Cryptoassets

The Innovative Investor’s

Guide to Bitcoin and Beyond
Chris Burniske and Jack Tatar
©2018 by Chris Burniske and Jack Tatar
Adapted by permission of McGraw-Hill Education
ISBN: 978-1-260-02667-2
Estimated reading time of book: 5–6 hours

Key Concepts
People who are interested in cryptoassets, or blockchain-based assets, should build an informed base of knowl-
edge before making any investment decisions. They should consider the suitability of these investments for
their own portfolios and answer three core questions about this new class of assets:

1. What? Investors should enhance their understanding of this new asset class by learning about the technol-
ogy and history behind the broad range of cryptoassets.
2. Why? Investors should research the opportunities that are afforded by cryptoasset investment, the associ-
ated risks that may arise, and how smart portfolio management may mitigate those risks.
3. How? Investors who decide to pursue cryptoasset investment should study the various approaches to add-
ing cryptoassets to their portfolios and research the logistics of their acquisition, storage, and taxation.

Introduction
Cryptoassets represent an entirely new asset class that may be indicative of the future of money and markets.
In Cryptoassets, industry insiders Chris Burniske and Jack Tatar show innovative investors how they can navi-
gate the world of bitcoin and blockchain technology and invest in these assets to bolster their financial future.
Cryptoassets is a comprehensive guide that helps investors understand the history and inner workings of these
assets, investigate and value them, and gain insight into the cryptoasset economy and the opportunities avail-
able for bold, innovative investors.

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Cryptoassets Chris Burniske and Jack Tatar

Part I: What
The Basics of Bitcoin and Blockchain Technology
In 2008, Satoshi Nakamoto (an anonymous name used by either one person or a group of people) published
a paper that founded Bitcoin, a platform that carries programmable money known as bitcoin, and formed the
basis of blockchain technology as a distributed and digitalized ledger. Satoshi hoped to create an alternative
financial system that was decentralized and relied on crypto proof instead of centralized servers or trusted par-
ties. This system showed potential for replacing a large portion of the current financial system, and as Satoshi
released the concept of blockchain technology to the world, it sparked a wave of disruption and rethinking of
global technology and financial systems.

Many financial and technological experts have embraced this technology, and as of January 2018, more than
1400 cryptoassets existed with a combined network value of over $500 billion. While numerous derivatives of
Bitcoin have emerged, bitcoin continues to be the largest and most universally transacted form, accounting for
35 percent of the total network value of cryptoassets. Bitcoin’s blockchain bears three distinct attributes:

1. It is distributed. Most databases tightly control who has access to informa-

tion, but Bitcoin allows any computer in the world to access its blockchain Many financial and
and view records of debits and credits within its accounts to create a sys- technological experts
tem of global trust. have embraced this
2. It is cryptographic. Bitcoin uses cryptography in two ways: first, to ensure technology, and as
that people who are trying to send bitcoin own the currency, and second,
of January 2018,
to add transactions in blocks that are chained together instead of adding
transactions one at a time.
more than 1400 cryp-
toassets existed with
3. It is immutable. Computers may build onto Bitcoin’s blockchain by perma-
nently appending information that can never be erased. a combined network
value of over $500
Part II: Why billion.

The Importance of Portfolio Management and Alternative Assets

Modern portfolio theory encourages investors to construct investment portfolios that maximize expected
returns based on their level of risk tolerance. Investors who smartly combine assets in their portfolios can
decrease the risk, or volatility, of the portfolio while generating returns that meet their long-term financial goals
and objectives.

Some investors have looked to include alternative assets and assets that are not correlated with traditional
capital markets to reduce the risk of their portfolios, especially following the wake of the financial crisis of 2008.
Bitcoin and other cryptoassets can help investors to accomplish this objective.

As an investor, you may expect that the addition of bitcoin to your portfolio would increase your portfolio’s
absolute return while also resulting in a greater assumption of risk. However, due to its near zero correlation
of returns with traditional capital market assets, in certain periods it has increased portfolio returns while also
decreasing the overall volatility of a portfolio.

Cryptoasset Market Behavior

As you consider the addition of cryptoassets to your portfolio, you may wonder about the general patterns that
may unfold as this asset class matures. To understand these patterns, it is important to recognize that given their
open-source and software-based roots, cryptoassets have unbounded potential to evolve.
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Cryptoassets Chris Burniske and Jack Tatar

The market price of a cryptoasset is driven by a combination of its utility value and speculative value. Utility
value is derived from the demand for the asset in that moment for the use case it targets, while speculative value
is driven by predictions of how widely used a cryptoasset will be in the future. Young cryptoassets are largely
driven by their speculative value, which can be hard to estimate. As a cryptoasset matures, its speculative value
should diminish relative to its utility value.

Cryptoassets are The Maturation of Cryptoassets

not yet mature, Cryptoassets are not yet mature, and there is a lack of understanding among
and there is a lack many investors about what will happen in the future. Like many other assets,
of understanding cryptoassets experience gains and losses. These rises and falls may seem
among many inves- euphoric or harrowing, depending on their direction, but they follow the same
evolutionary process that other emerging asset classes have faced over the last
tors about what will few centuries.
happen in the future.
Maturing markets, including the market for cryptoassets, face the potential for
market destabilization. Many factors can lead to this destabilization, including:

• The speculation of crowds as people fixate on the highs or lows of an asset.

• The belief that this time is different and that the market is too robust to allow for a crash.
• Ponzi schemes.
• Misleading information from asset issuers.
• Cornering to drive the price of an asset up or down significantly.
The potential for each of these factors is frequently cited by cryptoasset naysayers, but the factors are not
unique to cryptoassets: They have existed in every asset class for centuries. As an innovative investor, you can
avoid these common pitfalls by performing due diligence on the fundamentals of cryptoassets and exercising
caution to ignore the whims of crowds.

Part III: How

Fundamental Analysis and a Valuation Framework for Cryptoassets
You may be able to determine whether cryptoassets are worthy of long-term investment by using fundamental
analysis. Fundamental analysis can illuminate the overall health of these assets by looking at their intrinsic value
drivers. In traditional capital markets, many people rely on sell-side research to obtain this information, but sell-
side research does not yet exist for cryptoassets. As an innovative investor, you must pour through the details of
these assets or turn to reputable thought leaders who can arm you with the best available information.

Strategies covered include how to approach cryptoasset white papers, the competitive positioning of the asset,
and important technical market indicators. Additional topics include investigating the developers of the asset
to understand their commitment, background, and previous successes; comparing the asset to its digital sib-
lings; and assessing the issuance model to understand how the asset’s value may erode if its utility fails to live
up to expectations.

Operating Health of Cryptoasset Networks and Technical Analysis

Investors who are interested in cryptoassets should examine their underlying security systems. Hash rates, which
inform investors of the combined power of the mining computers that secure the network, can provide excel-
lent insight. Increases in the hash rate can suggest a greater level of security and commitment around the asset.

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Cryptoassets Chris Burniske and Jack Tatar

Additional considerations that potential cryptoasset investors should contemplate include:

• Decentralization. Ensure that the system is decentralized and not vulnerable to the whims of a single entity.
Decentralized assets should have a decentralized system of miners that are geographically dispersed to
avoid being at the mercy of a certain nation’s government.
• Software developers and application support. Look into the asset’s developers to gain a sense of the people
who created it and determine the level of application activity building atop the cryptoasset and its block-
chain.
• User adoption. Research the number of users, the number and dollar value of the transactions that are prop-
agated on the blockchain, and valuation metrics, such as dividing the cryptoasset’s network value by its
daily dollar transaction volume.
As you investigate the nuances of various cryptoassets, use technical analysis in conjunction with fundamental
analysis. This will help you to determine the price and movement of an asset over time and assess the right time
to buy and sell. When engaging in technical analysis, you should pay attention to the trading volume; the simple
moving average, or price trend of an asset over a period of time; and the support and resistance lines of an asset’s
price movements that define its trading range in order to gain a comprehensive understanding of the asset’s
current market behavior.

Practical Decisions Behind Investing in Cryptoassets

While contemplating making investments in cryptoassets, determine the best approach for acquiring and stor-
ing the assets. Regarding their acquisition, you may opt to mine for these assets on your own through mining
pools, or you may turn to cryptoasset exchanges or over-the-counter desks to acquire these assets. Exchange
traded funds (ETFs) can offer bitcoin exposure, and in some markets, people can invest in exchange-traded notes
or exchange-traded instruments that provide exposure to cryptoassets. After acquisition, you can choose to
house cryptoassets with a centralized custodian who tracks the investor’s balance, or you can have complete
autonomy and control by holding onto the related private keys. There are tradeoffs to both approaches, and as
a savvy investor, you should choose the option that best reflects your values.
Investment opportu-
The Future of Investing Is Here
nities for cryptoassets
In recent years, the infrastructure and regulation of cryptoassets have
matured considerably, but many investors haven’t yet acquired these assets
are growing, and
for their portfolios. Because of this, astute investors have an edge in entering while several capital
the market before the rest of the investing community takes advantage of the market opportunities
opportunities that cryptoassets provide. are available to inves-
Investment opportunities for cryptoassets are growing, and while several tors, it remains to be
capital market opportunities are available to investors, it remains to be seen seen what form these
what form these investments will take in the future. There is endless potential investments will take
for the products and vehicles that may be available for investors and money in the future.
managers in the years ahead.

You must choose your own investment philosophy, follow your own investing approach, and develop your own
viewpoint of which assets are suitable for your situation. By building an informed base of knowledge, you may
find that cryptoassets can provide an exciting opportunity for your financial future.

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Cryptoassets Chris Burniske and Jack Tatar

About the Authors

Chris Burniske is a cofounder of Placeholder, a New York-based venture capital firm that specializes in cryp-
toassets. Prior to Placeholder, he pioneered ARK Investment Management’s Next Generation Internet strategy,
leading the firm to become the first public fund manager to invest in bitcoin. He then transitioned to focus
exclusively on cryptoassets, paving the way for Wall Street to recognize it as a new asset class. His commentary
has been featured on national media outlets, including CNBC, the Wall Street Journal, the New York Times, and
Forbes.

Jack Tatar is an angel investor and advisor to startups in the cryptoasset community, and speaks and writes fre-
quently on the topic. With over two decades of experience in financial services, he was one of the first financial
professionals to receive certification from the Digital Currency Council. He is the coauthor of one of the earliest
books on Bitcoin, What’s the Deal with Bitcoins?

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