Category: Crypto

Will there ever be more than 21 million Bitcoin?

Anthony Pompliano is the host of the Pomp Podcast, where he talks about all things crypto and Bitcoin. He is also widely followed on Twitter. On Twitter, Pompliano often makes proclamations about banks and central banking. One of his most know catchphrases is “Long Bitcoin, Short the Bankers“.

Incidentally one might make the case that Pompliano is indirectly participating in the banking industry through Morgon Creek Capital, which is an investor in Blokfi.

This morning BlockFi announced that they have raised a $50M Series C round of funding. The investment round was led by my partners and I at Morgan Creek Digital, alongside an amazing list of co-investors like Valar Ventures, CMT Digital, Castle Island Ventures, Winklevoss Capital, SCB 10X, Avon Ventures, Purple Arch Ventures, Kenetic Capital, HashKey, Michael Antonov, NBA player Matthew Dellavedova and two prestigious university endowments.

I will be joining BlockFi’s board of directors as part of this investment.

Pomp Newsletter, August 2020

What does BlockFi do? Well according to the newsletter:

“For those that are unaware, let me break down what BlockFi does today, why I think this business can be one of the next multi-billion dollar fintech giants, and where they are going next. Today they have the following products:

  1. A lending product that allows an individual or organization to deposit crypto assets and take US dollar loans out against the collateral. This is popular for people who want USD liquidity, but would rather not sell their Bitcoin or other assets.
  2. An interest-bearing account where users can deposit Bitcoin, Ether, or stablecoins and earn up to 8.6% APY interest.
  3. A cryptocurrency exchange that has no transaction fees.“

Sounds like a bank. Quacks like a bank. Must be a bank.

How to Create Bitcoin

I myself am a customer of BlockFi as I have a deposit there. I’m actually a quite content customer. I should also note that I have nothing against the banking profession or of Anthonly Pompliano being one. It’s an honorable profession in my opinion.

Anyways, the cryptocurrencies that I have deposited at BlockFi, as highlighted in the newsletter, carry interest. Interestingly, the interest rates offered through BlockFi are considerably higher than interest rates shown offered by banks.

It’s worth wondering how BlockFi pays its customers interest. There are a number of ways BlockFi can do this. One way would be to just buy cryptocurrencies and pay the customers. However, although this might be good for customer acquisitions, it does sound pretty costly.

A second way, would be to lend out the deposits. The problem here is that if you are accepting deposits by paying up to 8.4% interest, you have to find lenders that can pay even higher interests, to get a positive spread after factoring in delinquencies.

As described in the newsletter, BlockFi has a lending program whereby lenders have to deposit crypto as a collateral. It might come as a surprise that the collateral required to get a loan at BlockFi is double the amount that is being lent. Alas, we can assume that BlockFi is not in much need of writing off bad loans.

Bitcoin Printing

A third way for BlockFi to pay out interests would be to simply add the amount to their clients statements. After all, this is what banks to and banking is all about. The location of the so-called money printing does not happen at the central bank level but at the banks they service.

So what happens if BlockFi or any other banking institution built on top of Bitcoin does this (NB: I have know idea if this is the case, I’m just theorizing here)? Now there are more Bitcoins in circulation that have been created.

The question I ask myself is this. Even if the supply of Bitcoin is fixed, what is to say that the circulation of Bitcoin cannot be increased when lending and other banking related institutions, such as BlockFi, become more widely used?

How does BlockFi custody assets?

This question is answered on the BlockFi website:

When clients send crypto to their BlockFi account or purchase additional crypto within the BlockFi Interest Account, that digital asset is replaced with an obligation to return the same amount of that crypto plus any interest earned. In order to pay our clients crypto interest on a monthly basis and to meet withdrawal requests on a timely basis, we engage in a number of activities, including (1) keeping a material amount of digital assets available for withdrawal with third parties such as Gemini, BitGo, and Coinbase; (2) purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures and (3) applying risk management to the lending activities in the institutional market. The credit risks to these institutions are mitigated by credit due diligence and/or collateral (such as cash, crypto, or other assets).

Digital currency is not legal tender, is not backed by any government, and the BlockFi Interest Account is not a bank account nor a brokerage account, and is not subject to FDIC, SIPC, or other similar protections. Interest rates, withdrawal limits, and fees are subject to change and are largely dictated by market conditions. This is not a risk-free product and loss of principal is possible.

How did Grayscale grow its AUM so fast?

When I write this, Grayscale Investments has about $9.8 billion in Assets under Management. This undoubtedly makes Grayscale one of the fasted growing asset management companies in history.

Established in 2013 by Digital Currency Group, Grayscale operates trusts that allow investors to invest in various cryptocurrencies. Trusts are open-end, which means that the number of units will change as investors move in or out of the funds.

The units in the Grayscale Bitcoin Trust (GBTC) and the Grayscale Etherium Trust (ETHE) are that are quoted on the OTCQX market. Both trade at a significant premium to the net asset value (NAV) per share. That in itself is intriguing, since Grayscale charges a 2% management fee on assets.

Why does the Grayscale Bitcoin Trust exist?

The Grayscale Bitcoin Trust is passive, as opposed to being an active fund. The investment policy is simply to hold Bitcoin. Passive funds are usually set up to track and index or some other benchmark. So you might ask yourself what is the point of setting having a fund that only holds one asset?

Why would somebody buy this as opposed to buying the underlying asset directly? How come that investors are willing to buy Grayscale Bitcoin Trust units at a premium to Bitcoin per unit and pay Grayscale a 2% annual fee, instead of just buying Bitcoin directly?

The answer is two-fold:

  1. Most institutional investors are simply not allowed to invest directly into Bitcoin. They have a strict mandate on what they are able to invest in. So, they can’t, even if they want to, get exposure to Bitcoin unless it is through a security, such as a trust unit. Eventually, we can expect the Grayscale Bitcoin Trust to convert into an ETF and the management fee to go down.
  2. Most investors into the Grayscale trust are not buying investing through the open market. They participate in something called an Offered Product. Accredited investors participate in the Offered Product and receive an allocation that values the trust units they receive on a NAV-basis, or Bitcoin per share. By participating in the Offered Product, they are also bound to selling restrictions and subject to significant limitations on resale and transferability.

More on Cryptocurrencies

Investing in Crypto from a Portfolio Perspective

The appeal of cryptocurrencies and digital tokens is for many the possibility of a home run. But betting on one outcome will make your outcome binary. You are either right or you are wrong. In an investing subject that has such high uncertainty of outcome, as blockchain and cryptocurrencies undoubtedly have, trying to determine who the most likely winner is, might not be the optimal investment strategy.

An investor in the blockchain space, even if that investor would be 100% convinced that distributed ledgers will disrupt the finance industry, will face three major problems:

  1. We don’t know who the winners will be
  2. We don’t know what the winner will be
  3. The last mover advantage

We don’t know who the winners will be

Industries tend to consolidate over time. This has been as true with banking and auto manufacturing as it has been true with breweries and paint manufacturing. Online, the power laws of industry consolidation have been even stronger. In the online world, the winner takes it all. The network effects of digital products such as search engines and social networks are so strong that they tend to create natural monopolies. 

There have been thousands of cryptocurrencies and altcoins created so far in the relatively short history of blockchain. If the network effects of cryptocurrencies are anything like in industries that the internet brought us, most of these currencies are destined to die.

We don’t know what the winners will be

One of the biggest allures of blockchain disruption is that distributed ledgers will significantly alter the way humans organize themselves and their endeavours. Some will even go so far as to say that the concept of the company as a way for people to organize their efforts will become obsolete. 

Yet, even though the formation of Bitcoin and other cryptos, such as Ravencoin, have been without the ownership and organization structure of a company, most organizations that are developing products and services on blockchain technology are formed through a corporation. 

Some are a combination of both. An example of this is the combination of the XRP cryptocurrency by the company Ripple. Ripple does not own or control XRP, but it owns a significant amount of XRP which it received when the company facilitated the creation of the XRP cryptocurrency. 

So, where will the value capture be? Will it be on a cryptocurrency level or on a company level? Is it better to have exposure to XRP or Ripple? Currently, this is extremely hard to tell. 

Last Mover Advantage

Bear in mind that Google was not the first search engine. Neither Chrome nor Explorer was the first internet browser and Windows was not the first operating system. Facebook was not the first social network. 

In the words of Peter Thiel, “you don’t want to be the first mover into a market, you want to be the last mover.” It is possible that none of the cryptocurrencies and none of the biggest blockchain-focused innovators currently out there are the last movers in the space. Maybe we are yet to see the equivalent of Microsoft, Google and Facebook of crypto and blockchain yet. 

Portfolio Approach

In an essay called Diversification and the Active Manager, Horizon Kinetics’ Murray Stahl and Steven Bregman bring up a thought exercise whereby an asset manager starts out with a diversified portfolio that includes one overperforming stock and simply holds it over a long period of time.

They take Intel and Microsoft as examples:

“From October 1987 to December 1999, the stock appreciated about 173x. Thus, if a 3% position in 1987 were held in a portfolio and not traded away, it would have become a dominant portfolio position by 1999. In truth, the position would have become so disproportionately large that no active manager would have been permitted to maintain it.  

In fact, Intel would be a much better example. Between October 1987 and December 1999, Intel shares appreciated approximately 2,680x. Obviously, a 3% position in 1987 would, as a practical matter, become the entire portfolio by December 1999, irrespective of what performance the other portfolio elements accomplished.  

If one contemplates these facts, the implications can be interesting. It should be self-evident that any portfolio manager who simply held Microsoft and Intel shares would have dramatically outperformed the S&P 500. Again, of course, this would not have been permissible. Nevertheless, in hindsight, this would have been the correct action.”

Building a diversified blockchain portfolio

Aside from basically buying a basket of cryptocurrencies, an investor would also like to have exposure to companies that are building blockchain-related products and services or investing in such projects.

Currently, the number of public companies that have that exposure is limited and many often simply seem fraudulent once you look under the hood. There are however a few stocks that are worth considering to gain exposure to blockchain and cryptocurrencies:

  • Galaxy Digital Holdings (aim to become a merchant bank in crypto and blockchain)
  • Overstock (through its subsidiaries tZero and Medici Ventures) 
  • Hut 8 (cryptocurrency mining) 
  • FRMO Corp (shareholder in Digital Currency Group and a number of mining ventures)

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a Blockfi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Cryptocurrency Mining has to be Profitable

In essence, a cryptocurrency is nothing but a transaction system, a means of exchange. You can argue (as you can with all currencies) that it is also a store of value, but the only reason to store value is the intent to exchange it for something else at a later date. 

Every transaction system has a settlement system. For all digital currencies, the settlement cannot be physical. The main problem with the previous versions of digital currencies has always been that digital things can be copied. Cryptocurrencies solved this with distributed ledger and the mining process. 

The Mining Process is the Settlement System

 In a Proof of Work cryptocurrency, transactions are facilitated through the mining process. So, in the case of proof of work cryptos, such as Bitcoin and Dash, there has to be a mining process. For there to be a mining process, the mining has to be profitable over the long term. 

Think of it this way: If I can buy a Bitcoin for less than the cost of mining a Bitcoin, why would I mine Bitcoin? But if the miners would stop mining Bitcoin and rather buy Bitcoin, there would be no Bitcoin. 

But That’s not how it Works…

The Proof of Work system is beautiful in that way because it adapts over time. If the price of Cryptocurrency falls below the cost of mining, fewer people will mine, which means that the total Hashrate will drop. When the Hashrate drops, the difficulty rate drops, which means that the likelihood of winning the block reward goes up.  

This mechanism means that over the long run, a functioning cryptocurrency should provide proper incentives to the miners, that is mining yields. 

The Dash Example

Dash is a Proof of Work cryptocurrency. The Dash development community has been very focused on payments and on building applications for Dash to become an alternative option to payments. Although Dash seems to be gaining traction on many levels, the price of the currency has fallen drastically over the last 6 months. 

For Dash miners, this means that mining Dash has become unprofitable. In April 2019, one could buy a Dash mining contract from Genesis Mining that would have a current yield (current daily mining output/cost of a day of mining) of close to 100%. 

Currently, you can buy a 12 month Dash mining contract that will cost you $0.27 a day per 30,000 mh/s. The output, however, based on the current Dash to USD exchange rate will be about $0.19. 

So as a potential Dash investor, what does this mean? One of two things needs to happen. Either Dash miners need to leave the mining pool to make mining more profitable or the value of Dash needs to go up and above the cost of mining. 

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a Blockfi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

CALCULATING BITCOIN (BTC) YIELDS ON GENESIS MINING | AUGUST 2019

Genesis Mining is one of the biggest cryptocurrency mining operations in the world that sells mining-as-a-service contracts. According to our research, Genesis is offering the most profitable mining contracts at the moment.

Genesis Mining Yield Example

  • If you would buy 30 TH of mining power today on Genesis Mining, that will cost you $139 dollars for a contract with a duration of 18 months. 
  • The cost per TH translates to $0.0846 per day or $2.5388 per day for 30 TH. 
  • On August 19, 30 TH contract would have paid out 0.000384 BTC in mining yield for the day or $4.11 per the current exchange rate. 
  • Under these conditions, the contract had a 62% yield on that day. 

Mining is subject to great volatility. BTC to USD exchange rates can change rapidly. Mining outputs are also subject to significant volatility with changes in difficulty rates, total hashpower and the amount of BTC yet to be mined. 

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a BlockFi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Mt. Gox | The Meteoric Rise and Fall of a Bitcoin Exchange

Although the history of the Mt. Gox Bitcoin Exchange is short, it is nothing short of amazing. Mt. Gox is a historic name in the world of cryptocurrencies, as it was one of the first Bitcoin exchanges to take off.

At the peak of its height, Mt. Gox’s customer base represented about 80% of the global trading volume. The rise of Mt. Gox, came to an abrupt end in 2014 when it was discovered that the exchange had become the victim of a large scale hack. Being unable to locate over 850,000 bitcoins that the exchange had in its possession, Mt. Gox was forced to close trading and to subsequently file for bankruptcy. 

Who founded Mt. Gox?

Jed McCaleb founded the Mt. Gox and in 2007, he registered the Mtgox.com web domain with the aim of turning it into a trading site for the famous Magic: The Gathering game cards. He then turned the domain to a bitcoin exchange site. 

After sometimes McCaleb realized he was getting more than he bargained for and he sold the site to Mark Karpeles who is a programmer, foodie, and bitcoin enthusiast and he usually calls himself Magicaltux in numerous online forums. Karpeles then rewrote the back-end software of the site and eventually turned the site into the most popular bitcoin exchange in the world. 

Karpeles was born in France and he spent some time in Israel before settling down in Japan. He got married in Japan and in 2011, he acquired the Mt. Gox exchange from an American entrepreneur known as Jed McCaleb. 

When did Mt Gox open?

Mt Gox was among the first Bitcoin exchange on the web but it was not related to cryptocurrency when it was developed. The mtgox.com domain was bought by programmer Jed McCaleb in 2007 for an online trading platform for virtual cards that are used in the game Magic: The Gathering.

In 2010, McCaleb then saw the opportunity to build a place where people can exchange their fiat currency to and from Bitcoin. This was how mtgox.com was launched as a Bitcoin exchange on July 18, 2010. McCaleb then sold the platform to French-born developer Mark Karpeles after a year.

How did Mt Gox get hacked

Mt Gox was first hacked in 2011 and during the first of the two hacks, the attackers were able to infiltrate into the computer that belongs to an auditor of Mt. Gox. This gave them the chance to change the Bitcoin pricing to a single cent. Afterwards, they then obtained the private keys of Mt. Gox clients which had their precious crypto assets kept in hot wallets which are internet-connected. 

The hackers then went on and create selling orders on the accounts and then bought the Bitcoins at this artificially reduced price and they were able to buy 2000 BTC with this way. This hack was estimated to be about $30.000 theft in Bitcoin and this was then dwarfed by the hack that occurred in February 2014.

The second Mt Gox hack was infamously known as the first major cryptocurrency exchange hack when it happened. The hacked value was an enormous $460 million worth of Bitcoin at the time. Although this may not be the largest hack in terms of the value in fiat money, it is considered to be the largest amount of Bitcoin that was ever stolen. 

More than 850,000 Bitcoins were stolen which includes 750,000 Bitcoins that were owned by its customers. At its peak price, the value of the bitcoin stolen is $17 billion while at the current price this will be about $3 billion.

Although Mt Gox stopped all Bitcoin withdrawals on February 2014, the exchange has already been emptied of its Bitcoins long ago. It was reported that Bitcoins were stolen bit by bit since the beginning of 2011. The group that did this investigation then indicated that by May 2013, the firm no longer held its Bitcoins. Mt Gox then filed for bankruptcy not long after the hack because they were no longer able to continue with the operations.

Will Mt Gox be rehabilitated?

According to TechCrunch, In February of 2019, there is a movement referred to as GoxRising which is working to have an alternative to bankruptcy for Mt Gox. The main idea behind GoxRising is simple and it is that instead of using the bankruptcy courts to give the assets of Mt Gox to the owners of the company, it is making use of civil rehabilitation law so as to return most of the asset to the creditors of the company.

It appears that GoxRising will be successful in these efforts because Tokyo lawyer, Nobuaki Kobayashi has been appointed by the Japanese courts to work on the civil rehabilitation process. This is going to be a piece of good news to those that have lost their assets in the Mt Gox failure because they will likely gain from this deal due to the civil rehabilitation law.

Another potential way this court may end is that the embattled CEO of Mt Gox, Mark Karpeles will likely end up with lots of Mt Gox assets if the bankruptcy process is allowed to move forward. This is because he owned about 80% of the company and when it went bankrupt, it will place him in a great position to get this huge payout under the Japanese bankruptcy law. If this happens, Karpeles knows that his life is in danger as he would receive lots of civil suits from Mt Gox creditors that has lost everything to him. More insults will be added because Bitcoin prices are much higher today than it was in 2014.

With the civil rehabilitation process, it looks like a winning idea to everyone that is involved in this deal and it looks like a way forward. The civil rehabilitation process is expected to take 3-5 years based on the reports from the media. Although civil rehabilitation may be considered to be a time-consuming process, it is still a lot better than bankruptcy.

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CLOUD MINING PROVIDERS | AN HONEST & UNBIASED REVIEW

Long story short, we believe that cryptocurrency mining has the possibility of becoming a major asset class. Somewhat paradoxically, we do not necessarily believe that Bitcoin, Ethereum or [insert cryptocurrency name] will necessarily skyrocket in nominal value. We believe that the mining process, in and by itself, can be a profitable endeavour, irrespective of how cryptocurrency prices and their respective market capitalization develop.

How? Well, imagine a scenario where there would be millions of different cryptocurrencies in circulation, each with its own purpose and use case. We are not saying that is the reality that we are predicting will happen. We are merely saying that is one of the ways this can play out. What we are saying is that in most of those alternate realities, mining and Proof of Work will play an important role. 

What is Mining? 

In all Proof of Work cryptocurrencies, the miners (or workers as they are also called) lend processing power to the system to facilitate transactions. As a reward, they get newly minted units of the cryptocurrency. Therefore, you could say that mining is a form of seigniorage. Seigniorage is basically a term for the profits made (normally by a government) by minting new currency. 

The role of miners is critical to the concept of decentralized currency, or consensus money, as the system does not rely on a central figure, but rather on individual actors that lend their resources to the network in exchange for the profit of seigniorage. 

Cloud Mining

Most ordinary people, we included, are not going to set up our own mining rigs and start negotiating with our electric utility company about favourable rates. Furthermore, if you want exposure to a particular asset class, you want to be able to get that exposure in a passive way. You don’t set up a business because you want exposure to equities, nor do you start underwriting loans to get exposure to the bond market. 

Cloud mining or mining as a service (MaaS) is a great way (at least in theory) to get exposure to the economics of cryptocurrency mining. A mining operation basically rents you a fraction of its hash power and in exchange, you receive the corresponding mining rewards, less a maintenance fee. 

Profitable Mining Contracts

We have tried out a few providers of cloud mining contracts. We have tried reputable providers, such as the Mining Pool of Bitcoin.com, Hashflare and Genesis Mining. 

It is worth noting that the profitability of mining can be very volatile from time to time. Irrespective of that, you would expect that the market for these contracts would be relatively efficient. You would not expect extreme differences in the profitability of the mining contracts. 

We find that if you are in the market to buy a mining contract for a modest amount (less than $1,000), you would be better off buying the cryptocurrencies on an exchange. But that defeats the purpose, remember. The aim is to earn a yield from mining. 

Some providers, seem to be outright scams, selling contracts that produce crypto at a steep loss. Hashflare.io, in particular, comes to mind.

Genesis Mining

Note that we are not endorsed in any way by Genesis Mining. The company does offer a referral code that customers can use to get credits, but we have never used it, nor do we ever intend to do. That would make us less objective. 

That being said, it is safe to say, that as these words are written, Genesis Mining has absolute superiority in the market. As far as we can tell, Genesis Mining is offering terms superior that all other providers we have tried out. This applies both in terms of the profitability of the contracts, as well as the fine print in their contracts 

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a BlockFi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Cryptocurrency Mining | A Future Asset Class?

Our interest in the mining process, and in the economics of the cryptocurrency mining process, in particular, was piqued by Murray Stahl and the activities and research of FRMO Corp and Horizon Kinetics into Cryptocurrency. 

Mining as an Asset Class

During the FRMO Corp 2017 Annual Meeting, Murray Stahl gave the following example of the profitability of Bitcoin mining: 

To mine cryptocurrencies, you can buy servers and depreciate them on some sort of reasonable schedule, based on their estimated useful life. If we hold back enough cash to the equal or compensate for the depreciation rate, then the unit value will remain constant. As an example, if you depreciate $100 worth of equipment, and hold back $100 of cash from the mining profits, you have $100 less net equipment, and you have $100 more cash.

The book value will remain the same, and you basically pay out the balance of the profits to the shareholders. In that way, you could have a business in which you’ve created a new security that doesn’t fluctuate in price; it’s just the dividend payout that fluctuates. Sometimes the dividend is higher and sometimes it’s lower; people can live with that. But the accounting value will always be the same. 

That’s a complicated concept to absorb; sometimes I need to explain it five times for people understand, but that’s the way it works. Income is very important in modern-day asset allocation.

Horizon Kinetics has already raised funds for partnerships around cryptocurrency mining (or rather Consensus Money Seigniorage, as we believe they would rather call it). Furthermore, based on various statements made by Murray Stahl and his partner Steve Bregman, it is to be expected that Horizon Kinetics will expand its offering of mining-related investment products, most likely through a closed-end investment fund. 

The Profitability of Mining

The Economics of Mining has characteristics that make it feasible as an asset class, in our opinion. It should come as no surprise that profit margins in mining can fluctuate quite wildly. Why is that? The biggest factor is the fluctuation in the price of the cryptocurrency that is being mined. 

However, there are other factors that affect profitability:

  • The cost of miners (also known as workers) can fluctuate
  • The electricity prices can vary 
  • Machines can perform or underperform 
  • The Difficulty Rate and number of miners and nodes 

Nonetheless, as is the case with Bitcoin, the whole system is designed for mining to be profitable over the long term. As Murray Stahl explained in a Consensus Money Podcast: 

So, there were times when cryptocurrency mining went to break even. It happens. But it’s not going to stay there very long because cryptocurrency mining is designed to equilibrate. So let’s just say that it was unprofitable for a number of weeks. Well, most of these companies were very poorly capitalized. 

So they can’t operate without profitability. They didn’t have huge cash reserves to operate unprofitably. What they would do to save cash is that they would turn off their machines. Which you can do in 30 seconds. If they turn off their machines, what happens is that the difficulty rating? Which you will recall, is the probability of solving this equation. If they turn up their machines, the difficulty rating goes down because there are fewer machines trying to solve the problem. 

So when difficulty rating goes down and you leave your machine on, your machine necessarily becomes more productive. The probability of earning a coin goes up. So ultimately the whole thing is designed to equilibrate. 

So, I’ve never really seen it being, maybe I’ve seen it for a day or two, get modestly unprofitable. Of course, it really isn’t moderatly unprofiitable, even so. Because when people calculate the cost of mining a coin, remember they are adding in the hosting fee plus the depreciation. The depreciation is not a cash expense. So on a GAAP basis, you might not be profitable but on a cash basis, you’re very profitable.

As Cryptocurrencies gain acceptance and their user base grows, many of them will be designed to have miners facilitating the system and the transactions flowing through that system. As acceptance and usage grow, mining will become a part of the conventional capital markets and become an asset class. 

Investing in Mining as a Service Contract

What sets investing in mining apart from investing directly in the cryptocurrencies is that, with mining, you are not speculating on the price of the cryptocurrency. The mining operations are productive assets as they produce yields. 

Think of it this way: You could mine cryptocurrency but every time you get your mining reward, you exchange it for your local fiat currency. Once you have paid for your operating costs, you will have something left over. Your operations will yield a return irrespective of the price fluctuations of the cryptocurrency itself. 

There also exists such a thing as Mining-as-a-Service. There are a number of mining companies, that sell mining agreements to customers. These contracts can have durations, ranging from 3 months up to 2 years and are sold on a per hertz per-second basis. 

At How to Value Stuff, we have not been doing any mining ourselves. We are, however, active buyers of mining contracts. In our experience, although this differs widely between providers, mining contracts carry extremely high investment yields at the moment. We will publish more about our experience with mining contracts in future posts. 

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a BlockFi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Is the Number of Active Blockchain Wallets a Leading Indicator?

A predictive indicator of how blockchain and cryptocurrencies are progressing in disrupting the world of the conventional finance industry is the number of active cryptocurrency wallets.

What are Crypto Wallets? 

According to Wikipedia, a cryptocurrency wallet is “A cryptocurrency wallet is a device, physical medium, program or service which stores the public and/or private keys and can be used to track ownership, receive or spend cryptocurrencies. The cryptocurrency itself is not in the wallet.“

Today, anyone who is interested in downloading a cryptocurrency wallet to his or her mobile phone will find an exhaustive list of wallets that allow the user to send, receive and hold cryptocurrencies, such as Bitcoin, and Ethereum.

That crypto wallets have gotten so much attention from entrepreneuring blockchain ventures should come as no surprise. Owning the relationship with the wallet user will be immensely valuable for any provider of wallets that can attract users at scale. Hence, there is a race for domination.

How Many Crypto Wallets Are There? 

According to Statista.com, there are just under 35 million active cryptocurrency wallets in use in 2019. This number has grown 5-fold over the last 3 years.

Statistic: Number of Blockchain wallet users worldwide from 1st quarter 2016 to 1st quarter 2019 | Statista

As the user base grows, cryptocurrencies are reaching more mainstream users. At 35 million users, the user base is tiny. Especially if you take into consideration that about 67% of Americans own a credit card and that there are over 1.5 billion credit cards in circulation between Visa and MasterCard.

More Thoughts on Crypto

Want to collect interest on your crypto? Sign up for a BlockFi account with this link and receive a $10 bonus in Bitcoin when you fund your account.

Clearing & Settlement | Blockchain Use Case

When you start to take a deep look at how the capital markets system actually works, you quickly come to realize that the system the capital markets operate on, is an archaic legacy system.

The Settlement System

Think for example, about how we settle securities transactions. If you buy a publicly-traded stock through a broker, how does the ownership of the stock transfer over to you? The settlement of that stock actually takes some days. This is why when companies are issuing dividends, they have a record date and execution date.

Cede & Company

But that’s just half of it. If you buy a stock, say one which is listed on the NYSE, you don’t actually own it. I first heard of this from Patrick Byrne, Overstock.com’s quirky founder. When I heard it, I thought he was exaggerating or just misunderstanding something.

But if you look it up, you’ll find that Cede technically owns substantially all of the publicly issued stock in the United States. Investors do not hold direct property rights in the securities they hold, but rather have contractual rights that are part of a chain of contractual rights involving Cede. If you still don’t believe this, there are actually plenty of legal cases where this system has caused major conflicts and confusion.

A Feature, Not a Bug

It is important to understand that this is not some sort of a conspiracy theory about men in dark rooms trying to use their power to advantage themselves. The current clearing and settlement system is built to suit the needs of a paper-based reality. Derek Edward Schloss explains this pretty well in an article called Security Tokens and The Digital Wrapper:

DTC’s system of share ownership was likely born of good intentions, although today it just looks like an expensive and inefficient upgrade of a slow, centralized, paper-based framework. As a result, our present-day public markets run on a system where we don’t actually own anything, controlled by multiple rent-seeking intermediaries at each stage, with sometimes wildly inaccurate share management and relatively slow settlement times across the board.

When the Transaction is the Settlement

If securities, such as stocks, are tokenized on a blockchain system, in theory, the transaction is the settlement. There are other advantages as well. Today it is hard for the issuer of a security to communicate directly with the shareholders. Voting, as described in the Bloomberg article that I link to above, can be quite tricky.

There are many exciting projects out there, that aim to improve those processes and would allow the issuers of securities to interact and share information with the owners of those securities. Ravencoin would be one of them.

Adoption of Security Tokens

So far, there the disruption of the current clearing and settlement system doesn’t seem to be there yet. Which is very understandable. The capital markets are huge and the barriers to entry are enormous. Not only is the regulatory scrutiny as high as it gets, but any incumbent system will also have huge network effects.

In his book, The Hard Thing About Hard Things, Ben Horowitz describes the internet landscape facing Netscape, before it came out with the first web browser:

At the time most people believed only scientists and researchers would use the Internet. The Internet was thought to be too arcane, insecure, and slow to meet real business needs. Even after the introduction of Mosaic, the world’s first browser, almost nobody thought the Internet would be significant beyond the scientific community – least of all the most important technology industry leaders, who were busy building proprietary alternatives. 

In the case of Security Tokens, at least the industry leaders seem to be very aware and already participating in clearing and settlement 2.0.

More Thoughts on Crypto

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