Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond

by Chris Burniske

The Internet was first conceptualized in the early 1960s to create resilient communication systems that would survive a nuclear attack on the United States.

Encryption techniques have been employed for centuries. Julius Caesar used a simple method of encryption during times of war to inform his generals of his plans. He would send messages using letters that were three letters after the letter they were supposed to represent. For instance, instead of using the letters ABC in his message, he would write them as DEF and his generals would decrypt them to understand his intended message. Understandably, this form of encryption did not remain secure for long.3

Nick Szabo,

Zooko Wilcox,

both of whom worked at DigiCash ...

Getting a global society to agree that something has value and can be used as a currency without government support and without a physical form is one of the most significant accomplishments in monetary history.

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.

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

A key differentiator between a scam and good intent is the communication and rationale of the developer team behind the issuance model.

CryptoNote

ring signatures,

Expectedly, Monero’s ability to create privacy in transactions was a technological breakthrough that was recognized within the cryptoasset community and the markets.

Augur

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.”

Sergio Lerner,

Great teams can be composed of average players, while a disjointed combination of great players can make average teams.

68 percent

68 percent

For a more holistic view, compare a portfolio with a standard deviation of returns of 4 percent to one that has a standard deviation of 8 percent. If both portfolios have the same expected return of 7 percent, it wouldn’t be a prudent decision to invest in the portfolio with more volatility, as they both have the same expected return.

What problem does it solve?

“Projects really should make sure they have good answers for ‘why use a blockchain.’”3

Swarm City

What gives a cryptoasset value?

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. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

About US$500 billion is transmitted annually through the remittances market. Assuming that bitcoin serviced that entire market, then to figure out the value of one bitcoin, one would need to assume its velocity. Say bitcoin’s velocity is 5, similar to that of the U.S. dollar. Then dividing that $500 billion by a velocity of 5 would yield a total value of bitcoin of $100 billion. If, at this point, we are at the maximum of 21 million bitcoin, and this is the only use for bitcoin, then that $100 billion divided by 21 million units would yield a value per bitcoin of $4,762.

valuation analysis

Meetup.com

To calibrate for network value, in Figure 13.11 we take the total network value of a cryptoasset and divide it by the cumulative repository points, the idea being that a certain amount of work has gone into creating each cryptoasset, begging the question, “What is the dollar value per repository point?” The higher this number, the dearer each repository point is valued, and potentially overvalued.

Using this methodology, as of March 2017 Dash was the cryptoasset architecture most valued by the market, as people were paying roughly $500,000 per repository point, though this does not mean it will stay that way. Interestingly, Bitcoin and Ethereum are very close, while Ripple and Monero seemingly have the most undervalued developers.

As mentioned in Chapter 9, the last exchanges to add a cryptoasset are the most regulated exchanges, such as Bitstamp, GDAX, and Gemini.

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.

One would assume that an efficient price for an asset would indicate a steadiness of network value to the transaction volume of the asset. Increasing transactional volume of an asset should be met by a similar increase in the value of that asset. Upside swings in pricing without similar swings in transaction volume could indicate an overheating of the market and thus, overvaluation of an asset.

As Ben Evans wrote in his report, “Almost all the returns are now private. Old world tech giants returned plenty in public markets—new ones have not.” By old world tech giants, he’s referring to companies such as Microsoft, Oracle, and even Amazon, all of which have provided much more value creation for public markets than private markets. Meanwhile, with companies like LinkedIn, Yelp, Facebook, and Twitter, the clear majority of returns have gone to private investors. For example, while Microsoft grew private money 20,000 percent, it grew public money 60,000 percent. Compare that to Facebook, which grew private money 80,000 percent, and public money under 1,000 percent. As Ben Evans put in his slides, “For Facebook to match Microsoft’s public market returns, it would need to be worth $45 trillion,” which is two and half times the GDP of the United States.6