Monday, March 20, 2017

Huge ETH Rally, Quick Rebalancing


Since my last commentary about 5 weeks ago, ethereum (ETH) has rallied
240% (from $12.45 to $42.40). This rally was on the back of
"enterprise ethereum", an announcement by some of the world's largest
tech, financial, and even oil companies, that they will be jointly
developing the ethereum platform.  While I remain very bullish on
ethereum, it is now an oversized portion of our cryptocurrency
portfolio.  I suggest rebalancing to bring eth back down to 50% of
your cryptocurrency portfolio and reinvesting the profits in bitcoin

There are a few upcoming ICOs (initial coin offerings, similar to
equity IPOs) that I think are extremely promising and in which I am
planning to invest heavily.  They are operationally demanding to
invest in. Let me know if you're interested in participating.

This last paragraph is some "inside baseball."  First, the SEC
rejected the Winklevoss twins bitcoin ETF proposal, and their
reasoning suggests they'll reject similar proposals in the near
future; this was expected but was still disappointing.  Second, the
bitcoin community has faced serious infighting for 2 years over how to
"scale" the network - allow it to handle more transactions per second.
This infighting took on increasing political importance and personal
animosity, culminating recently in one faction, "bitcoin unlimited",
having the majority of their nodes taken down by a "zero day" attack.
While this infighting slows bitcoin's technological progress, it
renders it extremely stable as "digital gold."  As a former political
science major, allow me this analogy: ethereum is like the French
government immediately after the French Revolution: the community has
total faith in its leadership to implement fast and radical change.
Bitcoin is like the American government post American Revolution: its
community emphasizes checks and balances and a constrained pace of
change for the sake of stability and security.  Ethereum is perfectly
suited for its role as a rapidly evolving technological platform,
while bitcoin is well suited for its role as a technologically stable
store of value. The SEC decision and political infighting have kept a
lid on bitcoin prices recently, but I expect that to be short-lived.


Monday, February 13, 2017

Birth of An Asset Class - Cryptocurrency

  I've been advocating bitcoin for a while now (+125% in 2016, +35% 2015) and I'll make a bold prediction: bitcoin will do even better in 2017 than it did in 2016.  But bitcoin is the tip of the iceberg.  Recently I've dived much more deeply into the cryptocurrency landscape and gained a greater understanding of its breadth.   Public blockchains are introducing entirely new business models to the world.

   The tech and banking industries took notice a few years ago, and now every large bank and tech company is engaged with blockchain technology to varying degrees.  In 2017, it's the investment industry's turn.  Every conference I've attended in the past year for pension and endowment investors included a presentation on blockchains and cryptocurrencies.  We're reaching critical mass and I think 2017 will finally see institutional investors tiptoeing in to the space.  

Let me take a big step back.  Why are cryptocurrencies valuable?  

Cryptocurrencies fall into 3 general categories:

1. Store of value - Bitcoin is currently king of this category.  The value propositions are: 

  a.  Can't be seized - to "own" cryptocurrency means to know an address associated with it (e.g. 47aH83hak83Hjkdoah8).  I can encrypt that address with an easy to remember password, and email the encrypted address to myself at yahoo and google and microsoft email addresses so they're stored on cloud servers and accessible anywhere.  That encrypted address gives me access to my money but it's worthless to anyone without the password needed to decrypt it.  No government official or judge can confiscate my money unless I tell them my password.  Cryptocurrency is the only asset to ever exist that can't be seized.  There's tremendous natural demand for an un-seizable asset; if only for this reason, cryptocurrency will appreciate in value.

  b.  Inherently deflationary - in a world of rampant money printing, this is a major attraction of "store of value" assets including precious metals and cryptocurrency.

  c.  Ease of transmission - unlike gold, cryptocurrency can be transferred anywhere in the world almost instantly and almost for free.

2. Internet 2.0 - Some cryptocurrencies act as fuel for decentralized work.  A great example is the ethereum network.  Anyone can spend the cryptocurrency "ether" to have computers all over the world execute "smart contracts."  The ethereum network is kind of like a new internet that serves as a platform for almost any application imaginable.  There are other networks for distributed file sharing, like IPFS.  A future facebook may draw on the ethereum and IPFS networks to execute code and store files, and will pay for these services using the cryptocurrency tokens of those networks.  Within a a couple years, you'll have apps on your smartphone that make use of cryptocurrencies entirely without your knowledge.  The cryptocurrencies will get used in the background, sometimes by free apps to pay for their infrastructure costs.  The current king in this category is the ethereum network, powered by the token "ether."

3.  Application Coins - a new business model has been born.  Imagine an online dice game that lets users wager real money.  There is no person or company actively managing the game; someone simply developed it and set the open source code in motion as a "smart contract" on the ethereum network.  The casino operates purely as distributed code according to pre-defined rules that are publicly visible.  Who would take the time to create such a game?  A developer could require that users convert their money into his newly created "casino-coin" to play.  If the game becomes popular, that would produce demand for casino-coins and the price of those coins would rise.  The developer could give himself some number of casino-coins and profit as they rise in value.  Alternatively, the casino could require that users spend a fixed amount of casino-coins to play, and users who want to play would then be forced to buy the coins from the developer.  To use an example that might be more intuitive - imagine if facebook required users to pay to upload images.  But instead of charging US dollars, they charged "facebook-coins" that users would have to buy with US dollars.  The advantage to using cryptocurrency is that the entire payment process could be fully automated and incorporated into the application itself.  There is no current king king in this category and my intuition is that the eventual winners haven't yet been developed.

How should we invest?  Cryptocurrency is a new asset class, and as with any asset class, there are a variety of ways to profit.

1.  Invest in publicly tradeable tokens - this is the equivalent to buying Microsoft stock or copper futures on an exchange and hoping the price will rise over the long-term.

2.  Invest in a hedge fund that actively trades the tokens - there are several hedge funds that arbitrage the prices of cryptocurrency tokens between exchanges and engage in statistical arbitrage and other traditional short-term trading strategies used in other asset classes.

3.  Invest in a fund that buys publicly tradeable tokens with the hopes of picking winners and outperforming the general cryptocurrency market.  This is the equivalent of investing in a mutual fund; you are betting on both the general cryptocurrency market as well as in the ability of the fund manager to outperform that market by picking the best tokens.

4.  Invest in a venture capital fund that provides capital to cryptocurrency projects before they're publicly tradeable.  This is similar to investing in a traditional venture capital fund that tries to invest in the next facebook pre-IPO.

I think in 2017, #1 - simply investing in publicly tradeable tokens is the best choice, but I'm already exploring the opportunities in #2-4.  In particular, I've been speaking with cryptocurrency venture capital managers and think they'll add tremendous value over the coming years by investing in cryptocurrency projects that are "pre-IPO."

For now, I'd suggest holding a 65%/35% split of bitcoin (BTC) and ether (ETH).  I suggest buying them using either Coinbase or Gemini Exchange.  Store your bitcoin using Electrum and store your ether using Mist.

For "power" investors, message me directly and I can provide some more esoteric suggestions for potentially profitable cryptocurrency investments.  I can also provide info and introductions to crypto hedge funds and venture capital funds.