Category Archives: Notes

“Crypto-currencies exhibit a size effect like stocks”

Published / by kgao / 1 Comment on “Crypto-currencies exhibit a size effect like stocks”

From the perspective of an investor into the alternative asset class of crypto-currencies, we document that returns of crypto-currencies are weakly correlated both in their cross-section as well as with established assets, and thus interesting investments for diversifying portfolios. An investment strategy based on the CRypto-currency IndeX (CRIX) bears lower risk than any single of the most liquid crypto-currencies. Furthermore, we show that crypto-currencies exhibit a size effect like stocks.

Pretty good paper on cryptocurrency investment factors and price drivers [link]. Note, though, that the researchers seem to have some sort of relationship with the CRIX.

Size effect = smaller coins tend to perform better.

I haven’t published much lately, and that’s unlikely to change. Not even sure if I’ll continue the newsletter. I find myself losing interest in writing about and analyzing the space during such a secular – and some may say overheated – bull market. What advice can I give you, other than “don’t sell” (unless it’s small amounts of profit taking) and “don’t daytrade to excess”?

The long-term prospects of cryptocurrencies, cryptoassets, and token economies are brighter than ever. $1T is squarely within sight.

A guy who knows what he’s talking about talks about Bitcoin

Published / by kgao

Written by security researcher Dan Kaminsky over 4 years ago, still very relevant and insightful today (the best kind of content, imo). Wired article. Some snippets:

Bitcoin’s a dollar bill, with a teleporter built in. We can just poke in a few coordinates and poof, off it goes, with the ease of posting to some forum somewhere.

There are a small number of choke points, which someday may be asked to honor these thefts. Will the currency translators accept the money? Will the mining pools? It’s really an open question.

Bitcoin miners could very well be doing useful work, same as the gold miners. That the work is pointless misses the point. Diamonds, for example, represent little more than millions of years of earthly labor making dull black coal into a shiny clear crystal.

Fighting over what’s “fiat” and what’s “real” is silly. It’s all fiat. Gold isn’t conscious; all value is belief. What’s fiat is who can change the supply and how. Nobody can just declare the existence of one million new bitcoin and start trading on it.

It would take a massive, society-rending effort against general purpose computing to really keep Bitcoin down.

Bitcoin is the first example of a new form of life…

Published / by kgao

…It lives and breathes on the internet. It lives because it can pay people to keep it alive. It lives because it performs a useful service that people will pay it to perform. It lives because anyone, anywhere, can run a copy of its code. It lives because all the running copies are constantly talking to each other. It lives because if any one copy is corrupted it is discarded, quickly and without any fuss or muss. It lives because it is radically transparent: anyone can see its code and see exactly what it does.

From Ralph Merkle on DAOs, Democracy, and Governance (yes, the guy who invented Merkle trees).

The quote echoes Kevin Kelly’s theme of technology-as-life-form in What Technology Wants.

The 4th Bitcoin and Crypto Portfolio Letter

Published / by kgao

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

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!

“A large percentage of currency…is used precisely to hide transactions”

Published / by kgao

“There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax-or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions.”

From Kenneth Rogoff’s “Costs and Benefits to Phasing Out Paper Currency.”

Notes from Grayscale’s Ethereum Classic (ETC) investment thesis

Published / by kgao

I read through the investment thesis PDF yesterday and wanted to share some relevant notes. I sold more than 90% of my ETC a month after the hard fork, so I hold a negligible amount relative to my overall crypto portfolio and don’t have plans to increase my ETC position. I am very bullish on ETH even after its recent price run-up.

Notes:

  • concentrates on two aspects: store of value (ETC as silver / platinum to BTC’s gold) and enabling a payments and smart contracts layer for the IoT
  • liked this line: “Ethereum was designed to be the next iteration of operating systems like Apple iOS or Microsoft Windows, embedded with the enhanced capabilities of blockchain technology.”
  • they note, and I didn’t realize, that less than 6% of all ETH outstanding voted on the hard fork issue
  • ETC strengths (relative to ETH):
    • truly trustless protocol (ie no hard fork)
    • no PoS risk, will wait until ETH implements it first and then assess
    • hard cap on ETC supply; currently 89M outstanding, will never exceed 230M (likely closer to 210M)
    • more decentralized development process unlike Ethereum which is driven by Vitalik and the Ethereum Foundation
  • ETC risks:
    • the Ethereum Foundation sold 90% of their ETC but still hold a substantial amount
    • the DAO hacker still holds 4% of all ETC in a known wallet address

Interesting report and while I personally won’t invest in ETC, was good to understand Barry and Grayscale’s perspective.

Portfolio Performance: February (+Monero, -Dash -Litecoin)

Published / by kgao

This continues a series of regular posts where I share the details of my crypto portfolio, trades, and observations on the market. Here’s January.

In February 2017, the Bitcoin price increased 24%. My portfolio increased 29%, so I outperformed slightly, due to Dash’s price rocket and Ether’s rebound. Past performance is at the bottom of this post.

Here’s what I currently own (also posted here):

  • Bitcoin: 75%
  • Ether: 13%
  • Dash: 9%
  • Monero: 3%

Observations:

  • I sold my small (~1%) position in Litecoin; it finally hit me that I had no point holding onto it even as a Bitcoin catastrophe hedge and the coin (wrt technology and community) is going nowhere
  • It’s clear post-SEC denial of the COIN ETF that cryptoassets have begun to shift from Bitcoin to altcoins and digital tokens. Perhaps for diversification reasons, perhaps because big investors are seeking the drug of ever-increasing returns. I expect Bitcoin market dominance to fall below 75% before rebounding
  • Dash has been a huge beneficiary of this move away from Bitcoin. I purchased the bulk of my position around $17 and it’s currently trading at $78. I do believe Dash can become a $1B market cap coin but am skeptical of its long-term potential for a variety of reasons (quality of team is the biggest). I sold 1/3 of my position between $45-50 and may sell more in the coming days / weeks
  • In seeking even more upside (perhaps a dumb move) I’ve started to research altcoins outside the top 10 by market cap. I’m even looking at digital tokens although I still remain VERY skeptical of their average technological and network value

Portfolio benchmarks:

  • In calendar year 2016, Bitcoin increased 137%. My portfolio returned 107%, so I underperformed significantly largely because of Ether’s performance
  • In January 2017, Bitcoin fell 5%. My portfolio lost 2%, so I outperformed slightly
  • In February 2017, Bitcoin increased 24%. My portfolio increased 29%, so I outperformed slightly, driven by Dash

I’ll publish at least one of these posts every month. If you want more frequent updates, subscribe to my investment newsletter below. Thanks, happy investing!

The COIN ETF decision: What’s next?

Published / by kgao

Now that the SEC has effectively denied the Winklevoss COIN ETF, what’s next for Bitcoin?

I wrote the below in reply to a friend and figured I may as well share it here. Much of it is inline with Vinny’s essay.

In the short term the price might go sideways or down but will rebound within a month or two. I’ve already bought some on this dip. I don’t expect the price to fall below $1K and it will likely return to its ATH by April or May

In the long run this won’t have much effect. I actually agree with the SEC that it’s too early for an ETF. I’d prefer to see Bitcoin trading at $3-5K per coin, a total crypto market cap of $50-100B. Once the ETF floodgate is open, there will be many approved ETFs in short order, for Bitcoin and possibly altcoins like Ethereum. From there it’s onto the regulated futures and forwards on exchanges like the CME. So can only be better when the ecosystem is deeper, more mature, more institutionalized and regulated.

I don’t see any near-term catalysts and I’m not on the lookout for one. The main story is a strong one: Bitcoin as digital gold. Bitcoin as an uncorrelated asset with equities, bonds, currencies, commodities. Bitcoin as the Internet of money / value. The big one on everyone’s minds is Segwit / possible hard fork which may happen later this year.