Cryptoassets

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The innovative investor’s guide to an entirely new asset class—from two experts on the cutting edge

With the rise of bitcoin and blockchain technology, investors can capitalize on the greatest investment opportunity since the Internet. Bitcoin was the first cryptoasset, but today there are over 800 and counting, including ether, ripple, litecoin, monero, and more. This clear, concise, and accessible guide from two industry insiders shows you how to navigate this brave new blockchain world—and how to invest in these emerging assets to secure your financial future.

Cryptoassets gives you all the tools you need:

* An actionable framework for investigating and valuing cryptoassets

* Portfolio management techniques to maximize returns while managing risk

* Historical context and tips to navigate inevitable bubbles and manias

* Practical guides to exchanges, wallets, capital market vehicles, and ICOs

* Predictions on how blockchain technology may disrupt current portfolios

In addition to offering smart investment strategies, this authoritative resource will help you understand how these assets were created, how they work, and how they are evolving amid the blockchain revolution. The authors define a clear and original cryptoasset taxonomy, composed of cryptocurrencies, cryptocommodities, and cryptotokens, with insights into how each subset is blending technology and markets. You’ll find a variety of methods to invest in these assets, whether through global exchanges trading 24/7 or initial cryptoasset offerings (ICOs). By sequentially building on the concepts of each prior chapter, the book will provide you with a full understanding of the cryptoasset economy and the opportunities that await the innovative investor.

Cryptoassets represent the future of money and markets. This book is your guide to that future.


Introduction

 

 

Books, TV shows, and movies have been making futuristic predictions for decades, many of which were originally considered absurd. Star Trek featured several that proved to be not so outlandish: the indispensable handheld communicators have become today’s smartphones, the personal access display device is now our tablet, and a universal translator exists, of which there are several apps to choose. Edward Bellamy’s enigmatically titled 1887 book Looking Backward predicted debit and credit cards, and 2001: A Space Odyssey imagined forms of social media, though nothing on the scale that we currently have. Alvin Toffler’s Future Shock gripped readers in the 1970s as it predicted the exponential change destined to shake our society, and issued a warning: “In the three short decades between now and the twenty-first century, millions of ordinary, psychologically normal people will face an abrupt collision with the future.” This future would create “the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.” Exponential change has now become a buzzword, but the power of an exponential curve is rarely considered.

 

Each year will entail greater change than the year before. Such a concept differs drastically from a linear rate of change, where the future will change just as quickly as the past did (see Figure I.1.) The two may appear similar in the early days of change, but when the exponential curve starts to inflect it quickly, and at times violently, distinguishes itself. Figure I.1 Exponential versus linear rates of change While year 1 exhibits the exact same value for linear and exponential change in Figure I.1, as does year 2, by year 7 an exponential rate has progressed nearly tenfold more than the corresponding seventh period of linear change. We often operate with the rough assumption that the rate of change over the next year or two will be roughly equal to that over the prior years, which is a linear world view. That works for the early stage of change, but not when the exponential curve starts to bend like a hockey stick. Unfortunately, most investment portfolios are being managed with a linear world view, with indices that are pegged to the past guiding our future investments. Nothing could be more shortsighted or potentially dangerous in a time of exponential change. The Internet has irrevocably changed the world, and it continues to do so as developers build on the platform of connection it creates. Thus far, the World Wide Web has been the greatest meta-application to leverage the underlying fiber of the Internet.

 

The indexed web contains at least 4.73 billion pages, nearing the point where there will be one page for every human.1 The beginning of the Internet is commonly associated with the 1990s, with Tim Berners-Lee stumbling upon the idea of the World Wide Web while trying to create an information management system for CERN, and Marc Andreessen developing the first widely used web browser, which ultimately became Netscape. Although the accomplishments of Berners-Lee and Andreessen were linchpins to mainstream adoption, the web and the ability to browse it were the first killer apps built on top of the Internet, not to be conflated with the creation of the Internet itself. We are likely still in the early stages of leveraging the potential of the Internet and building meta-applications atop it. The Internet was first conceptualized in the early 1960s to create resilient communication systems that would survive a nuclear attack on the United States. According to one of the Internet’s progenitors, Paul Baran, the key to accomplishing such resilience was decentralization.2 J. C. R. Licklider proselytized the concept of an “Intergalactic Computer Network,” convincing his colleagues at DARPA—which is responsible for investigating and developing new technologies for the U.S. military—of its importance.3 Leonard Kleinrock, an MIT professor, was doing work on packet switching—the technology underpinning the Internet—that would lead to the first book on the subject: Communication Nets. Ironically, though they were all working on a means to connecting the world, many of the early researchers in this period were unaware of one another. But their dream has been realized. Every day more than 3.5 billion Google search queries are made,4 18.7 billion text messages are sent (that doesn’t even include WhatsApp and Facebook Messenger, which combine for more than 60 billion messages per day),5 and 269 billion emails are sent.6 Interestingly, however, the Internet has become increasingly centralized over time, potentially endangering its original conception as a “highly survivable system.” Human ingenuity often surfaces when it’s most needed, and now, a new technology is emerging that returns to the decentralized ethos of the original Internet with the potential to revolutionize our computational and transactional infrastructure: blockchain technology.

 

 

Every second, millions of packets of information are transacted between humans and machines using the Internet, and blockchain technology is forcing us to rethink the costs, security, and ownership of these transactions. 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.”7 Incumbents are sensing the inherent creative destruction, especially within the financial services sector, understanding that winners will grow new markets and feast off the disintermediated. Many startups are eyeing these middlemen with the oft-flickering thought that has been credited to Amazon’s Jeff Bezos: “Your fat margins are my opportunity.”8 If financial incumbents don’t embrace the technology themselves, Bitcoin and blockchain technology could do to banks what cell phones did to telephone poles. Nearly every global bank, exchange, custodian, and financial services provider is part of some blockchain consortium, investing in the potential disruptors or internally building its own team. These players include JP Morgan, Goldman Sachs, Citibank, the New York Stock Exchange, NASDAQ, Banco Santander, Barclays, UBS, South African Reserve Bank, Bank of Tokyo Mitsubishi, Mizuho, China Merchants Bank, Australian Stock Exchange, and more. Financial incumbents are aware blockchain technology puts on the horizon a world without cash—no need for loose bills, brick-and-mortar banks, or, potentially, centralized monetary policies. Instead, value is handled virtually, through a system that has no central authority figure and is governed in a decentralized and democratic manner.

 

 

Mathematics force order in the operations. Our life savings, and that of our heirs, could be entirely intangible, floating in a soup of secure 1s and 0s, the entire system accessed through computers and smartphones. Technology providers smell the disruption as well, with Microsoft and IBM most vocally leading the charge. Microsoft provides Blockchain as a Service (BaaS) for developers within its Azure cloud platform. Marley Gray, its director of technology strategy, has said, “We want, and frankly our customers want, access to every blockchain. It could be two guys in a garage that forked bitcoin and had this genius idea and people want to try that out. We don’t want to have any barriers. We’re open to all. We help even the smallest players onboard.”9 Just as the Internet and World Wide Web changed how we live our lives and interact with others, it also made millionaires out of the innovators who began companies based on these technologies—and the investors who invested in them. Those with the foresight to have bought Google during its “Initial Public Offering” (IPO) would have seen a 1,800 percent appreciation by August 2016, and those who bought Amazon’s IPO would have seen a 1,827 percent appreciation.10 Blockchain architectures and their native assets are well on their way to becoming the next great meta-application to leverage Internet infrastructure. They already provide services that include global currencies, world computers, and decentralized social networks, among hundreds of others. The native assets historically have been called cryptocurrencies or altcoins, but we prefer the term cryptoassets, which is the term we will use throughout the book. The terms cryptocurrencies and altcoins convey only a fraction of the innovation that is occurring in the cryptoasset economy. Not all of the 800 existing cryptoassets are currencies. We are not just witnessing the decentralized creation of currencies but also of commodities and polished digital goods and services, as blockchains meld technology and the markets to build Web 3.0. It’s early enough in the life of blockchain technology that no books yet have focused solely on public blockchains and their native cryptoassets from the investing perspective. We are changing that because investors need to be aware of the opportunity and armed both to take advantage and protect themselves in the fray.

 

 

Inevitably, innovations of such magnitude, fueled by the mania of making money, can lead to overly optimistic investors. Investors who early on saw potential in Internet stocks encountered the devastating dot-com bubble. Stock in Books-A-Million saw its price soar by over 1,000 percent in one week simply by announcing it had an updated website. Subsequently, the price crashed and the company has since delisted and gone private. Other Internet-based high flyers that ended up crashing include Pets.com, Worldcom, and WebVan.11 Today, none of those stocks exist. Whether specific cryptoassets will survive or go the way of Books-A-Million remains to be seen. What’s clear, however, is that some will be big winners. Altogether, between the assets native to blockchains and the companies that stand to capitalize on this creative destruction, there needs to be a game plan that investors use to analyze and ultimately profit from this new investment theme of cryptoassets. The goal of this book is not to predict the future—it’s changing too fast for all but the lucky to be right—but rather to prepare investors for a variety of futures. Bitcoin, the most widely known cryptoasset, has been riding a roller coaster. If one had invested $100 in bitcoin in October 2009—the first time an exchange rate was established for the nascent digital currency—one would now have over $100 million. In November 2013, if one had invested that same $100 in bitcoin, one would have endured an 86 percent drop by January 2015. There are nearly 800 other stories to tell, considering there are over 800 cryptoassets floating on globally connected and ever-on markets. At the end of 2016, a list of the top 50 included:12 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. This book will be the first of its kind to dive deep into a number of these. While many have slipped under the mainstream radar, the opportunities they present may be just as great as bitcoin. We hope to transform today’s intelligent investor into an innovative investor by providing a guide that explains what cryptoassets are, why they should be considered, and how to invest in them. Written by Benjamin Graham, The Intelligent Investor is a seminal work on value investing that Warren Buffet crowned as “the best book about investing ever written.”13 While we can only hope to achieve a fraction of the success Graham had in educating investors, our goals are very similar. We have chosen to focus on an asset class that didn’t exist in Graham’s day, and one that serves as a nice hedge against the exponential change that increasingly will disrupt existing portfolios over time. One of the keys to Graham’s book was always reminding the investor to focus on the inherent value of an investment without getting caught in the irrational behavior of the markets.

 

 

Just as he aimed to arm the intelligent investor with the tools to make an investment decision based on fundamental analysis, we hope to do the same for the innovative investor who is considering adding cryptoassets to his or her portfolio. This is not a get-rich-quick book with the latest hot tips. Rather it’s a book that grounds this new asset class in the context of its own history, common investment strategies, the history of financial speculation, and more. Investors who follow through on their interest in cryptoassets and examine them in the context of their overall financial goals and portfolio strategies will become innovative investors. We’ve written this book for the novice and the expert. We’ve divided it into three parts: What, Why, and How. The What lays the foundation for this new asset class, providing a concise explanation of the technology and history of cryptoassets.

 

 

The Why dives into why portfolio management matters, as well as why we think this is a whole new asset class that offers great opportunity—as well as great risk. The How details how to approach adding a cryptoasset to a portfolio, including a framework for investigating the merits of a new asset, and the logistical grit of acquisition, storage, taxes, and regulation. Each chapter effectively can stand alone. The world of cryptoassets may at times feel like science fiction; we imagine that when the Internet was first explained and discussed, people felt the same way. For many, change sparks fear. We understand that. But it also kindles opportunity, and we hope to prepare the reader to recognize, understand, and act on the opportunities available in the world of cryptoassets. Tomorrow inevitably becomes today. Exponential change isn’t going away. This book will help the innovative investor not only survive but thrive. Let’s dive in.

Burniske, Chris (2017-10-19T22:58:59). Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond (Kindle Locations 398-526). McGraw-Hill Education. Kindle Edition.

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Chris Burniske, Jack Tatar

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