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."
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.