Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond
by Chris Burniske
30 popular highlights from this book
Key Insights & Memorable Quotes
Below are the most popular and impactful highlights and quotes from Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond:
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.
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.
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.
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.
When Mt. Gox opened, bitcoin was worth less than $0.10, and just a year later it was worth over $10. While $10 may not sound like much, consider that in the period of a year bitcoin increased 100-fold, meaning that a $100 investment had turned into $10,000.
One of the most important, but often overlooked, indicators of a cryptoasset’s ongoing health is the support of the underlying security system. For proof-of-work based systems, such as Bitcoin, Ethereum,1 Litecoin, Monero, and many more, security is a function of the number of miners and their combined compute (or hashing) power.
a cryptoasset is in its early days and it’s not growing, then its future is likely not going to be bright.
As much as these comments about premines and instamines can sound black and white, the reality is there may be appropriate reasons for different issuance models. Issuance models are evolving as developers sort through the cryptoeconomics of releasing cryptoassets to support decentralized networks.
In getting to know the community better, consider a few key points. How committed is the developer team, and what is their background? Have they worked on a previous cryptoasset and in that process refined their ideas so that they now want to launch another?
After a valuation analysis is done, or at the very least current value is contemplated, the best thing the innovative investor can do is to know and understand the cryptoasset developers and surrounding community.
For bitcoin, instead of looking at the “domestically produced goods and services” it will purchase in a period, the innovative investor must look at the internationally produced goods and services it will purchase. The global remittances market—currently dominated by companies that provide the ability for people to send money to one another internationally—is an easily graspable example of a service within which bitcoin could be used.
The velocity of a currency is calculated by dividing the Gross Domestic Product (GDP) for a certain period by the total money supply. For example, if the GDP is $20 trillion, but there are only $5 trillion worth of dollars available, then that money needs to turn over four times, or have a velocity of four, in order to meet demand on any given year. Currently, the velocity of the USD is a little north of 5.
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.
anywhere in the world. The innovative investor might say: “OK, I understand that bitcoin can have utility as MoIP, just as Skype has utility as VoIP, but how does that translate to bitcoin being worth $1,000 a coin?” Bitcoin’s utility value can be determined by assessing how much bitcoin is necessary for it to serve the Internet economy it supports.
Utility value refers to the use of the cryptoasset to gain access to the digital resource its architecture provisions and is dictated by supply and demand characteristics. For bitcoin, its utility is that it can safely, quickly, and efficiently transfer value to anyone, anywhere in the world.
Similarly, a cryptoasset service called Swarm City6 (formerly Arcade City) aims to decentralize Uber, which is already a highly efficient service. What edge will the decentralized Swarm City have over the centralized Uber?
Any cryptoasset worth its mustard has an origination white paper. A white paper is a document that’s often used in business to outline a proposal, typically written by a thought leader or someone knowledgeable on a topic. As it relates to cryptoassets, a white paper is the stake in the ground, outlining the problem the asset addresses, where the asset stands in the competitive landscape, and what the technical details are.
A number of cryptoasset-based projects focus on social networks, such as Steemit4 and Yours,5 the latter of which uses litecoin. While we admire these projects, we also ask: Will these networks and their associated assets gain traction with competitors like Reddit and Facebook?
Cornering is also important to consider in crowdsales, especially if the founding team has given itself a significant chunk of the assets. While crowdsales will be further detailed in Chapter 16, the key takeaway for now is that if the founding team gives themselves too much of the assets outstanding, then they have immense power over the market price of the cryptoasset and this is potentially concerning.
Cryptoassets that have small network values are particularly susceptible to the cornering of their markets.
As markets mature over time, there is more regulation on what information asset issuers must provide and by whom that information must be verified and audited. With cryptoassets, however, these standards are not yet in place.
smell tests” are easy to begin with. First, do a quick Google search for “Is _______ a scam?” If nothing pops up, then check to see if the project’s code is open source.
The swift action revealed the strength of a self-policing, open-source community in pursuit of the truth.
A new cryptoasset called OneCoin was met with much interest due to its promise of providing a guaranteed return to investors.
Millions of dollars poured into OneCoin, whose technology ran counter to the values of the cryptoasset community: its software was not open source (perhaps out of fear that developers would see the holes in its design), and it was not based on a public ledger, so no transactions could be tracked.
The Ponzi scheme is a specific and easily identifiably structure that isn’t applicable to Bitcoin but could be to some phony cryptoassets. While a truly innovative cryptoasset and its associated architecture requires a heroic coding effort from talented developers, because the software is open source, it can be downloaded and duplicated. From there, a new cryptoasset can be issued wrapped in slick marketing.
It wouldn’t be until the summer of 2010 that a formidable place of exchange would come into existence
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.
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.
