Cryptoassets

The Innovative Investor’s Guide to Bitcoin and Beyond

Chris Burniske and Jack Tatar

McGraw-Hill © 2017
368 pages
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Rating Take-Aways

8
9 Importance • In 2008, an individual using the pen name Satoshi Nakamoto released a paper with
details about a currency called bitcoin.
7 Innovation
7 Style • He also explained the blockchain software that underpins bitcoin. Nakamoto’s
blockchain is a decentralized financial recordkeeping system.

• The code is open source; anyone can use it to obtain bitcoins or create new
  cryptoassets.
Focus • Blockchains can be public – open to everyone – or private.
Leadership & Management • Cryptoassets include cryptocurrencies, cryptocommodities and cryptotokens.
Strategy
Sales & Marketing
• Cryptoassets are alternative investments that can diversify a portfolio.
Finance • You can buy and trade cryptoassets on their own exchange.
Human Resources
IT, Production & Logistics • Investors can purchase a ground-floor investment opportunity via an initial coin
offering listed on cryptocurrency sites such as CoinFund.
Career & Self-Development
Small Business • Decentralized blockchain technology applications can substantially change or disrupt
Economics & Politics the way business works in many sectors of the economy.
Industries
• Remittances, insurance claims, supply chains, health care, real estate information and
Global Business delivery tracking are targets for more effective redesign using blockchain technology.
Concepts & Trends

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getabstract

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Relevance
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What You Will Learn
In this summary, you will learn:r1) What cryptoassets are and where they originate, 2) How they differ from traditional
investments, and 3) How to evaluate different kinds of cryptoassets.
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Recommendation
Financial experts Chris Burniske and Jack Tatar offer a good start to those seeking in-depth information on the
investment potential of bitcoin, blockchain and cryptoassets. Their readable, amply detailed manual begins with a
basic introduction to bitcoin and continues into how digital technologies are disrupting various industries. At times,
the authors can come across as cheerleaders for cryptoassets, issuing a clarion call to those who regret missing out
on previous Internet fortunes. Nevertheless, their comprehensive knowledge of this new technology is robust. While
never giving investment advice, getAbstract recommends this substantive guide to beginners of all things crypto.
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Summary
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The Origins of Bitcoin
Bitcoin shot onto the world’s radar just as the United States’ financial system was breaking
down in 2008 amid the fallout from collateralized mortgage obligations (CMOs). In October
of that year, an individual using the pen name Satoshi Nakamoto released a paper detailing
a currency called bitcoin and explaining the blockchain software that underpins it.

getabstract Nakamoto had created an alternative to the centralized arrangements used for electronic
“Bitcoin lets anyone be
their own bank, putting financial transactions. He designed the system to have “decentralized autonomy”; that
control in the hands of is, the masses rather than the government would oversee it. Ostensibly, Nakamoto’s
a grassroots movement
and empowering the blockchain, had it been available earlier, could have tracked the mortgages in CMOs and
globally unbanked.” surfaced the linkages among them, thereby increasing the securities’ transparency and
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perhaps mitigating the widespread financial crisis that erupted.

Nakamoto’s real identity and his whereabouts remain unknown. But bitcoin and blockchain
have caught on and given rise to a flourishing number of cryptoassets.

The ABCs of Bitcoin and Blockchain

In general, the term “blockchain technology” refers to its components, “hardware, software,
getabstract applications and users, in relation to a personal computer.” Bitcoin currency is the product
“Bitcoin, with a capital
of the particular software coding that constitutes the bitcoin blockchain technology. Bitcoin
B, is a platform
software is open source, meaning that anyone can access the technology to generate bitcoins
that carries upon it or to alter the algorithms and create other cryptoassets. The software is a distributed, digital
programmable money, recordkeeping ledger. No one can alter or erase the records in a chain. Data updates occur
known as bitcoin with a
lowercase in subsequent entries. The technology uses encryption to ascertain the bona fides of those
making transactions. Blockchain is transparent; anyone can view the details.
b.”
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“Miners” are individual computer users who compete to record transactions on Bitcoin’s
blockchain. Their “proof-of-work” is how the different computers group the transactions
into a block and the blocks into a chain. The miners must solve a “cryptographic puzzle”
to gain access to append to the blockchain. For their efforts, they receive pay in bitcoins.
The process boosts the supply of bitcoins, and the awarded coins motivate users to mine.

Cryptoassets                                                                                                                                                                         getAbstract © 2018 2 of 5

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 Blockchains can be either public or private: Public blockchains are open to anyone on the
Internet, while private blockchains are akin to intranets, available only to authorized users.

The Evolution of the Currency and the Technology

getabstract
“As a small portion In its short existence, bitcoin’s price increases have been impressive. An initial purchase
of the innovative of $100 in bitcoins on July 19, 2010, at the start of bitcoin trading, would have soared
investor’s overall
portfolio, alternatives to a mind-boggling $1.3 million by January 2017. In comparison, over this period, $100
are an effective way to invested in the S&P 500 would have grown to $242. Similarly, bitcoin delivered returns well
balance risk.”
getabstract in excess of those provided by the technology stalwart FANG stocks – Facebook, Amazon,
Netflix and Google.

Bitcoin also did better on a risk-adjusted return basis than the three major indices – the S&P
500, DJIA, and NASDAQ 100. However, not everybody bought into bitcoin at its inception:
Those who purchased $100 worth at a peak price of $1,242 per bitcoin in November 2013
would have seen that $100 investment whittled down to $83 by January 2017.

Early in 2011, bitcoin captured the attention of a wider audience – and of criminal
getabstract elements – with the debut of the dark web’s Silk Road online marketplace, which chose
“Bitcoin’s blockchain is
a database that records the cryptocurrency as its coin of the realm. Drug dealers quickly overtook the digital Silk
the flow of its native Road. Another spike in bitcoin’s profile, along with an almost 700% increase in its value,
currency, bitcoin.”
getabstract happened in April 2013. Some observers speculate that this leap in demand for bitcoins was
the consequence of a financial crisis in Cyprus, which led to Cypriots losing money in their
bank accounts. Bitcoin holders would not have been susceptible to such sovereign losses,
because bitcoin is outside a government’s control.

Then, in November 2013, bitcoin burst onto the global stage due to rising demand in China.
The People’s Bank of China noticed this activity and promptly clamped down on the use
of bitcoin. At the same time, authorities in the United States caught up with the founder
of Silk Road and closed down the website. A long, steep and rocky decline in bitcoin’s
getabstract value followed.
“Each time miners add
a block, they get paid
in bitcoin for doing Subsequently, blockchain became more prominent than bitcoin as a “general purpose
so, which is why they
choose to compete in
technology” that, like the steam engine, has the potential to change the world. As 2017
the first place.” began, the inventory of cryptoassets grew to more than 800 offerings, including Litecoin,
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Ripple, Zcash and Ethereum. However, bitcoins – worth $17 billion at the time – made up
the lion’s share, roughly 70%, of the total value of cryptocurrencies.

What Cryptoassets Can Do for Investment Portfolios

Cryptoassets are alternative investments, as are investments in real estate and commodities.
Alternatives help diversify portfolio risk, since they have low correlations with traditional
capital assets. The three main categories of cryptoassets are:
getabstract
“A private blockchain
is typically used to • Cryptocurrencies – These function, like money, as a “means of exchange, store of value
expedite and make
existing processes
and unit of account.”
more efficient, thereby • Cryptocommodities – These encompass the parts of the digital infrastructure, such as
rewarding the entities bandwidth and storage.
that have crafted the
software and maintain • Cryptotokens – These vouchers enable user access to “digital goods and services,” such
the computers.” as social networks and games.
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An investment in these assets can help bring down the overall risk of a portfolio, since their
correlation with mainstream capital assets is near zero. This unusual circumstance is likely

Cryptoassets                                                                                                                                                                         getAbstract © 2018 3 of 5

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 because cryptoassets are so new that their pool of investors does not overlap much with
those who invest in conventional securities.
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“If [the SEC] feels What Differentiates Cryptoassets from Other Investments
there are still not In 2017, the US Securities and Exchange Commission issued guidelines to classify
enough consumer
protections in place cryptoassets as securities. However, as of early 2018, the SEC has not approved any
for bitcoin and other cryptoasset’s applications for exchange trading, nor is it required to do so.
cryptoassets, then it
has no obligations to
approve any exchange- Aside from the status of SEC approvals, a good way to understand cryptoassets is
traded products.”
getabstract to consider the investment class in which they’re categorized, but the multiplicity of
their functions as currencies, commodities and tokens makes cryptoassets complicated to
classify. The US Commodities Futures Trading Commission sees them as commodities, and
the US Internal Revenue Service has referred to them as property. Traditional assets fall
into the broad groups of “capital assets, consumable/transformable assets or store of value
assets.” Cryptoassets are somewhere between a commodity and a store of value, unlike
metals such as gold, which are both. Cryptoassets are a distinct asset class for the following
important reasons:
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“While exchanges, by
default, will store the • They have a unique form of governance. Developers, owners of mining computers,
assets they trade, that
is not always the safest the companies that intermediate cryptoassets, the asset holders and the end users all
place.” participate in oversight and accountability.
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• A computer code issues the assets in a way that intentionally maintains a scarce supply.
For example, releases of new bitcoins occur on a progressively decreasing schedule. The
maximum number of coins, 21 million, will be in circulation by 2140. After that date,
holders will receive transaction fees, similar to those credit card companies pay.
• Cryptoassets offer uses that other asset classes do not, and these will evolve as technology
changes. Most notably, bitcoin serves as a “decentralized global currency.”
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“Over time, next to Some people invest in these new assets for their intrinsic utility, such as bitcoin’s ability
zero bitcoin will be to settle financial transactions. This purpose might be difficult to distinguish from an
issued, but the aim
is for the network investor’s “expectation of profit,” a condition met by SEC-regulated securities. Speculation
to be so big by then is another motive for holding the assets, just as occurs with some traditional instruments.
that all contributors
get paid a sufficient
amount via transaction Trading Cryptoassets
fees, just like Visa or Because they are new investment vehicles, cryptoassets trade on exchanges separate from
MasterCard.”
getabstract those of conventional securities. As an alternative to mining, an investor can acquire
holdings of existing assets or make ground-floor purchases of newly created cryptoassets
through an initial coin offering. These issues might be announced in a private network, on
social media or on listing sites such as CoinFund. Exchanges have proliferated, from one in
mid-2010 to more than 40 in early 2017. Trading volume has taken off as a consequence;
the worth of bitcoin trades reached more than $11 billion in January 2017.
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“When a cryptoasset
is skyrocketing, it With greater capacity, liquidity has increased and the value of trades has jumped. In January
can be hard to resist
the urge to jump in
2017, the price of a single bitcoin shot past $1,000. Similarly, other cryptoassets such as
and ride the rocket. Ethereum have seen increases in their trading volume over time. Of course, external factors,
However, the timing including regulation, affect the market. As of 2016, better than 90% of the global trading
can be precarious, and
spotting the end of a in bitcoin took place in China. In 2017, the People’s Bank of China’s restrictions caused
bubble is not easy.” bitcoin’s price to plummet from its $1,000 peak, just as happened in 2013, the first time
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the currency hit the $1,000 mark. However, bitcoin’s value recovered more quickly in 2017
due to the greater number of exchanges.

Cryptoassets                                                                                                                                                                         getAbstract © 2018 4 of 5

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 The availability of exchanges for trading cryptoassets is a sign of “market maturity,” as is
a decline in volatility. And as specific new assets develop their features, their performance
will better correlate both with other cryptoassets and with conventional securities.

The market for cryptoassets is making progress in these areas, but it has a way to go to reach
maturity. Importantly, the assets have attracted masses of speculators and experienced wild
getabstract market swings. Some new asset offerings have turned out to be fraud schemes presented
“Any cryptoasset to investors with false information. As with most new assets, investing in cryptomarkets
worth its mustard has
an origination white calls for a great deal of caution.
paper.”
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Evaluating Cryptoassets
Cryptoassets appeal to innovators, and they offer investors many opportunities for early
participation in start-up companies. Blockchain technology applications can substantially
change or disrupt the way business works in many sectors of the economy. In the financial
services industry, speedy and low-cost bitcoin payments could replace companies like
Western Union for sending remittances across borders. “Business-to-business payments”
likewise could flow more readily with cryptocurrencies. Distributed ledger technology can
smooth the insurance industry claims process. Supply chains, health care and real estate
information access, and delivery tracking are all targets for more effective redesign using
getabstract blockchain.
“If the miners for a
cryptoasset are all in
a single country, then As with traditional offerings, fundamental analysis is a good place to start an investment
that cryptoasset could evaluation of a cryptoasset. The creators of a cryptoasset provide a “white paper” with the
be at the mercy of that
nation’s government.” specifics of the asset, the problems it solves, its competition, its technical information and
getabstract the plan the developers have for its issuance. The asset should have a “decentralization
edge,” which is a legitimate reason for this standalone product. A white paper should
contain detailed descriptions of the asset’s utility and its competitive advantage.

Value also derives from the supply of the asset relative to the demand for it. Speculative
activity affects the asset’s potential value. An asset’s turnover, or its velocity, is another
indicator of value. Additionally, it’s preferable to have the computers mining the cryptoasset
spread far apart geographically rather than clustered together, so that they are not subject
getabstract
to any single jurisdiction.
“Even though the rules
regarding taxation Technical analysis, based on price and volume, can supplement fundamental metrics.
of these assets may
change, one thing is Cryptoassets require storage after their acquisition. Options include deposit accounts at a
clear: as with any trading exchange; a “hot wallet,” giving an investor access to the asset through the Internet;
other asset, the IRS is
watching.” and “cold storage” of the asset in an investor’s offline device.
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“Goldilocks Years of Cryptoassets”
Though Wall Street still remains largely on the cryptoassets sidelines, some large
corporations and financial institutions are beginning to test the feasibility of using
blockchains. Millennials, however, could make this the moment for investing in
cryptoassets, given their greater comfort with the concept, its practices and its promise.
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About the Authors
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Chris Burniske is a co-founder of Placeholder Ventures, a firm that focuses on cryptoassets. Jack Tatar is an investor
in and adviser to cryptoasset start-ups.

Cryptoassets                                                                                                                                                                         getAbstract © 2018 5 of 5

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