May 3, 2019

Satoshi Nakamoto Returns

In the latest demonstration of higher levels of centralization in the Bitcoin Cash network, one miner acquires up to 44% of the hash rate. Facebook stablecoin project progresses with the code name Project Libra seemingly circulating among the Facebook blockchain team. Renowned crypto analyst Chris Burniske revises his valuation framework initially put forward in 2016.

Key Takeaways;

  • Bitcoin forms new 2019 high as the network continues to grow from strength to strength despite prices remaining significantly lower than early 2018 highs.
  • Cryptoassets co-author Chris Burniske (@cburniske) revises methodology for valuing cryptocurrency networks
  • An unknown miner acquires a significant share of hash rate on the Bitcoin Cash network

The market leader bitcoin has formed new 2019 highs today. Prices may be significantly below values at the start of 2018 but Bitcoin has become more entrenched than ever into society with protocols being built on top of the network, more awareness of the technology, and more computing power securing the ledger.

Quick bits (and bitcoins)

Satoshi Nakamoto acquires up to 44% of Bitcoin Cash Hash Rate

The Bitcoin Cash network has become drastically more centralized as an unknown miner with the text “Satoshi Nakamoto” in Coinbase transactions acquired up to 44% of the hash rate. There are a number of theories circulating as to the source of the hash rate. The most prominent theory is that Craig Wright (AKA Faketoshi) and/or the Calvin Ayre CoinGeek tag team is behind the hash rate with plans to dump bitcoin cash on the market for bitcoin cash sv. The amount of hash rate controlled by this miner has since been decreasing but the fact that this phenomenon took place indicates high levels of centralization in the network (as measured by the distribution of hash rate which can be quantified using a metric such as HHI) and questionable security (as measured by the cost to carry out a 51% attack).

Bitcoin Core 0.18.0 Released

The latest version of the most popular software client in the crypto world has been released. The main feature included in this upgrade is a hardware wallet integration feature. Hardware wallets are widely considered the most secure way for everyday users to store their private keys.

Launching Project Libra

Facebook’s rumoured stablecoin project is slowly turning into a reality. Reports this week refer to a payments network built on blockchain technology, referred to as Project Libra by Facebook employees. The stablecoin is planned to be backed by government currency and there is also reports that Facebook will be partnering with Visa, Mastercard, and e-commerce merchants for the launch.

Bitcoin awareness increases despite price drops

A survey completed by Blockchain Capital among 2,029 American adults demonstrates that bitcoin has improved across a number of metrics since the price increases of 2017. The last survey was completed in October 2017 in the midst of the bear market. The survey found that “Bitcoin awareness, familiarity, perception, conviction, propensity to purchase and ownership all increased/improved significantly ”.

Interesting insights 🤔

Valuing Crypto Assets

Chris Burniske, a general partner at Placeholder VC, has revised and expanded his valuation framework for crypto assets proposed initially in 2016. Given the nascency of the crypto industry, frameworks for valuing these assets remain rudimentary.

However, Burniske and the colleagues he has worked with both at Placeholder VC and his previous firm Ark Invest have done a good job of developing models that can be used to value these assets. Mature markets such as equities have converged on generally accepted valuation models over hundreds of years of essentially trial and error.

Burniske foresees this happening orders of magnitude faster in the crypto markets.

“In time, I expect similar convergence on standard valuation models to happen around popular cryptoassets until we get to the point where we have consensus mathematical models, and merely bicker over the inputs to the models”

The main thesis of Burniske’s initial framework was valuing crypto networks using the equation of exchange. The equation of exchange is essentially a mathematical model that can be rearranged to calculate how big the value of a crypto network needs to be to cater to the properties of its native currency. Properties such as quantity, velocity, and the price of what resource is being provided are taken into account meaning that the estimates derived from these models can get highly complex.

While in the initial framework all networks were proposed to be valued with the equation of exchange, Burniske notes that most crypto assets are similar to capital assets and would be better valued using a more traditional methodology. Discounting expected future cash flows to the present is a common valuation method used in the equities market.

Future cash flows are discounted using an interest rate based on the riskiness of the asset. Burniske proposes that with crypto assets that have capital asset properties such as proof-of-stake coins, all future value can be discounted back to the future. It is noted that this is a tricky methodology to carry out and may involve assigning a value to properties of the cryptocurrencies such as governance rights on a network.

On the other hand, Burniske proposes proof-of-work assets are still better valued using the equation of exchange. Burniske notes that "any purely proof-of-work asset can be considered a cryptocommodity [an asset which can be consumed but does not have ongoing income producing properties], and MV = PQ [equation of exchange] remains our best bet at pricing such assets.”

We are still in the beginning phases of valuation methodologies being developed for crypto assets. In the pursuit of alpha, it can be worthwhile delving into one of the few well-regarded fundamental-driven theses on investing in crypto assets. You can find the full report here.