My Bitcoin and Crypto Portfolio: the 5th issue

Published / by kgao / Leave a Comment

Things just get crazier, don’t they? Here’s my April performance against benchmarks:​

Currently these assets are more than 1% of my portfolio:

  • BTC: 50%
  • ETH: 19%
  • XEM: 11%
  • DASH: 3%
  • ZCL: 3%
  • PEPECASH: 2%
  • XMR: 2%
  • XRP: 1%
  • BTS: 1%

I like to review my investment theses and see what needs an update. The success of Ripple is the biggest outlier. It’s currently #2 on CMC and has gone up 10x in just the last month. Whether a pump or playing catchup, XRP’s performance makes me question two price drivers I used to deem important:

1. Token supply mechanics (percent of supply issued, predictability of the issuance rate, current and expected inflation)

2. Degree of decentralization (with respect to the team, to its sources of funding, to its transparency in everything from source code to operations). Perhaps in these times of continued Bitcoin scaling uncertainty, the market is moving to centralized assets (in addition to XRP, other examples include XEM, DASH, assets like FACTOM and STEEM)

Then again the Ripple bubble could soon burst and upend these observations.

Recommended reads:

  • My Medium essay on how Pepe the frog became a very interesting cryptocurrency and trading card community [link]
  • Token sales / ICOs and their pros and cons [link]
  • The Siacoin team explains why the cryptocurrency market cap indicator is misleading [link]. Jimmy Song shares a related perspective on Bitcoin’s dominance index [link]
  • One person’s thoughtful and balanced story of how they got into cryptocurrency investing and lessons learned [link]

Thanks for reading!

Kevin (@kgao)

3 branches of BTC “governance”:
–Full Nodes (can veto miners & devs)
–Miners (can veto devs)
–Devs (can help others bypass some vetoes)
-Jameson Lopp (@lopp)

Why I own each cryptoasset in a few words

Published / by kgao / Leave a Comment

I find it helpful to try and get my investment rationale into as few words as possible. Ideally I would review these (along with my investment theses) from time to time to determine if I should increase, maintain, or decrease a position.

As you can tell my portfolio is steadily expanding, though BTC + ETH still remains ~70% of my holdings.

The 4th Bitcoin and Crypto Portfolio Letter

Published / by kgao / Leave a Comment

Hi everyone, it’s been awhile since I sent an update. But if the crypto market continues to perform the way it has, I should probably just shut up 🙂

The following assets represent >1% of my current portfolio:

  • Bitcoin: 57%
  • Ether: 23%
  • NEM / XEM: 6%
  • Dash: 4%
  • ZClassic: 1%
  • Pepecash: 1%
  • Monero: 1%

And these assets are sub-1%: Litecoin LTC, Ethereum Classic ETC, Zcash ZEC, Decred DCR, Emercoin EMC, Counterparty XCP, Aeon AEON, Storjcoin SJCX, Ripple XRP, and Bitshares BTS.

A few weeks ago I sent a summary of investment theses. Thanks to those who gave feedback and asked questions and challenged my thinking.

The crypto market is doing very well. My cautious prediction was $100B USD total market cap by 2020 but we may see that before this year is over! Regardless of whether or not this constitutes a “bubble”, I think the fundamentals of crypto are stronger than ever. Innovation. Experimentation. Talent. Growth in multiple use cases. Software is eating the world, and crypto is eating money.

My investment strategy is currently a mix of:

1. Hold big positions in the leading assets with the strongest fundamentals – eg, BTC and ETH. My target is probably closer to 50% BTC instead of the 57% today

2. Take sizable “flyer” bets on interesting assets that could see breakout price growth in the next 3-6 months – eg, ZCL and Pepecash (I’m writing a separate long essay on Pepecash to clarify my thinking and explain what the hell it’s all about, but it’s perhaps the only asset I actually enjoy following, as opposed to most of the rest in which greed now predominates)

3. Diversify into different use cases of coins and assets because long-term, we don’t know who will win and what use cases will prove popular – Dash for its marketing and self-funding and potential to cross the chasm, NEM for its Asia presence and hybrid of private + public chains and quietly competent development team

I still need to calculate my April returns versus benchmarks and will share that when it’s ready.

Two general interest links for you to read:

“We have the tech of 93 combined with the hype of 99.” – Sergej Kotliar

Cheers!

Kevin

Cryptocurrency Investment Theses

Published / by kgao / Leave a Comment

Hi everyone – I spent a few hours to write a running list of the observations and theses that inform my investment decisions these days. To the extent I have explicit heuristics for investment, these are it. Given how quickly this market moves, I’ll probably need to rewrite them in 3 months. So take what I’m saying as a snapshot of what I believe at this very moment, but like a banana, they’ll ripen fast.

Wanted to share a working draft so I can get your feedback and further sharpen and refine thinking. These are raw so my advance apologies for anything too unsubstantiated or grossly generalized. Each day adds more questions and I’m excited to continue learning and investing and reading.

I may or may not send a portfolio update this week. The portfolio has expanded quite a bit. If not this week then definitely next. Look forward to hearing from you!

Theses / Observations

  • Crypto will go from a $30B market today to $100B by 2020
    • Current drivers
      • Large hedge funds and institutional investors investing in the space
      • Continued growth in “Bitcoin as digital gold” storyline
      • Cryptocurrencies as both a comparatively volatile asset class, a historically high performing one, and one whose price performance is uncorrelated with equities, currencies, and commodities
      • Crypto investment is a closed loop; profits are re-invested right back in the system, into more altcoins and ICOs and coin launches; it’s no accident one of the largest if not the largest crypto exchange is Poloniex which doesn’t accept fiat; the feedback loop is both faster and stronger than eg the standard startup creation wealth cycle where ex-Google millionaires start companies and make angel investments
    • Future drivers
      • Development of real derivatives and futures exchanges
      • Regulated investment vehicles eg ETFs
      • Growth in cryptocurrencies for transactions, remittances, and payments
      • Growth in usage of products backed by tokens eg Storj SJCX, Golem GNT, Factom FCT
      • Growth in usage of blockchains backed by tokens eg Ethereum ETH, Stratis STRAT (question: will individual or enterprise oriented blockchains do better?)
      • Growth in ICOs as a fundraising method (projected $400M raised in 2017, with Bitcoin and Ether as the two most widely accepted currencies to participate)
      • Internationalization – today if you live outside of the US, Japan, and Europe, it is hard to purchase and securely store any cryptocurrencies other than Bitcoin
  • PoS assets will outperform PoW assets in the near term
    • This includes PoS like assets such as NEM XEM and Dash DASH and Decred DCR
    • These assets are more compelling for the average investor because #1 they reduce supply and #2 they offer an interest-like return for staking which is rarely worth the opportunity cost but promotes hype and fomo
    • Ethereum’s transition to Casper / hybrid PoW-PoS will be an interesting data point
  • Coins with low or zero inflation will outperform coins with high inflation or unknown supply dynamics
    • Low or zero inflation: NEM XEM, Monero XMR, Bitcoin BTC
    • High inflation or unknown supply schedule: Zcash ZEC, Ripple XRP, MaidSafeCoin MAID
  • BTC price will continue to underperform “high-quality altcoins” until there is some broadly accepted resolution to the blocksize debate
    • The likely timetable for this resolution could be anywhere from 3 months (unlikely) to 12 months
    • There is a low double digit percentage chance of a hardfork
  • What is a high quality altcoin?
    • General investment principle is to avoid SCAMS and avoid any coins that have recently been pumped (eg, any coin that has seen 3-5x price increase in a month)
    • An engaged and knowledgeable community whose interests are beyond simple price chatter and trading speculation; activity on Slack and Reddit are proxies
    • A strong team is valuable, but more important imo is a single visible technical leader with a pronounced vision (eg, Vitalik and ETH, Jake and DCR, Riccardo and XMR even if he may not consider himself thus); this leader can be anonymous (eg, NEM XEM, AEON); other proxies include Github activity (stars and commits and followers) and degree of interaction between team and community in primary communication channels
    • While it may be a good idea to avoid a team or founder with a questionable past, it’s unclear whether the market penalizes this (e.g., Jed McCaleb with MtGox and Ripple and Stellar)
    • Any asset that started as an ICO requires more diligence: look at how well the ICO process was communicated and managed; quality and reliability of roadmap and deliverables; whether best practices were implemented for ICO sale (eg, cap on raise, some sort of vesting schedule, a comparatively modest % of founder owned coins); in my opinion WeTrust and Melonport are examples of ICOs done well
  • Privacy coins are presently overvalued
    • Comparatively low transaction activity and growth (eg, Monero XMR, Zcash ZEC)
    • When privacy feature is optional, the majority of users choose the less private method (or default method) due to cost and convenience and lack of education (eg, Dash PrivateSend)
  • Some ICOs / asset tokens are remarkably high performing despite no real usage or even the existence of a functioning public product). Why?
    • Examples include Golem GNT, Augur REP, MaidSafeCoin MAID
    • Speculation fever, the same trends that are driving altcoins
    • Ethereum ETH fanboys (value of building on the ERC20 standard)
    • Early winners putting their winnings back into the system (eg, early Bitcoin BTC investors, Ethereum ETH ICO investors)
    • VC and angel FOMO on the potential appearance of a whole new startup equity asset class (similar to USV’s fat protocols thesis)
    • Market size if the products are built and executed to their original vision(s)
  • Marketing coins are undervalued and may continue to be
    • Marketing coins are any coins whose founders or users do a good job of promotion and marketing (eg, Dash DASH, anything Barry Silbert, PIVX, Dogecoin DOGE, Steemit STEEM)
    • Some hire a PR or marketing agency; some (beware scams) are even more aggressive, using bots and shills and hired accounts to astroturf social media channels
    • Self promotion is frowned upon (in part for good reasons e.g. to avoid scams) but can be effective for increasing short-to-medium term price
  • Enterprise focused coins which have a good team and develop solid technology are good performers but this may be temporary. Two risks:
    • One, enterprises may succumb to the same network effects as individual users (one enterprise coin e.g. Ethereum to rule them all)
    • Two, enterprises may finally realize blockchain technology and public chains are overhyped
    • Until that happens, enterprise focused coins (eg, Stratis STRAT, NEM XEM, Emercoin EMC) will continue to do well, despite the large number of them with questionable differences
    • The question is, how many of these enterprise coins can reach the $1B market cap level? So far only two have: Ethereum ETH and Ripple XRP (and the latter I am highly skeptical of, from faux decentralization to large outstanding company-controlled supply to conflicting internal business models)
  • Pump and dumps will continue as:
    • Crypto as an asset class continues to grow and lots of money enters the system, most of which is chasing returns or uninformed
    • Risk is asymmetric; purely anecdotal but it seems that far more coins experience large and sudden price pumps (e.g., 3-5x or more over 4 weeks) but very few experience comparable price crashes (unless it’s off the back of a pump)
    • Early adopters take profits (e.g., early investors in Bitcoin and Ethereum’s ICO) and invest back into system to diversify investments and seek continued high returns and because exiting into fiat is unattractive and inefficient
    • There is overlap with sketchy and scammy audiences and projects. This may always be a part of crypto, e.g., MLM schemes, penny stocks, dark net markets
    • Despite blockchain’s supposed transparency, teams and products and technology can be even harder to understand and verify than your typical startup
    • Markets are small and illiquid for all but the top coins which make them easy targets for price and volume manipulation
    • Exchanges rely on volume and speculation revenues in the absence of large lending and derivatives markets, and the simple act of listing or delisting a midsize coin can cause large price fluctuations. Thus, any coin which has yet to be listed on one of the major altcoin exchanges (e.g., Polo) has pump potential both in the run-up to a potential listing and after listing
  • Leading edge technology is getting harder to understand (eg, Segwit, Snarks) while simultaneously it’s become easier and easier to fork and create altcoins
    • Examples:
      • ZCash -> ZClassic (one developer didn’t like the 20% ZCash founders fee and in a few weeks had created his own which is now a $4M coin and growing, and will further fork into ZClassic and Zencoin)
      • Dash -> Pivx
      • Bitcoin -> Peercoin -> Novacoin -> Blackcoin
      • ETH -> ETC
      • BTC -> LTC
    • Number of developers who can do this is growing
    • Ecosystem itself is growing and thus can more easily support coin launches and forks and small coins (including miners, multi currency wallets, exchanges, marketers, and investors)
    • General direction is towards customized and personalized coins – one coin for everyone and every need – “YOU get a coin and YOU get a coin and YOU get a coin…”
  • REMEMBER: The market is “worth” $30B but this is not equivalent to $30B invested in the space. Even a 1% sell off ($300M) can crash the price of many assets and see the disappearance of many billions of value. This is particularly acute with altcoins whose daily volume may be, say, $10-50K USD

Cryptocurrency Investment Decisions: What I own, won’t buy, and need to research

Published / by kgao

This page is out of date and won’t be updated anytime soon. For the latest assets that I own and my approach to investing, refer to the investment theses and my occasional portfolio letters. Thank you!

Here is a running list of cryptocurrencies (including digital tokens and ICOs) that I have researched and made a decision about whether to invest or not. The list will grow and change over time.

Assets I currently own:

  • Bitcoin BTC
  • Ethereum ETH
  • Dash DASH
  • Monero XMR
  • NEM XEM
  • Pepecash PEPECASH
  • Zclassic ZCL

I also own small (sub 1%) amounts of Litecoin LTC, Ethereum Classic ETC, Zcash ZEC, Decred DCR, Emercoin EMC, Counterparty XCP, Aeon AEON, Storjcoin X SJCX, Ripple XRP, and Bitshares BTS.

Assets I need to research and/or may invest in:

  • Factom FCT
  • Stratis STRAT
  • DigixDAO DGD
  • Ark ARK
  • Peercoin PPC

Assets I won’t invest in for now:

  • BlackCoin BLK
  • MaidSafe MAID
  • Antshares ANS
  • Huntercoin HUC
  • Augur REP
  • ShadowCash SDC

Notes from in-depth University of Cambridge study on the cryptocurrency ecosystem

Published / by kgao

Great report. Highly recommend reading the full PDF (116 pages but goes quick). In a nutshell:

First, the user adoption of various cryptocurrencies has really taken off, with billions in market cap and millions of wallets estimated to have been ‘active’ in 2016. Second, the cryptocurrency industry is both globalised and localised, with borderless exchange operations, as well as geographically clustered mining activities. Third, the industry is becoming more fluid, as the lines between exchanges and wallets are increasingly ‘blurred’ and a multitude of cryptocurrencies, not just bitcoin, are now supported by a growing ecosystem, fulfilling an array of functions. Fourth, issues of security and regulatory compliance are likely to remain prevalent for years to come.

Here are my notes and takeaways:

  • crypto is worth $27B = Airbnb
  • 3M to 6M active crypto wallets
  • 2K+ people working full-time in the industry
  • crypto exchanges (eg, Kraken, BitFlyer) employ the most people
  • 70% of large miners say they have “high influence” on protocol development
  • report divides industry players into #1 exchanges, #2 wallets, #3 payments, and #4 mining with growing levels of crossover
  • companies surveyed have 21 full-time employees on average (still early days)
  • “A 2016 joint report from Coinbase and ARK Invest estimates that 54% of Coinbase users use bitcoin strictly as an investment”
  • “Non-monetary use of Bitcoin has also increased. For example, the use of the OP_RETURN feature in the bitcoin scripting language (frequently used for embedding metadata in bitcoin transactions, for enabling e.g., time-stamping services and overlay networks) has increased roughly 100x since January 2015”
  • four currencies (USD, EUR, JPY and CNY) dominate trading
  • impression is that we’re still in very early days of proper security and auditing; as an investor, remember to turn on 2FA and only keep small amounts on exchanges
  • “The average business (B2B) payment has a transaction size of $1,878, whereas P2P transfers ($351) have higher average transaction sizes than consumer (C2B) payments ($210)”

3 important charts from the report

…Bitcoin dominates but Ethereum has shown impressive growth

…trading in Chinese RMB dropped precipitously after the government crackdown on margin accounts and no-fee trading

…Mining is now a multi-billion dollar industry!

April Bitcoin News Letter: The hard fork plot thickens. Bitfinex recovers fully from its $71M hack.

Published / by kgao

The newsletter continues to evolve. I try to highlight the items you can’t miss, and provide links for you to dig deeper. If you have any questions, email me or find me on Twitter.

William Mougayar and Nick Tomaino (two analysts I regularly read) are organizing a Token Summit on May 25th in New York. If I weren’t a 16 hour flight away, I’d be there. What a lineup.

Right now to be on the newsletter you need to contact me. At some point I’ll migrate to MailChimp. Also I didn’t link to the sources below because I was too lazy.

**

What you must know in Bitcoin land

For anyone who’s closely following the hard fork debate, this Reddit discussion and its linked source are must reads [Reddit discussion, Greg’s email]. If the implications are true, then it means that the magnitude and duration of the hard fork debate are mostly motivated by Bitmain’s desire to maximize its short-term profits, and not by differing views of Bitcoin’s scaling roadmap.

Bitfinex was hacked for $71M USD worth of Bitcoin in September of last year. They socialized the loss to all Bitfinex account holders and issued a custom token to represent the loss. This token represented an IOU from Bitfinex which you could hold or trade. Several days ago Bitfinex fully redeemed 100% of those tokens [source]. Which means that in the span of 8 months, Bitfinex has fully recovered from a $71M hack and paid back everyone who lost money. What a story, and a fascinating precedent for future hacks.

Meanwhile Bitcoin continues to grow. The number of active Bitcoin users doubles every 12 months [source]. And while the blocksize is reaching its limit, but not yet turning away significant transaction volume [source]. Although fees are increasing as you can see in Woobull’s chart below:

Why do the vast majority of Bitcoin investors and pundits think a hard fork is bad? Vinny Lingham explains: #1 Reduced network effects. #2 Whales dumping coins on both chains. #3 Brand confusion. #4 User and merchant confusion [source]

If you want to educate yourself on the basics of a hard fork, and what it means for investors and users, here’s a good FAQ [source]. The current implementation of Bitcoin is referred to as simply Bitcoin or Bitcoin Core. The competing / new implementation is called Bitcoin Unlimited (BU), and here’s a solid 3-part series on how BU works [source] (with a pro-Bitcoin Core bias).

Finally, a long and excellent article on Bitcoin’s evolution [source].

In investor news…

  • Another Bitcoin ETF application was denied, but Bitcoin investors have moved onto the hard fork debate [source]
  • Roughly speaking, the market thinks Bitcoin Core (the current Bitcoin implementation) is worth 90% of
  • Bitcoin’s price, and Bitcoin Unlimited (the competing version) is worth 10% [source]
  • Pantera believes bitcoin and digital assets now overbought, see below chart [source]

**

What you must know in crypto land

Zcash (ZEC) appoints AngelList founder Naval Ravikant and Matthew Green to its Board of Directors. Outside of Bitcoin, Zcash may have the most impressive collection of cryptography and software engineering talent. [source]

ICOs and appcoins and decentralized app tokens are now worth $260M [source]. To understand the general investment thesis, read these 2 essays from USV [one, two]. As an individual investor I’ve stayed away from ICOs and I recommend you to do the same. Too many scams, too much insider trading, too little verifiable transparency.

A great round-up of concerns about the altcoin Dash, the two big ones: #1 Potentially rigged mining during its launch. #2 Big holders (Masternodes) who have a lot of influence over economics and governance [source]. I more than halved my holdings after its recent price surge but 7% of my portfolio is still in Dash (see my portfolio breakdown here).

Venture money is slowing but continues to come into Bitcoin / blockchain, especially for proven products. Ledger raises $7M for its security and storage solutions [source]. Shapeshift raises $10M for its cryptocurrency exchange service [source]. I love Shapeshift.

It is very possible that services that deal solely in crypto could end up being to financial regulation what torrent sites are to anti-piracy laws… a huge pain in the ass. Like torrent sites that don’t distribute actual copyrighted content, cryptocurrency services using LN channels won’t actually control or transmit other users’ bitcoins. Many services may find themselves back in a new and undefined legal grey area. [source]

**

That’s it. Next week comes the Portfolio Letter where I share my holdings, recent trades, and brief analysis of interesting assets. Here’s the last one.

Bitcoin Portfolio Letter: Taking altcoin profits and buying back into Bitcoin

Published / by kgao

Hi everyone, here is my second Bitcoin Portfolio Letter where I share my exact crypto investment portfolio, what trades I’ve made, and which assets I’m looking at. Each week I alternate between a portfolio letter like this one and a news letter.

Thanks!

Kevin (@kgao)

Performance relative to Bitcoin price benchmark:

I’ll release March performance results in the next letter. Probably outperformed Bitcoin due to the strong run-up of Ethereum and Dash. In January Bitcoin fell 5% and my portfolio fell 2.5%. In February Bitcoin gained 24% and my portfolio gained 29%.

Trades this month

  • Sold 5% of my Bitcoin BTC holdings when the price passed $1200. Right now I’m buying a little each day, because I think it’s underpriced due to hard fork drama
  • Sold 5% of my Ethereum ETH holdings at $43
  • Sold 10% of my Dash DASH holdings at $73
  • My general philosophy is to take small profits when I’m seeing 300%+ price spikes. In the long run my goal is to be investing with the house’s money, so to speak
  • Invested 1% of portfolio into Decred DCR at $5, then sold 10% of that when it spiked to $15

What I got right and wrong since the last Portfolio letter

  • Right that Decred DCR was a good investment – was trading at $5, now trading at $12
  • Right that Shadowcash SDC was crap – was trading at $3.50, now trading at $1.50
  • Verdict still out on Augur REP – was trading at $8.50, now trading at $10
  • Wrong on Zcash ZEC – was trading at $45, now trading at $69. I still suspect the issuance rate / mining-driven inflation is too high to be a good near-term investment but may take a small position

What I’m looking at now

  • NEM / XEM – what I like: no inflation, no PoW (blockchain is secured by a PoS-like model), incentivized staking, geographic depth (the top altcoin in Japan), potential synergy with its private blockchain solution Mijin and early but promising enterprise use cases
  • Bitcoin BTC is underpriced despite HF risks and I’m buying small amounts daily. Right now Bitcoin is 63% of my portfolio and I’d like it to be 65-70%
  • The HF debate has me increasingly concerned about the long-term viability of PoW only blockchains. All this time we’ve been concerned about external 51% attacks without realizing, like all large systems, that corruption comes from within. PoS or at least hybrid PoS / PoW may be the future
  • While I still think Monero XMR will win the privacy coin war in the short-term, I’m questioning whether its price will reflect this victory. I may reduce my position
  • Published a Crypto Cheatsheet (screenshot below) which has key facts and concepts for most of the assets in my portfolio

That’s it. Thanks for reading! Hit ‘reply’ to contact me or find me on Twitter.

Crypto Investment Cheatsheet

Published / by kgao

I’m compiling a cheatsheet as a forcing function to research and remind myself of each asset’s unique characteristics. Here it is, a Google doc with comments enabled.

The coins I’ve added so far include:

  • BTC
  • ETH
  • DASH
  • XMR
  • ZEC
  • DCR
  • NEM

I will add more with time.

My areas of focus when considering a new crypto investment – and so far they are limited largely to currency coins as opposed to app coins – are:

  • Issuance rate, method, and inflation
  • Transaction types and activity
  • Blockchain funding and governance models
  • Strength of team and community

Love to hear your feedback and what coins I should add. Cheers!