UNDERSTANDING CRYPTO FUNDAMENTALS : value investing in crypto assets and management of underlying... risks

Saying that many investors were not convinced by cryptocurrencies in their first decade of existence would be an understatement. Originally, author Thomas Jeegers was one of them. He looked into this new virtual money more than once and, each time, decided not to invest. Like many long-term investors, he was looking for fundamentals. Crypto had none — or so he thought. This book details why his perspective on cryptoassets has shifted – and why yours should, too. Recent developments in this field have turned crypto from a speculative financial innovation to a new asset class, one with a new kind of fundamentals that offer real economic value. One that will change finance and investments. One that may be a trigger defining the fourth industrial revolution, the same way steam, electricity, and the Internet were triggers for the first, second, and third industrial revolutions, respectively. Despite what advocates of the traditional financial establishment like to claim, cryptoassets were by far the best financial investment of the last decade, even risk-adjusted, and could still be so for the coming one. They should not be overlooked, regardless of one's opinion of them. This book answers the main questions any potential long-term investor in cryptoassets should ask: What are cryptoassets and blockchain technology? Why consider cryptoasset investments? When is a good time to invest? Where should one invest? How should one invest? Which valuation methods are appropriate? Understanding Crypto Fundamentals includes a deep dive into the management of risks specific to cryptoassets, both financial and non-financial, and provides the tools needed for investment success in this new asset class. Upon completing the book, you will have a new perspective on cryptoassets and how you can benefit from them as an investor. Thomas Jeegers is a CFA Charterholder and Financial Risk Manager (FRM), and has earned an MBA from INSEAD as well as multiple blockchain certifications from institutions including INSEAD and Oxford University. He has worked in finance for 10 years and is a frequent speaker at events on blockchain and cryptoassets. Table of Contents About the Author About the Technical Reviewer Disclaimer Preface Introduction Part I: Why Consider Crypto Investments? Chapter 1: A Brief History of Money What Makes Money? Precious Metals As Money Storing Value From Money to Currency The Ascension of Paper Currency Central Banking and Fractional Reserve Banking The Great Depression The Bretton Woods Era The Return to Fiat Currencies Increasing the Pace of Printing The COVID-19 Pandemic Where to Go from Here? The Highest Stock-to-Flow Asset of All Time Key Concepts Extension Questions Chapter 2: Complementary Currencies Structural Imbalances A Procyclical Monetary System Monetary and Financial Sustainability Multiple-Currency Systems The Wörgl Experiment The Swiss Miracle Incentives Due to Currency Devaluation A Possible Future Key Concepts Extension Questions Chapter 3: Blockchain As a Force for Good Decentralization Privacy Inclusion Private Property Free Speech Inflation Environment Sustainability Transparency Velocity Foreign Exchange Accounting Sharing Economy Creators’ Empowerment Key Concepts Extension Questions Chapter 4: Portfolio Management Primer Price Fluctuations Risk and Return The Sharpe Ratio The Sortino Ratio Simple Analysis of Return for Investors Correlation and Diversification Fiduciary Duty of Portfolio Managers Key Concepts Extension Questions Part II: What Are Cryptoassets? Chapter 5: Birth of a New Asset Class Genesis of the First Cryptoasset: Bitcoin A Solution to the Double-Spend Problem Byzantine Generals Problem Byzantine Fault Tolerance Decentralized Money Proof of Concept: Rai Stones Bitcoin Beyond Its Genesis Crypto Platforms and Smart Contracts Altcoins Key Concepts Extension Questions Chapter 6: Blockchain Basics Blockchain’s Main Characteristics A Chain of Blocks Asymmetric Encryption Updating a Decentralized Ledger Consensus Mechanisms Updating a Decentralized Ledger with Proof of Work Structure of a Block Under Proof of Work The “Longest” Chain Is Always Right Software Updates and Forks Public vs. Private Blockchains and Hybrids Is Blockchain Going to Replace All Databases? Updating a Ledger Under Proof of Stake Alternative Consensus Mechanisms Decentralized Data vs. Decentralized Transactions Why Is Blockchain Different? Key Concepts Extension Questions Chapter 7: Cryptoasset Taxonomies Challenges with Setting up a Cryptoasset Taxonomy Cryptoasset Taxonomy by Form and Function Cryptocurrencies Digital Store of Value Medium of Exchange Privacy Coins Stablecoins Alternative Cryptocurrency Taxonomy Cryptocommodities Platform Protocols or Smart Contract Platforms Interoperability Oracles Cryptotokens Platform Tokens Financial Services Cryptotokens Non-Financial Services Cryptotokens Web 3.0 Cryptotokens Non-Fungible Tokens (NFTs) The General Taxonomy for Cryptographic Assets (GTCA) The Digital Asset Classification Standard (DACS) The Global Crypto Classification Standard (GCCS) Cryptoassets Technology in Layers Are Cryptoassets Securities? Key Concepts Extension Questions Chapter 8: Cryptoasset Investment Types Direct and Indirect Investments In Cryptoassets Exchange-Traded Funds (ETFs) Companies Using Blockchain Companies with Cryptoassets on Their Balance Sheet Companies Providing Crypto Services Early-Stage Cryptoasset Investing Mining Traditional Cryptoasset Mining ASIC-Resistant Mining Mining Pools Staking Crypto Lending Liquidity Mining Yield Farming Airdrops Transaction Routing Key Concepts Extension Questions Part III: When Is a Good Time to Invest? Chapter 9: Crypto Trends Bitcoin Price Bitcoin “Halving” Cycles Bitcoin Golden Bull Ratio Bitcoin Cycles Rallies Bitcoin Cycles Duration Relative Market Dominance Bitcoin Lead Macrocycles and Correlations Other Crypto Cycles Charts in Technical Analysis Understanding Gartner’s Hype Cycles Calendar Adjustments Fear & Greed Index Adoption Key Concepts Extension Question Chapter 10: Prime Time Liquidity DEX Accessibility Layer 1s Interoperability Exchange-Traded Funds (ETF) Availability Formal Taxonomy Regulation Historical Data Awareness on Privacy Adoption As Means of Payment Crypto Ecosystem Key Concepts Extension Questions Part IV: Where Should One Invest? Chapter 11: Investment Vehicles Keys and Addresses Hot Wallets and Cold Wallets Custodial and Non-Custodial Wallets Centralized and Decentralized Platforms User Interfaces and Exchanges Deterministic and Non-Deterministic Wallets Seed Phrases Additional Wallet Features Bitcoin Core Wallet Safety Storing Private Keys Safely Key Concepts Extension Questions Part V: How Should One Invest? Chapter 12: Investment Strategies Buy Low, Sell High Timing the Market Dollar-Cost Averaging Filter the Noise Taxation Borrowing As an Alternative to Sale Behavioral and Mental Biases Confirmation Bias Loss Aversion Endowment Effects Conservatism Bias Anchoring Effect Overfitting Bias Data-mining Bias Sample Selection Bias Survivorship Bias Framing Bias Herd behavior bias Prediction Overconfidence Bias Size and ESG Biases Key Concepts Extension Questions Chapter 13: Non-Financial Risk Management “51% Attack” Risk Quantum Computing Governmental Risk Developer Risk Risk of Community Disagreement Mining Concentration Risk Ownership Concentration Risk Regulatory Risk Platform Risk Custody Risk Oracle Risk DDoS Attacks Scams and Market Manipulation Decentralized Insurance Key Concepts Extension Questions Chapter 14: Financial Risk Management Credit Risk Liquidity Risk Market Risk Value at Risk (VaR) Analytical VaR Historical VaR Monte Carlo VaR Characteristics of VaR Metrics Roy’s Safety-First Criterion Shortfall Risk Expected Shortfall Backtesting Stress Testing Key Concepts Extension Questions Part VI: Which Valuation Methods Exist? Chapter 15: Assessment Framework What Problem Is the Asset Solving? How Important Is the Problem? How Is the Asset Solving the Problem? Which Candidate Best Solves the Problem in this Market? How Reliable Is the Team Behind the Asset? How Is the Local Regulatory Environment? Do the Tokenomics Make Sense? How do Rating Agencies Assess the Cryptoasset? Cryptoasset Picking Key Concepts Extension Questions Chapter 16: Value Investing in Cryptoassets Combining Valuation Methods Net Present Value of Future Cash Flows Valuation Based on Multiples Asset Value, Earnings Power and Value of Growth Asset Value Based on Replacement Costs Earnings Power Value Based on Staking Rewards Valuing Growth Measuring and Valuing Usage of a Cryptoasset Measuring Growth Based on Usage Including Supply in Valuations Stock-to-flow Model Stock-to-flow Cross Asset (S2FX) Model Valuation from Comparables Network Value to Transactions Ratio Other Fundamental Metrics Behind Cryptoassets Fulcrum Index Valuing Bitcoin As a Cybersecurity Protocol Valuation Methods Not Based on Fundamentals Key Concepts Extension Questions Chapter 17: Concluding Remarks Looking Back Looking Forward Part VII: Appendices Appendix A: Precursors of Cryptoassets Anonymous eCash and DigiCash: 1982 Secured Chain of Blocks to Timestamp Documents: 1991 The Eternity Service: 1996 Hashcash: 1997 Bit Gold: 1998 B-Money: 1998 Appendix B: Bitcoin’s Replacement Cost Valuation Appendix C: Financial Products Applied to Crypto Leverage and Margin Trading Derivative Products Call and Put Options Futures Contracts Acronyms and Abbreviations References Index