most influential entities and participants.
- “Bitcoin fits these thematic molds. It allows a global transaction to be settled in an hour as opposed to a couple of days” Banks are often limited to doing transfers during business hours. Could the immediate settlement of bitcoin provide it the advantage over fiat money?
- “Uber, Airbnb, and LendingClub … decentralized services that were easily understandable and had precedent for being peer-to-peer” However, Bitcoin has a an impressive challenge, ““Decentralizing a currency, without a top-down authority, requires coordinated global acceptance of a shared means of payment and store of value.”
The inner workings of Bitcoin’s blockchain is composed of a distributed record, cryptographic, immutable in nature, and requires proof-of-work.
There are two types of blockchains – private and public. The difference between public and private blockchains is similar to that between the Internet (unauthorized access) and intranets (authorized access-only).
Private systems, on the other hand, employ a bouncer at the door. Only entities that have the proper permissions can become part of the network
Bitcoin’s Ecosystem is similar to a computer’s ecosystem. There are end-users (users of bitcoin), then there are apps (like in app store that use bitcoin), then there is Bitcoin (bitcoin’s software) which acts as the operating system and lastly there are miners (who are the hardware).
- “While there is merit to many of these solutions, some claim the greatest revolution has been getting large and secretive entities to work together, sharing information and best practices, which will ultimately lower the cost of services to the end consumer.”
Chapter 3 – “Blockchain, Not Bitcoin?”
This chapter discusses the general interest in blockchain (underlying ledger) and bitcoin (currency) separately.
- “The China ruling, combined with the FBI’s capture of the creator of the Silk Road, Ross Ulbricht,6 and soon thereafter the collapse of the biggest exchange at the time, Mt. Gox,7 put many bitcoin investors on edge as to its long-term viability in the face of government and law enforcement crackdowns.”
- But to Bitcoiners it had always been “bitcoin and blockchain.” The asset, bitcoin, was what incentivized an ecosystem of players—miners, developers, companies, and users—to secure and build upon Bitcoin’s blockchain, delivering means of exchange and store of value services to the world. (bitcoin and blockchain? How can they succeed alone? )
- Ethereum’s goal was to serve as a decentralized world computer, whereas Bitcoin aimed to be a decentralized world currency.
- It is this second movement that we will investigate further in this chapter, as it’s important for the innovative investor to understand why some people will claim bitcoin and other cryptoassets aren’t needed to keep their implementations secure and functioning: welcome to the world of private blockchains.
- The combination of Masters, Bloomberg, and the Economist led to a spike in interest in blockchain technology that set (People that endorsed blockchain )
- “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. The entities don’t need to get paid in a native asset as reward for their work, as is the case with public blockchains.”
- “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.
Chapter 4 – The Taxonomy of Cryptoassets
This chapter explains the taxonomy of crypto assets – just like there is taxonomy of assets in the real-world.
Cryptotokens are in the earliest stage of development, and will likely be the last to gain traction as they require a robust cryptocurrency and cryptocommodity infrastructure to be built before they can reliably function.
- “Just as in the physical world, where currencies and commodities fuel an economy to create finished goods and services, so too in the digital world the infrastructures provided by cryptocurrencies and cryptocommodities are coming together to support the aforementioned finished-product digital goods and services.
- “In an increasingly digital world, it only makes sense that we have digital commodities, such as compute power, storage capacity, and network bandwidth.”
- “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”
- “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”
- “the most important cryptocurrencies today [are] including bitcoin, litecoin, ripple, monero, dash, and zcash”
Altcoins are cryptocurrencies that are slight modifications to the Bitcoin.
Litecoin was created by Charlie Lee keep currency in its peer-to-peer roots by using less intensive proof-of-work hashing algorithm.
Ripple is a cryptocurrency created in 2004 by Ryan Fugger. “Ripple has since pivoted away from being a transaction mechanism for the common person and instead now “enables banks to send real-time international payments across networks.”
Example of National Currency: “To this day, auroracoin takes the cake as the cryptocurrency with the grandest plan for widespread usage throughout one country. Icelanders were given a cryptocurrency with little education and means to use it. Unsurprisingly, the value of the asset collapsed and most considered it dead.”
“Currently, three notable cryptocurrencies put privacy and anonymity first. In order of launch, they are Dash, Monero, and Zcash”
“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”
Chapter 5 – Cryptocommodities and Cryptotokens
Having understood cryptocurrencies, this chapter focus on cryptocommodities and cryptotokens.
- “…the largest cryptocommodity, Ethereum, is a decentralized world computer upon which globally accessible and uncensored applications can be built.
- cryptocommodities, provisioning decentralized resources like cloud storage, bandwidth, transcoding, proxy re-encryption, and so on.
- “… smart contracts are […] conditional transactions because they refer to logic written in code that has “IF this, THEN that” conditions.”
- 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
- 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 (How ether and etherium work together )
“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. ”
“We refer to many of these dApp native units as cryptotokens, while others refer to them as appcoins.”
“like Golem, which aims to be a supercomputer for compute intensive problems. 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).”
“While many merchants understandably complain about credit card fees of 2 to 3 percent, the “platform fees” of Airbnb, Uber, and similar platform services are borderline egregious. Many of the cryptotoken systems that are imitating such platforms plan to take a fee that is an order of magnitude less, using underlying blockchain architectures to facilitate the decentralized transfer of value and services.”
Cryptotokens can facilitate prediction markets. The company Augur is worth noting. “Brian Armstrong, CEO of Coinbase, which is one of the largest companies in the cryptoasset sector, has called it an “awesome project with huge potential.”36 Even Vitalik Buterin acknowledged its potential when he called it an “Uber for knowledge”.”
Gnosis, held a crowdsale in April 2017 raising money at an implied valuation north of $300 million.
Rootstock, similar to Counterparty, intends to run on Bitcoin. Rootstock is led by Sergio Lerner, who specialized in IT security for much of his life, and when he first came to Bitcoin audited many aspects of the code. He now leads a team that is basically building Ethereum on Bitcoin, and the system will be compatible with all dApps that run on Ethereum. Just as Ethereum has ether, Rootstock will have its own native currency called RSK.
Part II – Why – Investment Portfolio Management with Bitcoin
Part two of the book focuses on “returning the to fundamentals of investment theory [that] will allow investors to properly position their overarching portfolio to take advantage of the growth of crytoassets”
Chapter 6 – The Importance of Portfolio Management and Alternative Assets
This chapter returns to the fundamentals of Modern Portfolio Theory (MPT). Authors argue that “the potential of bitcoin and other crypto assets is so great that we believe they should be considered an asset class of their own.” They suggest that a portion of investments of a portfolio be allocated to such assets.
Chapter 7 – The Most Compelling Alternative Asset of the Twenty-First Century
This chapter studies the historical data and concludes that Bitcoin has been “the most compelling alternative asset of the twenty-first century”.
Chapter 8 – Defining Cryptoassets as a New Asset Class
Chapter 9 – The Evolution of Cryptoasset Market Behavior
This chapter discusses how the crypto asset market behavior changes over time so that the investor can make an informed decision. Authors conclude that “we’re seeing maturation of these assets and greater overalls with others, it’s fair to consider bitcoin and crypto assets to be in their early stages.”
Chapter 10 and 11 – The Speculation of Crowds , “This Time Is Different” Thinking, and Ponzi Schemes
Many “see cryptoassets as speculative pump-and-dump vehicles or worse”. Next two chapters [10 and 11] will address these arguments by putting cryptoassets in the context of the history of past investment bubbles, scams, and speculation.
There are five main “patterns that lead to market destabilizing:”
- The speculation of the crowds – “There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent” (Graham, The Intelligent Investor)
- “This time is different” – Eventually people believe that markets can’t possible crash. History and authors of This Time is Different: Eight Centuries of Financial Folly prove that this time is NEVER different.
- Ponzi Schemes – “The idea is simple: new investors pay old investors. As long as there are enough new investors, old investors will continue to be rewarded handsomely.”
- Misleading information from assets issuers – deceptive or misleading information from the issues of the asset.
- Cornering (“pump and dump”) – refers to when one more investors work to drive a price of an asset up or down significantly.
In chapters 10 and 11, authors conclude that these unstable market characteristics are not unique to Cryptoasset markets. Rather the tradition asset market (stock exchanges etc) have and are prove to the same weaknesses. It is only a matter of time and evolution that these crypto assets reach maturity.
Part III – How – Approach to adding crytoasset to a Portfolio
Chapter 12 – Fundamental Analysis and a Valuation Framework for Cryptoassets
This chapter puts forwards an analysis and valuation framework for crypto assets – which can be done by the founding characteristics of a crypto asset:
- White Paper – Look for clarity and cohesiveness in the white paper. Furthermore, evaluate the business potential of the problem and technical details.
- Decentralization edge – Does this project really need a blockchain?
- Valuation – understand both the utility and speculative value of the crypto asset.
- Community and developers – they work together keep the crypto asset alive. Research the commitment level, background, past-experience, and dedication of the community from online networks like reddit, conferences, etc.
- Relation to digital siblings – how does it relate to another asset? Is it a fork? If so, what aspects are being changed and why?
- Issuance model – what is the supply schedule? “If a crypto asset has a high rate of supply issuance, as bitcoin did in its early days, then that can error the asset’s value if its unity isn’t growing in line with expectations.” Also, consider if the distribution is fair.
Chapter 13 – Operating Health of Cryptoasset Networks and Technical Analysis
This chapter provides guidelines for investigating the network health of crypto assets. Network health is an indicator of its future potential.
- Miners – a strong network of miners is essential. They should be decentralized (not run my one large corporation).
- Software Developers – look at developer activity metrics (commits to code, comments, updates etc) to get an idea of the commitment of the developers
- Company Support – What companies are accepting the cryptocurrency? What investors are supporting the crypto asset? Look for external organizations supporting the crypto asset.
- User Adoption – Look for traction metrics of number of users, number of transactions propagated on the blockchain, dollar value of those transactions, valuations metrics (network value of crypto asset divided by daily dollar transaction volume)
- Support and Resistance – Chart a support and resistance graph for the crypto asset. Allows you to study the behaviour of price movements in the past and attempt to predict the future.
- Simple Moving Average – Chart a simple moving average graph for the crypto asset. It allows you to smooth out the price trend over a period of time.
- Pay attention to Volume – If the price increase with volume, it is sustainable. However, without volume increases it could be speculative and short lived.
Chapter 14 – Investing Directly in Cryptoassets: Mining, Exchanges, and Wallets
After preforming the analysis, this chapters guides on how to actually make the investment in the crypto asset.
There are three ways to buy or invest in crypto assets:
- Mining – one can become a miner to earn from “coinbase” compensation and/or transaction fees.
- Exchanges – buy crypto assets from exchanges or over-the-counter (OTC).
- Wallets – choose between web (cloud), desktop (device), mobile (device), hardware (dedicated device) or paper (yes, on paper) wallets.
Chapter 15 – “Where’s the Bitcoin ETC?”
This chapters presents the growing capital marketing investment choices available to investors.
- Grayscale Investment offers the largest capital market vehicle with bitcoin exposure.
- Bitcoin Investment Trust (BIT)
- (Planned) Bitcoin Exchange Traded Fund (ETF) (pending SEC approval)
- ETN Option offered by XBT Provider on Nasdaq Nordim in Stockholm, Sweden.
- ETI Option offered by Gibraltar Stock Exchange under symbols BTCETI
Chapter 16 – The Wild World of ICOs
“Another exciting part of the crypto asset world for an […] investor is the ability to get involved directly with the developer teams, launching crypto assets from the beginning.”
ICO stands for initial coin offering (or as authors put it, initial crypto asset offering). ICOs offer the ability (yet to be regulated by a governing body) for anyone to invest in a project as compared to only the elites or venture capitalists.
ICOs are still uncertain as they are yet to be commented on by the regulators about its nature and classification of the assets.
Chapter 17 – Preparing Current Portfolio for Blockchain Disruption
This chapter guides the reader to revisit their current investment approach knowing what the crypto asset knowledge is capable of.
“When considering investing in crypto assets, innovative investor need to not only consider an individual investment (like bitcoin or ether) but also how this new asset class and overall concept of blockchain could impact other assets within the portfolio.”
For example, how will bitcoin influence remittances (sending money abroad), business-to-business payments, and insurance? Each of these categories have big players such as Western Union, Visa etc. The authors advise the reader to get familiar with Clayton Christensen’s work on Innovation to make educated decisions about with business are at the risk of getting disrupted.
Chapter 18 – The Future of Investing is Here
The last chapter concluded with optimistic views of the crypto asset world. Authors suggest that millennials are more receptive to the philosophy of the crypto world and could be the single most important factor in driving the “future of investing”.
Authors are optimistic that Millennials will take a wholesaling approach to portfolio management by educating themselves about the crypto space. Not only will they be users but also evangelists of this new asset class.
Lastly, the authors conclude by saying that given the infancy of this field, the reader must be dedicated to constantly keep learning more about this space as the history unfolds.