Jun

6

 I just wrote this two minute primer on Bitcoin and Blockchain.

We are at $2,500 but potentially a long way to go still. The must read that explains the fundamentals of a blockchain and bitcoin is still the original white paper.

The breakthrough is the ability to transfer ownership of a digital good without a trusted third party - this was not possible before bitcoin. The implication is that cash can for the first time become digital without an intermediary like a bank, visa, paypal etc. Much of the nomenclature is borrowed from mining. The miners in a competitive process keep the network secure and is rewarded by transaction fees as well as a block reward, currently 12.5 bitcoins per block - on average every 10 minutes. The block reward is cut in half in about every 4 years. There will never be more than 21 million bitcoins. Bitcoin can be seen as digital gold - limited supply, hard coded the protocol, no cost of storage and transferable as easy as an email, Gold 2.0. The bull case of bitcoin is that it is arguably 'better' than gold, and gold's 'market cap' is around 10 trillion, which would equal around $500,000 vs. the current price of around 2,500 per bitcoin.

Each block in bitcoin is capped in size to 1MB, this has meant that transaction fees recently gone up dramatically as the blocks are getting full and is now averaging some $3. There has been a big scaling debate in the space for a couple of years now that hasn't been resolved yet. Barry Silbert of Digital Currency Group is right now building consensus around a promising scaling solution. It if becomes a reality, one could expect the price of bitcoin to experience a relief rally.

As for investing, most trading are done on dedicated exchanges such as GDAX, Bitstamp, OKCoin etc. The Winklevoss ETF was rejected by the SEC earlier this year, currently that is being reviewed for a final decision but there are not big hopes. Interestingly, CME Group launched an index last year and rumor has it they might look into launching futures on Bitcoin. The most liquid listed asset is currently two ETNs listed on the Stockholm Stock Exchange by xbtprovider. Their combined assets are around $80M. They have seen some institutional buying as well.

The price currently seems to be driven by Japan, Korea, maybe India. Seen quite high premiums in those markets recently.

Other blockchains:

Every major bank is currently researching blockchains as it has the potential for instant and secure settlements in combination with the fear of being disrupted by nimble fintech startups. I think they are slowly realizing that if you create a private blockchain without a token which is required for the consensus mechanism in an open blockchain such as bitcoin, you are essentially just creating a shared, inefficient database; nothing revolutionary. The point with blockchain is precisely that you're able to do away with the trusted 'third party'. The biggest bank project is called R3: and is run by more than 70 financial institutions. They announced earlier this year that they in fact is not building a blockchain. I think this blockchain hype much driven by consultants preying on banks scared of being disrupted will slowly die down.

The open blockchain currently with the most promise besides Bitcoin is Ethereum. The transactions in Ethereum is much more flexible than Bitcoin, which gives rise to the possibility of trustless 'smart contracts' - programmable money. These contracts will execute according to the code, ie code becomes law. I can imagine asset management type of apps, financial derivatives, decentralized autonomous organizations (the most famous was called the DAO, and had a funding of $150M, see ) all built on top of Ethereum. If the "killer app' for Bitcoin is digital gold, the current killer app for Ethereum is tokens and so called ICOs, this is a really good introduction by a partner at Andreessen Horowitz, Balaji S. Srinivasan.

This is another take on the token space by Chris Dixon also Andreessen Horowitz. As an example the BAT, an Ethereum based token earlier this week raised $37M in 30 seconds.Even though Ethereum is attracting some real money it is still experimental in nature, still very much evolving, buggs are still found, their consensus algorithm is untested at this stage, the native token ether might not be a store of value as the inflation is not capped as Bitcoin's is. The project is much more centralized vs Bitcoin.

There are many other blockchains, one example is Zcash that uses zero knowledge cryptography to protect the privacy of transactions. This discussion with Nick Szabo and Naval Ravikant is really good– two of the absolute brightest minds in the space.

Resources:

Bitcoin stats

Crypto market caps

Bitcoin price

General info

Ethereum

Industry research


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