"Worse Than Tulips..." And Other Enduring Misconceptions About Crypto Assets

Via CoinDesk.com,

Chris Burniske is a cofounder of Placeholder Ventures in New York and former blockchain products lead at ARK Investment Management LLC. Jack Tatar is an angel investor and advisor to startups. In this opinion piece, adapted from their book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, they explain what mainstream financial commentators still don't understand about the space – even if the markets are starting to get it.

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This has been a breakout year for crypto assets, but not so long ago we were thickly in "blockchain, not bitcoin" season.

When we began work on our book, the consensus play seemed to be stripping the native assets out of blockchains and privatizing these originally open networks.

With the book, we set out to make a stand for public blockchains as the more important innovation, to confront the misguided (and persistent) claim that crypto assets are elaborate scams, and to reassure macroeconomists that not all crypto assets are currencies.

Bitcoin, not blockchain

One of the main motivations for writing the book was to emphasize the value of the native assets that incentivize a distributed set of actors to provision a digital good or service with no central operator, i.e. crypto assets.

Given the recent boom in interest around crypto assets, it seems counterintuitive that much of 2014, 2015 and 2016 were dominated by the idea that blockchain technology was important, while crypto assets could be forgotten and little would be lost.

The term distributed ledger technology (DLT) became popularized to convey this concept, effectively washing those pursuing DLT-strategies clean of association with bitcoin. Many in the financial services industry were all too eager to forget that bitcoin was the mother of blockchain technology.

Fall 2015 was when the frenzy around private blockchains really began, with Blythe Masters and Digital Asset Holdings featured on the cover of Bloomberg Magazine, and the Economist running a front cover piece called "The Trust Machine."

The combination of Masters, Bloomberg, and the Economist led to a spike in interest in blockchain technology that set off a sustained climb in global Google search volumes for "blockchain." In the two weeks between Oct. 18 and Nov. 1, 2015, just after Bloomberg and the Economist published their articles, global Google search volumes for 'blockchain' grew 70 percent.

We find ourselves on the flip side of Jamie Dimon’s reasoning: we believe the majority of private blockchains and DLT implementations will become the CompuServes and AOLs of the cryptoasset movement.

Time and again through the history of information technology, open has won out over closed, public has won out over private. This is not to say there isn’t a place for closed and private, but rather that the impact such systems have on the world consistently pales in comparison to the change brought about by open and public systems.

As we write in the book,

"We see many DLT solutions as band-aids to the coming disruption. While DLT will help streamline existing processes — which will help profit margins in the short term — for the most part these solutions operate within what will become increasingly outdated business models."

Baby boomer biases

Famously, Nout Wellink, former president of the Dutch Central Bank, said of bitcoin, "This is worse than the tulip mania... At least then you got a tulip [at the end], now you get nothing."

image courtesy of CoinTelegraph

Nout displays a type of anti-crypto asset bias many baby boomers suffer from: if these things have no physical form, how could they possibly have value?

To start, such a mindset then raises the same question of much of our world, which is increasingly based upon things that have only digital representations and amass massive amounts of value.

For example, the market caps of Twitter, Facebook and Google are largely based on 100% digital services - certainly, those services produce cash flows, but cash is paid in exchange for a digital service, implying a purely digital service can have value.

To sate the skeptical, in our book we provide a deep dive into methodologies for valuing bitcoin, and explain how the methodologies can be put to use for crypto assets more broadly.

One of our favorite explorations was working to quantify the contributions of developers, which we don’t think we nailed, but hopefully provided a basis for future work and exploration. Below is one of the developer graphs, showing the frequency of activity based on code repository points and the number of days a crypto asset project has been in the works.

In addition to explaining how crypto assets have a very real form of value, we spend two chapters exploring the most famous market disasters across all kinds of asset classes, including John Law and the Mississippi Company that brought France to its knees, the cornering of the gold market by Jay Gould, and different forms of this time is different thinking.

We spend a significant chunk of time exploring the history of financial speculation to highlight that all asset classes go through growing pains, and we should expect the same of crypto assets.

We may have new bad actors in the crypto markets, but they are playing old tricks.

Why so many?

A question asked by many new to the industry is, why do we need more than 100 currencies? Can’t we do with just a handful? And if these things intend to be currencies, why are they so volatile?

For that reason, we titled the book Crypto assets, and not Cryptocurrencies, and we explain our thinking as follows:

Historically, crypto assets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of crypto assets as currencies, but rather most are either digital commodities (crypto commodities), provisioning raw digital resources, or digital tokens (crypto tokens), provisioning finished digital goods and services.

A currency fulfills three well-defined purposes: to serve as a means of exchange, store of value, and unit of account. However, the form of currency itself often has little inherent value. For example, the paper bills in people’s wallets have about as little value as the paper in their printer. Instead, they have the illusion of value, which if shared widely enough by society and endorsed by the government, allows these monetary bills to be used to buy goods and services, to store value for later purchases, and to serve as a metric to price the value of other things.

Meanwhile, commodities are wide-ranging and most commonly thought of as raw material building blocks that serve as inputs into finished products. For example, oil, wheat, and copper are all common commodities. However, to assume that a commodity must be physical ignores the overarching “offline to online” transition occurring in every sector of the economy.

In an increasingly digital world, it only makes sense that we have digital commodities, such as compute power, storage capacity, and network bandwidth. While compute, storage and bandwidth are not yet widely referred to as commodities, they are building blocks that are arguably just as important as our physical commodities, and when provisioned via a blockchain network, they are most clearly defined as crypto commodities.

Beyond cryptocurrencies and crypto commodities - and also provisioned via blockchain networks - are “finished-product” digital goods and services like media, social networks, games, and more, which are orchestrated by crypto tokens. Just as in the physical world, where currencies and commodities fuel an economy to create finished goods and services, so too in the digital world the infrastructures provided by cryptocurrencies and crypto commodities are coming together to support the aforementioned finished-product digital goods and services.

Crypto tokens are in the earliest stage of development, and will likely be the last to gain traction as they require a robust cryptocurrency and crypto commodity infrastructure to be built before they can reliably function.

The markets catch up

We wrote Cryptoassets to cut against the grain of thinking that claimed bitcoin and its digital siblings were a niche movement, and instead to emphasize to investors that this represents the greatest opportunity for investors and entrepreneurs since the Web.

In the midst of writing, the markets came to the same realization, taking the aggregate network value of crypto assets up roughly 15-fold, and doing much of the convincing for us.

Nonetheless, we hope the book serves as a useful guide to the uninitiated, an explainer for befuddled financial professionals, and a reflection on the wild ride it’s been for the crypto OGs.

Comments

any_mouse BaBaBouy Sun, 10/29/2017 - 15:27 Permalink

Cryptos are as valuable as Facebook or Twitter.

The article says so.

Old fashioned stores of value have industrial uses. A base value. High tech requires the metals.

It comes down to Full Faith and Credit.

There is no inherent value.

Thus, the need for massive proselytizing by crypto believers.

Multi Level Marketing. The early adopters are making the most. The late entrants are sustaining the early adopters.

In reply to by BaBaBouy

VD any_mouse Sun, 10/29/2017 - 15:40 Permalink

correct. lots of crypt0-pyramid pumpers here; well, 4 main ones to be exact. do your due diligence. make sure you track the track records of these resident crypt0-trollz here shilling very hard -- one of them we know for sure has an abysmal track record with silver "investing". you've been warned.

In reply to by any_mouse

NiggaPleeze tmosley Sun, 10/29/2017 - 18:20 Permalink

 Fabulous prediction, I propose we enter into a legally binding contract, if a basket of BullshitCoin and other ponzi-coins increase in value less than 50,000%, you will pay me the difference based on investing $1,000 today, and if that basket increases by more than 50,000%, I will pay you 100x the additional increase.  That's a 100-to-1 payment!Deal?

In reply to by tmosley

NiggaPleeze VD Sun, 10/29/2017 - 23:20 Permalink

 He said two years.Crypto-currencies are a classic example of a ponzi scheme.  The guy who wrote the code will make countless millions, since he paid virtually nothing for all the bullshitcoin but sold them to idiots for a fortune.Ponzi scheme:  a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.Which part of that definition does not apply to Cryto-crap?  Crypto-crap is a case study of how even "educated investors" can get suckered by Ponzis.

In reply to by VD

EddieLomax any_mouse Sun, 10/29/2017 - 16:35 Permalink

Yep, I've got three questions for the Cyrpto fans1) How large does the block chain get?  D2) How much data needs to be transmit for each transaction?3) I've lost the password to my crypto wallet, who do I contact to get my completely anonymous account holding my life savings back?  I can prove my name, address and all the other details that are in no way recorded on it if that will help? Perhaps I'm missing something, well there is question #4.4) I want to buy some petrol, why would bitcoin be a better way to pay for it then my amex? Feels like it has a use, but buying pretend money with real money isn't my sort of bargain.

In reply to by any_mouse

NiggaPleeze EddieLomax Sun, 10/29/2017 - 17:01 Permalink

 And even if you don't lose your password, if you happen to die, how will your estate get the password?  Did you keep your password next to your wallet?And did you make a backup you can access?  Otherwise if you lose/damage your phone/computer ....  (Where did you keep that password?)Oh, and then there are brute force attacks.  Even if they aren't practical yet, for the average person, Moore's law keeps ticking....

In reply to by EddieLomax

ebworthen NiggaPleeze Sun, 10/29/2017 - 17:42 Permalink

You guys are making way too much sense, and I don't see any MATH in your posts, so you must be wrong.You're probably baby-boomers or Gen-X'ers, you've been around, seen some things, so you're cynical.You might even have been an adult when the Tech.-bubble popped, so you don't understand crypto.Never-mind that some of the root words are:  bit, ether, and crypt.  To the moon!https://i.pinimg.com/736x/d3/4c/b3/d34cb3f8db4188f47d87c6b3b0d7acce.jpg(link opens in new window/tab)

In reply to by NiggaPleeze

Blue Steel 309 NiggaPleeze Sun, 10/29/2017 - 18:38 Permalink

Moore's law has been on hiatus, but it is about to pick back up and straighten out that curve with a vengeance.

Brute forcing block chain is probably much closer than most people think, if they think about it at all.

Some advances include:

*2D magnets
*integrating memory on CPU
*materials involving properties of light
*other materials science advances I won't list here
*advances in neural circuits

None of these are commercial yet, but the different tools they need to solve quantum computing or something similar are being discovered at a rapid pace, along with new designs for parallel processing and circuit designs that will be huge leaps in speed.

In reply to by NiggaPleeze

kochevnik NiggaPleeze Sun, 10/29/2017 - 22:13 Permalink

You think everyone has that same problem of chemical dependence and passion for stupid behavior? Not everyone lives in 3rd world ghetto shitholes unable to think past next crack hit.  Why would such person have 'estate'?Moores law stopped working about 2006. In any case others issues much larger for crackers like latency  and honeypots

In reply to by NiggaPleeze

VD Looney Sun, 10/29/2017 - 15:36 Permalink

Tylerz have been promising a market crash for YEARS and now they're pumping cyrpt0 articles -- this website is here for ad revenue and as such Tylerz are trying to make as much money off this latest bubble du jour. There are irresponsible crypt0-shillz literally living on zerohedge 24/7/365; some of them shilled silver promising $60oz any moment -- they may have convinced some gullible speculators here on zh. This time will be no different; in fact, it will be worse. Far worse. You were warned then. You are being warned again. Buyer beware.

In reply to by Looney

Son of Captain Nemo Son of Captain Nemo Sun, 10/29/2017 - 16:39 Permalink

P.S.

I'll say it again... Crypto has a place as a very real "medium of exchange" IF and WHEN an international engineering task force that is all inclusive that solicits ideas for development like the IETF...

Having said this... The "store of value" DOES NOT EXIST at present. And until IT DOES join that "medium of exchange" part that has yet to agree on "specie standards" it's nothing less than "vaporware" ripe for the worst asault by the "Usual Suspects" as they see fit!!!

In reply to by Son of Captain Nemo

VD Son of Captain Nemo Sun, 10/29/2017 - 16:46 Permalink

absolutely true. before you encrypt, while you write via pen on paper your "secret" words off your screen, while you do all your "anonymous" computing, the screens are being captured by the NSA on the fly. there are nodal exploits w/in the blockchain that can be achieved by the NSA at any point in time; it is their proof of concept being trial balooned as "Satoshi's". the copy-cats can get whacked too.

In reply to by Son of Captain Nemo

Son of Captain Nemo VD Sun, 10/29/2017 - 17:09 Permalink

VD

The only way I would ever involve myself with "dipping the toe in the water" is if crypto has it's "OWN" network with devices and encryptions standards that are independent of every other existing network that currently exists.

Then of course there is the conundrum of backing that crypto with something of value such as a commodity that I believe banks are still using to "close deals"... Last I checked (http://www.zerohedge.com/news/2017-10-26/everything-you-wanted-know-abo…)

In reply to by VD

HRClinton HRClinton Sun, 10/29/2017 - 17:41 Permalink

Correct answer (that surprised the hell out of me, when I learned about it):FUTURES CONTRACTS. It was the first instance of FCs on a massive scale.Even though the Tulip Mania popped eventually, the core value of FCs remained. (My part to add value on occasion, when I'm not bitching about this, that or (them)).

In reply to by HRClinton

overbet NemesisteM Sun, 10/29/2017 - 16:34 Permalink

The truth? Many on here missed returns you'll never likely see again in your lifetimes and instead of humbly accepting the truth, you bash.

Never admit you were wrong and still daily proven wrong as your gold price drifts sideways. Continue to attack with every excuse you can muster to avoid acknowledging reality.

As you will see from the dowvotes dips shits really don't like the truth. It's just more comfortable to avoid it when your proven wrong. Nothing I stated was incorrect. Btc continues to rise gold continues to be stagnant. I don't like the truth! Down vote! Ps I down voted myself to get u monkeys started.

In reply to by NemesisteM

RedBaron616 overbet Sun, 10/29/2017 - 18:02 Permalink

Just because someone made lots of money on speculation doesn't mean we have to sink to bended knee before their majesty. Even the lottery has a winner and look at those odds. Should we bow before them too, as they were all wise? Speculators make money on occasion.  That doesn't make them brilliant or someone to emulate.You are true believer. Buy, Buy, Buy! No thanks. The NSA can make all your "value" go poof. If the IRS doesn't get there first.

In reply to by overbet

USA USA tmosley Sun, 10/29/2017 - 16:29 Permalink

tmosley,You have tried and tried, it is time you give up. The herd is going to the slaughter and thanks to people like you, I will be on the side that watches.Well done sir, now enjoy your profits and attemps to help the sheep!edit: $6250 @ 1329 hrs. If my damn gold was only doing this bad!!!!

In reply to by tmosley

Winston Churchill Sun, 10/29/2017 - 15:10 Permalink

I know when my brain damaged(car crash) landscaper starts telling me about his crypto buying plansthat the final stage of the mania has arrived.That was yesterday,set your watch by it.The tailor in "the emperor had no clothes" story did get paid, seems these folk lore lessons need to be repeatedfor our ADD addled generation more often in childhood.A beautifull house,built with no foundations,in a swamp.What could go wrong ?