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

by Chris Burniske

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. To quote a May 2016 article in Harvard Business Review by Don and Alex Tapscott: “The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the blockchain, the technology behind digital currencies like bitcoin.”

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. The libertarians in the room would say it’s a usefully shared illusion of value, going back to the idea the paper itself is worth little. Bitcoin is a similarly shared representation of value, except it has no physical manifestation and no top-down authority to protect it. Despite these hurdles, the elegance of the mathematics that allow it to function has also allowed it to grow and store billions in value.

Throughout this book, we will focus on public blockchains and their native assets, or what we will define as cryptoassets, because we believe this is where the greatest opportunity awaits the innovative investor. Sometimes, cryptoassets have the exact same name as their parent blockchain but with different capitalization. Other times there’s a slightly different name for the asset. For example, the native asset of Bitcoin’s blockchain is bitcoin, the native asset of Ethereum’s blockchain is ether, the native asset of Litecoin’s blockchain is litecoin, etc.

THE MIRACLE OF BITCOIN One of the most miraculous aspects of bitcoin is how it bootstrapped support in a decentralized manner. The importance, and difficulty, of being the first currency to do so cannot be emphasized enough. Until people understand how bitcoin works, they often argue that it has no value as currency because, unlike what they’re used to, you can’t see it, touch it, or smell it. Paper currency has value because it is mutually agreed upon by members of society that it has value. It’s much easier for society to agree to this with a government involved. 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. 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.

For example, a fully functional decentralized insurance company, Airbnb, or Uber all hold great promise, and developer teams are working on similar use cases. One can think of an Airbnb or Uber as a middleman, connecting the consumer and provider of a service, and then taking a 20 to 30 percent fee for doing so. 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.

On its path to maturity, bitcoin’s price has experienced euphoric rises and harrowing drops, as have many cryptoassets. One of the most common complaints among bitcoin and cryptoasset naysayers is that these fluctuations are driven by the Wild West nature of the markets, implying that cryptoassets are a strange new breed that can’t be trusted. While each cryptoasset and its associated markets are at varying levels of maturity, associating Wild West behavior as unique to cryptoasset markets is misleading at best.

While speculators have often been scorned, they were perhaps most famously denigrated by Franklin D. Roosevelt in his inaugural address on March 4, 1933. As America was struggling through the Great Depression, which many pinned on the stock market crash of 1929, there was strong resentment against speculators. Every crisis loves a scapegoat. In his speech, Roosevelt called them “money changers” to invoke religious judgment: Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

Innovative investors are active participants in their financial future, but this doesn’t mean they must be alone on that journey. Relying on the advice of financial professionals can be effective because they can provide research and direction. Yet while innovative investors may take advice from experienced professionals, the final decisions are their own. They adapt their investing approach, strategies, and even selections based on what is occurring around them. This is especially vital in the age of exponential change that we’re living in.