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Therefore, $1,000 will purchase more hash rate for a Bitcoin computer than an Ethereum computer, and it is this dollar value that’s most important in deterring attackers from attempting to recreate the network.
A way to quantify the decentralization is the Herfindahl-Hirschman Index (HHI), which is a metric to measure competition and market concentration.
For the HHI, anything less than 1,500 qualifies as a competitive marketplace, anything between 1,500 to 2,500 is a moderately concentrated marketplace, and anything greater than 2,500 is a highly concentrated marketplace.6
After all, if the miners for a cryptoasset are all in a single country, then that cryptoasset could be at the mercy of that nation’s government.
Bitcoin node distribution as of April 2017
“Before users can trust the protocol, they need to trust the people who created it.”
If no one is maintaining the software, then two things will happen: One, bugs will be found and exploited by bad actors. Two, without enough developers, the software will stagnate, ultimately losing out to more compelling projects.
CryptoCompare has created called Code Repository Points,
Interestingly, Bitcoin and Ethereum are very close, while Ripple and Monero seemingly have the most undervalued developers.
Another good site for monitoring overall developer activity is OpenHub.
One of the best metrics we have found as a proxy for company support is the number of exchanges that support a cryptoasset.
As mentioned in Chapter 9, the last exchanges to add a cryptoasset are the most regulated exchanges, such as Bitstamp, GDAX, and Gemini.
As cryptoassets grow in diversity, so too do their trading pairs with fiat currencies, as shown with Ethereum’s ether in
Willy Woo, a Coindesk.com contributor, utilized Google Trends to evaluate the searches done on Google for the term “BTC USD.” He wanted to do this as “an effective proxy for the growth and engagement of bitcoin over time.”
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.
Figure 13.21 Bitcoin’s network value divided by estimated transaction volume (30-day rolling average) Data sourced from Blockchain.info
Charting the support and resistance lines of an asset’s price movement over time is a tried and tested tool for technical analysis.
Often, previous resistance lines will become support lines if the asset has broken through a resistance line convincingly and stays elevated.
For example when a short term SMA is below a longer term one and then crosses it—you have indicated an upward shift in momentum that is a buy signal.26
Inversely, if a short term average crashes beneath a long term average, that is a bearish signal as the price of the asset is falling quickly and is commonly referred to as a death cross.
For a young cryptoasset, it’s not unusual to see price increases or decreases along with low volume. This indicates that the trading book is thin and thus the asset is susceptible to wild swings in price.
If bitcoin prices enjoy an uptrend, but the currency’s upward movements take place amid weak volume, this could mean that the trend is running out of gas and could soon be over.
Similarly, a falling price with increasingly strong volume indicates capitulation as traders are rushing for the exits, whereas a falling price on low volume is of less concern.
themselves, it’s valuable to have a deeper understanding because for many cryptoassets mining is the means of new supply issuance and the security system underpinning transactions.
We call this output the golden hash. Recall
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 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.
However, to use GPUs a new version of the Bitcoin software needed to be created that could instruct a GPU how to go about the process, and writing that code took time. It was finally released in the summer of 2010, after Jeff Garzik offered a reward of 10,000 bitcoin to the originators—a mining operation known as puddinpop—to open source the software for all to use.
Currently, top-of-the-line ASICs have a hash rate of 14 TH/s, meaning these machines crunch data and output a hash 14 trillion times a second.7
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.
OTC is not quite an exchange because the buy and sell orders are not out in the open. Instead, an entity like the aforementioned services matches large buys with large sells, which allows big trades to be made without moving the order books within an exchange. OTC is a potential path for accredited innovative investors that want to deploy large amounts of capital.
Some of the most popular Western exchanges include Bitstamp, Bittrex, Global Digital Asset Exchange (GDAX), Gemini, itBit, Kraken, and Poloniex. BTCC, OKCoin, and Huobi dominate China, but also offer services in other geographic locations.
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.
Exchanges such as Bitfinex and Kraken provide a mix of security, regulatory adherence, and access.
With credit card chargebacks, everyone has to bear the cost, whereas with cryptoassets only those who are careless bear the cost.
Also referred to as leverage, 30 to 1 margin trading means an investor only has to put down $1,000 to trade with $30,000 of money. While gains can be astronomical, so can losses, and the same applies to derivatives.
Some exchanges “socialize losses” for leverage gone wrong because there is no other way the products can be offered.19 Socializing losses means that all investors on the exchange take a loss for a few investors’ foolhardiness.
This is particularly relevant for New York residents, where the BitLicense has made it considerably harder for cryptoasset startups to operate. The BitLicense was a piece of regulation put in place in 2015 that required companies interfacing with cryptoassets to go through a lengthy and expensive regulatory process to operate in New York, which led the majority of cryptoasset startups to cease operations in the state.
Coinbase was one of the first companies to offer insurance for its clients’ bitcoin holdings, which includes the bitcoin in GDAX, the exchange it operates.22 In part, Coinbase is able to insure its clients’ bitcoin because it keeps less than 2 percent of customer funds online; the rest is in highly secure offline storage.
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.
many exchanges don’t even have separate private keys for different customers. The exchange has its own private keys to the cryptoassets it is responsible for on the respective blockchain and then has internal books that record the customer balances.
More recently, a hack of Bitfinex’s exchange cost investors $72 million.30 The hack was a result of Bitfinex storing 100 percent of its client assets in hot wallets.
Coinbase has the most well-known vaulting service within its web wallet.
If the private keys are stored on the smartphone, then that mobile application is a mobile wallet, as is the case for mobile wallets such as Airbitz and Breadwallet.
Digital Currency Group (DCG). Founded by Barry Silbert, a serial entrepreneur and influential figure in the Bitcoin community, some would say that DCG is in the early stages of becoming the Berkshire Hathaway of Bitcoin.
Currently, it has the Bitcoin Investment Trust (BIT), the Ethereum Classic (ETC) Investment Trust, and a potential bitcoin ETF (exchange traded fund) in filing with the SEC.
The first trade was for 2 shares of GBTC at $44/share. Through the entire day there were just 765 shares traded, or just over 75 bitcoin. Admittedly a thin market, but this day in May was the first time a bitcoin vehicle was traded on a regulated U.S. capital market.
It’s clear that GBTC has traded well above its net asset value for much of its short life.
Whatever the reason, it is a sign that investors are interested in gaining bitcoin exposure in their portfolios.
