Saying that many investors were not convinced by cryptocurrencies in their first decade of existence would be an understatement.
Originally, author Thomas Jeegers was one of them. He looked into this new virtual money more than once and, each time, decided not to invest. Like many long-term investors, he was looking for fundamentals. Crypto had none — or so he thought. This book details why his perspective on cryptoassets has shifted – and why yours should, too.
Recent developments in this field have turned crypto from a speculative financial innovation to a new asset class, one with a new kind of fundamentals that offer real economic value. One that will change finance and investments. One that may be a trigger defining the fourth industrial revolution, the same way steam, electricity, and the Internet were triggers for the first, second, and third industrial revolutions, respectively.
Despite what advocates of the traditional financial establishment like to claim, cryptoassets were by far the best financial investment of the last decade, even risk-adjusted, and could still be so for the coming one. They should not be overlooked, regardless of one’s opinion of them.
This book answers the main questions any potential long-term investor in cryptoassets should ask:
What are cryptoassets and blockchain technology?
Why consider cryptoasset investments?
When is a good time to invest?
Where should one invest?
How should one invest?
Which valuation methods are appropriate?
Understanding Crypto Fundamentals includes a deep dive into the management of risks specific to cryptoassets, both financial and non-financial, and provides the tools needed for investment success in this new asset class. Upon completing the book, you will have a new perspective on cryptoassets and how you can benefit from them as an investor.
Author(s): Thomas Jeegers
Publisher: Apress
Year: 2023
Language: English
Pages: 315
Table of Contents
About the Author
About the Technical Reviewer
Disclaimer
Preface
Introduction
Part I: Why Consider Crypto Investments?
Chapter 1: A Brief History of Money
What Makes Money?
Precious Metals As Money
Storing Value
From Money to Currency
The Ascension of Paper Currency
Central Banking and Fractional Reserve Banking
The Great Depression
The Bretton Woods Era
The Return to Fiat Currencies
Increasing the Pace of Printing
The COVID-19 Pandemic
Where to Go from Here?
The Highest Stock-to-Flow Asset of All Time
Key Concepts
Extension Questions
Chapter 2: Complementary Currencies
Structural Imbalances
A Procyclical Monetary System
Monetary and Financial Sustainability
Multiple-Currency Systems
The Wörgl Experiment
The Swiss Miracle
Incentives Due to Currency Devaluation
A Possible Future
Key Concepts
Extension Questions
Chapter 3: Blockchain As a Force for Good
Decentralization
Privacy
Inclusion
Private Property
Free Speech
Inflation
Environment
Sustainability
Transparency
Velocity
Foreign Exchange
Accounting
Sharing Economy
Creators’ Empowerment
Key Concepts
Extension Questions
Chapter 4: Portfolio Management Primer
Price Fluctuations
Risk and Return
The Sharpe Ratio
The Sortino Ratio
Simple Analysis of Return for Investors
Correlation and Diversification
Fiduciary Duty of Portfolio Managers
Key Concepts
Extension Questions
Part II: What Are Cryptoassets?
Chapter 5: Birth of a New Asset Class
Genesis of the First Cryptoasset: Bitcoin
A Solution to the Double-Spend Problem
Byzantine Generals Problem
Byzantine Fault Tolerance
Decentralized Money Proof of Concept: Rai Stones
Bitcoin Beyond Its Genesis
Crypto Platforms and Smart Contracts
Altcoins
Key Concepts
Extension Questions
Chapter 6: Blockchain Basics
Blockchain’s Main Characteristics
A Chain of Blocks
Asymmetric Encryption
Updating a Decentralized Ledger
Consensus Mechanisms
Updating a Decentralized Ledger with Proof of Work
Structure of a Block Under Proof of Work
The “Longest” Chain Is Always Right
Software Updates and Forks
Public vs. Private Blockchains and Hybrids
Is Blockchain Going to Replace All Databases?
Updating a Ledger Under Proof of Stake
Alternative Consensus Mechanisms
Decentralized Data vs. Decentralized Transactions
Why Is Blockchain Different?
Key Concepts
Extension Questions
Chapter 7: Cryptoasset Taxonomies
Challenges with Setting up a Cryptoasset Taxonomy
Cryptoasset Taxonomy by Form and Function
Cryptocurrencies
Digital Store of Value
Medium of Exchange
Privacy Coins
Stablecoins
Alternative Cryptocurrency Taxonomy
Cryptocommodities
Platform Protocols or Smart Contract Platforms
Interoperability
Oracles
Cryptotokens
Platform Tokens
Financial Services Cryptotokens
Non-Financial Services Cryptotokens
Web 3.0 Cryptotokens
Non-Fungible Tokens (NFTs)
The General Taxonomy for Cryptographic Assets (GTCA)
The Digital Asset Classification Standard (DACS)
The Global Crypto Classification Standard (GCCS)
Cryptoassets Technology in Layers
Are Cryptoassets Securities?
Key Concepts
Extension Questions
Chapter 8: Cryptoasset Investment Types
Direct and Indirect Investments In Cryptoassets
Exchange-Traded Funds (ETFs)
Companies Using Blockchain
Companies with Cryptoassets on Their Balance Sheet
Companies Providing Crypto Services
Early-Stage Cryptoasset Investing
Mining
Traditional Cryptoasset Mining
ASIC-Resistant Mining
Mining Pools
Staking
Crypto Lending
Liquidity Mining
Yield Farming
Airdrops
Transaction Routing
Key Concepts
Extension Questions
Part III: When Is a Good Time to Invest?
Chapter 9: Crypto Trends
Bitcoin Price
Bitcoin “Halving” Cycles
Bitcoin Golden Bull Ratio
Bitcoin Cycles Rallies
Bitcoin Cycles Duration
Relative Market Dominance
Bitcoin Lead
Macrocycles and Correlations
Other Crypto Cycles
Charts in Technical Analysis
Understanding Gartner’s Hype Cycles
Calendar Adjustments
Fear & Greed Index
Adoption
Key Concepts
Extension Question
Chapter 10: Prime Time
Liquidity
DEX Accessibility
Layer 1s Interoperability
Exchange-Traded Funds (ETF) Availability
Formal Taxonomy
Regulation
Historical Data
Awareness on Privacy
Adoption As Means of Payment
Crypto Ecosystem
Key Concepts
Extension Questions
Part IV: Where Should One Invest?
Chapter 11: Investment Vehicles
Keys and Addresses
Hot Wallets and Cold Wallets
Custodial and Non-Custodial Wallets
Centralized and Decentralized Platforms
User Interfaces and Exchanges
Deterministic and Non-Deterministic Wallets
Seed Phrases
Additional Wallet Features
Bitcoin Core
Wallet Safety
Storing Private Keys Safely
Key Concepts
Extension Questions
Part V: How Should One Invest?
Chapter 12: Investment Strategies
Buy Low, Sell High
Timing the Market
Dollar-Cost Averaging
Filter the Noise
Taxation
Borrowing As an Alternative to Sale
Behavioral and Mental Biases
Confirmation Bias
Loss Aversion
Endowment Effects
Conservatism Bias
Anchoring Effect
Overfitting Bias
Data-mining Bias
Sample Selection Bias
Survivorship Bias
Framing Bias
Herd behavior bias
Prediction Overconfidence Bias
Size and ESG Biases
Key Concepts
Extension Questions
Chapter 13: Non-Financial Risk Management
“51% Attack” Risk
Quantum Computing
Governmental Risk
Developer Risk
Risk of Community Disagreement
Mining Concentration Risk
Ownership Concentration Risk
Regulatory Risk
Platform Risk
Custody Risk
Oracle Risk
DDoS Attacks
Scams and Market Manipulation
Decentralized Insurance
Key Concepts
Extension Questions
Chapter 14: Financial Risk Management
Credit Risk
Liquidity Risk
Market Risk
Value at Risk (VaR)
Analytical VaR
Historical VaR
Monte Carlo VaR
Characteristics of VaR Metrics
Roy’s Safety-First Criterion
Shortfall Risk
Expected Shortfall
Backtesting
Stress Testing
Key Concepts
Extension Questions
Part VI: Which Valuation Methods Exist?
Chapter 15: Assessment Framework
What Problem Is the Asset Solving?
How Important Is the Problem?
How Is the Asset Solving the Problem?
Which Candidate Best Solves the Problem in this Market?
How Reliable Is the Team Behind the Asset?
How Is the Local Regulatory Environment?
Do the Tokenomics Make Sense?
How do Rating Agencies Assess the Cryptoasset?
Cryptoasset Picking
Key Concepts
Extension Questions
Chapter 16: Value Investing in Cryptoassets
Combining Valuation Methods
Net Present Value of Future Cash Flows
Valuation Based on Multiples
Asset Value, Earnings Power and Value of Growth
Asset Value Based on Replacement Costs
Earnings Power Value Based on Staking Rewards
Valuing Growth
Measuring and Valuing Usage of a Cryptoasset
Measuring Growth Based on Usage
Including Supply in Valuations
Stock-to-flow Model
Stock-to-flow Cross Asset (S2FX) Model
Valuation from Comparables
Network Value to Transactions Ratio
Other Fundamental Metrics Behind Cryptoassets
Fulcrum Index
Valuing Bitcoin As a Cybersecurity Protocol
Valuation Methods Not Based on Fundamentals
Key Concepts
Extension Questions
Chapter 17: Concluding Remarks
Looking Back
Looking Forward
Part VII: Appendices
Appendix A: Precursors of Cryptoassets
Anonymous eCash and DigiCash: 1982
Secured Chain of Blocks to Timestamp Documents: 1991
The Eternity Service: 1996
Hashcash: 1997
Bit Gold: 1998
B-Money: 1998
Appendix B: Bitcoin’s Replacement Cost Valuation
Appendix C: Financial Products Applied to Crypto
Leverage and Margin Trading
Derivative Products
Call and Put Options
Futures Contracts
Acronyms and Abbreviations
References
Index
