Cryptoassets is my latest read. I read a lot of books, but rarely do I read one that is worthy of a review anymore. I have read a lot of the better books already in the fields applicable to finance, trading, investing, self-help. However, I have not yet read a book specific to cryptocurrency investing.
This book, while having a lot of repeat information, has given me a lot to think about. I plan to apply many of the concepts I have learned here to improve my fundamental analysis of cryptos. I consider myself a techno-fundamentalist in stock trading. However, in crypto trading I have leaned very heavily on technicals as analyzing the fundamentals is entirely different here than in stocks. I have relied on the opinions of others too heavily. I am too skeptical a person for that.
Rather than attempt to make my notes into a clean blog post, below is my google doc with my notes on it. It is not incredibly well organized or 100% grammatically correct, but hopefully it is good enough to convey what I got out of the book.
THE BOOK IS FOCUSED MORE ON INVESTOR’S IN CRYPTOS. I AM PREDOMINANTLY A TRADER, BUT CONSIDER MYSELF A TECHO-FUNDAMENTALIST. I HOLD COINS THAT ARE 100% IN PROFIT AFTER THE TRADE COMPLETES. WANT TO BE HOLDING THE BETTER ONES. LOOKING TO IMPROVE MY FUNDAMENTAL ANALYSIS OF THE COINS. I HAVE A STRONG GRASP OF TECHNICAL SIDE ALREADY.
BASICS OF BITCOIN AND ITS ORIGINS
NOT A LOT OF NEW INFORMATION FOR ME, BUT I DID PICK UP A COUPLE OF THINGS. REVIEWING INFORMATION YOU ALREADY ARE COMFORTABLE WITH CAN BE USEFUL. EVERY STOCK TRADING BOOK I READ AT THIS POINT IS 95% REPEAT INFORMATION, BUT THAT SMALL NUGGET OF INFO CAN BE VERY USEFUL.
PART 2 -WHY
GETS INTO A LOT OF DETAILS ON MODERN PORTFOLIO THEORY, CONSTRUCTING A PORTFOLIO, EXAMPLES OF PERCENTAGE OF ACCOUNT TO HAVE IN RISKIER ASSETS, ETC. NOT MUCH APPLICABLE TO ME, AND ALSO MATERIAL I ALREADY HAVE GONE OVER MANY TIMES.
THIS IS THE BEST PART FOR ME. ESPECIALLY CHAPTER 12 and 13. I RE-READ THESE CHAPTERS.
KEY BULLET POINTS FOR EVALUATING A CRYPTOCURRENCY:
- READ WHITE PAPER-read at least the intro and conclusion, the rest can get highly technical. Try to read the whole thing though. Overly vague white papers should be a warning sign. Should be able to briefly explain the coin to a friend.
- DECENTRALIZATION EDGE-DOES THE PROBLEM BEING SOLVED BY THE COIN NEED TO BE DECENTRALIZED? DOES AN EXISTING CENTRALIZED SOLUTION WORK AS WELL OR BETTER? Vitalik Buterin quote: “Projects should really make sure they have good answers for ‘why use a blockchain.’” Examples-Steemit vs Centralized Blogging Platforms. On the surface there does not appear to be an edge here, but directly compensating the content creators is where blockchain is useful. Uber vs a blockchain style service(Swarm City is the example used). Little to no middleman to take so much of the profits. More money to the drivers. Still, a slight edge may not be enough to overtake the giants. Lindy effect: The longer a new tech lives the more likely it will survive for the long term.
- VALUATION-THE VERY DIFFICULT PART. HARD TO QUANTIFY THIS ONE Two types of value: Utility value and Speculative Value. Speculative is incredibly hard to quantify, Utility value can somewhat be quantified, but it is difficult. May not be something I attempt to include in my analysis at this point.
- COMMUNITY AND DEVELOPERS-TRACK RECORD, ETC.-Fairly self explanatory. GO through developer public social media profiles, go to subreddits/slacks/telegrams of the coin. Previous crypto experience and/or tech startup business(successful) is incredibly helpful
- RELATION TO DIGITAL SIBLINGS-IS THERE A COIN THAT IS ALREADY IN EXISTENCE DOING THE SAME THING? Concept of bitcoin maximalists-Bitcoin will simply absorb any new ideas into its ecosystem. How hard would it be for Bitcoin to absorb this new idea?
- ISSUANCE MODEL-current and ongoing rate of supply. An oversupply can be healthy for the price stability and potential use of a coin. However, it will naturally hinder the price growth. This is the balance that you must analyze as a trader/investor.
–The distribution(might make this it’s own bullet point)- Premines can generally be considered a bad thing. It consolidated power in a small amount of hands, potentially undermining the inherent decentralized nature of cryptoassets. Dash is an example given of a large premine.
Chapter 13: Operating Health(Not interested in the basic Technical Analysis)
-Need a healthy and spread out miner base. Need enough spread of the miners to reduce the chance of a 51% attack(long story short, it is the ability to process invalid transactions. A very bad thing.) blockchain.info/pools
-The bigger and more diverse the miner base, the more secure it inherently becomes(for blockchain style assets).
-Hash Rate can be used as measure of the health of the miner network. Cannot just look at the raw hash rate, have to compare the network value to the cost to produce the hash rate. Different coins use different hashing algorithms(ASIC based, CPU based, GPU based) which make direct comparison hard. In general a steady uptrend of hashing power is good.
-Geographic Distribution of Miners is important as well. Having a large percentage in one county can be a bad thing for obvious reasons.
-Check the project GitHub. Look for active development, some code forks, etc.
-Cryptocompare has developer star points-code repository points can helpful to streamline the research process
-Obviously older projects will generally have a lot more code revisions. Have to account for that.
-Another resource OpenHub-Number of lines of code. Can be misleading as naturally a project like Ethereum is way more robust than Bitcoin.
-Can be broken down into backers and companies that are using the service
-Venture capitalists support
-Actual use cases
-Big exchanges supporting the asset is a big deal as well.
-Coindesk tracks venture capital investments for some coins
-Number of trading pairs can be used as a gauge for a cryptos health as well.
- Number of users
- Number of transactions propagated on the blockchain
- Dollar value of those transactions
- Valuation metric, which is the network value of a cryptoasset divided by its daily dollar transaction volume
Number of users:
-Number of wallets: Example number of bitcoin wallets on blockchain.info. Hard to quantify when there are a number of providers, but trends even on one provider can be useful.
-Woo’s law-the new moore’s law-Willy Woo coindesk.com contributor uses Google Trends to evaluate BTCUSD searches over time. Based on analyzing this he estimates a doubling of bitcoin users every year.
Number of transactions:
-Blockchain.info for BTC and Etherscan.io for ETH as examples.
Dollar value of Transactions:
-Same places as above to find this info.
Valuation metric(Crypto P/E Ratio):
-Essentially market cap divided by transaction volume
Chapter 16-ICO’s Bullet point list of things to consider when evaluating an ICO(similar to chapter 12):
- Is there a published white paper?
- Is there a detailed development road map that includes a breakdown of all appropriate financials along the way?
- Does it use an open, public blockchain, and is the code published?
- Is there clear, logical, and fair pricing in the token sale?
- Is it clear how much of the token has been assigned for the development team and how those tokens will be released? Releasing them over time keeps the developers engaged and protects against centralized control of the token.
- Does the token sale tout itself as an investment? It should instead be promoted for its functionality and use case and include appropriate disclaimers that identify it as a product, not an investment.
I would add my own bullet points when analyzing cryptos:
- Supply-Analyze the supply and market cap of the coin versus the rest of the market. That coin you love with a 150 rank in market cap might have a lot of room to grow, but it is unlikely to break the top 10 or 5 and hold that level. Know at what point an asset has exceeded a reasonable market cap, that could be a decent sell indicator.
- For ICO’s: The total amount raised in the ICO is important. Example SNT(Status) Raised $100 million. Who is left to buy at this point? Prefer ICO’s to have a cap, and the cap needs to be at a reasonable level. I am not sure what level just yet, more research required.
- For ICO’s: Typically the better price gains have come from ICO’s priced under 10 cents. This is just an observation I have made.
- First mover advantage: This is similar to the related siblings bullet point
- Probably several more in time
I WANT TO DEVELOP A CHECKLIST FOR CRYPTOCURRENCIES TO MAKE ANALYZING THEM EASIER. POSSIBLY SIMILAR TO STOCK EP SPREADSHEET. (I AM A SPREADSHEET NUT).
PROBABLY HAVE A DIFFERENT SPREADSHEET FOR ICOS AS THERE ARE SOME DIFFERENCES BETWEEN ESTABLISHED AND NEW COINS. ICO MARKET IS WROUGHT WITH SCAMS, BUT THE POTENTIAL IS IMMENSE IF YOU FIND THE RIGHT COIN. WILL BE USING A SMALL AMOUNT OF MY ACCOUNT TO BUY HIGH QUALITY ICOS. RIGHT NOW RELYING TOO HEAVILY ON OTHER PEOPLE’S ANALYSIS, PREFER TO DO MY OWN ANALYSIS. I AM INHERENTLY SKEPTICAL, WHICH IS A HEALTHY THING IN THIS SPACE.
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Also published on Medium.