Tag Archives: altcoins

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