From Unchained, Laura Shin with Chris Burniske, Placeholder Ventures and the co-author of "Cryptoassets: The Innovative Investor's Guide To Bitcoin And Beyond"
|Mar 11||Public post|
In this edition, I’d like to bring you rather a technical talk on “how to value a crypto asset”, between Chris Burniske (Placeholder Ventures) and Laura Shin from Unchained (and now at Unconfirmed). Given all the speculations and hype, it is something rarely mentioned in the mainstream media.
TL; DL (Too Long; Didn't Listen)
Chris Burniske’s Book - “Cryptoassets: The Innovative Investors' Guide to Bitcoin and Beyond" is a must read for anyone interested in Crypto.
He applies what is known as the equation of exchange (MV = PQ) to crypto assets and describes why the velocity of crypto assets - the frequency with which they change hands during a particular time frame - is likely to be much higher than for traditional assets, and; discusses why he gives crypto assets much higher discount rates, which are used to determine what you should pay now for something will be worth more later.
A venture firm help the developers and entrepreneurs get off the ground and when their job is done, it no longer have to hold that asset necessarily and it can transition out and pass the asset back to the utility holders. At that point, they’ve just become a placeholder.
Hodl - It was originally a typographical error where someone wrote hodl instead of hold, which is actually a hilarious piece of Bitcoin history.
“I think Bitcoin ETF would be an important moment for the space. It’s a bit of a bastardization of Bitcoin. It’s only a matter of time until we see more vehicles that will securitize Bitcoin and other crypto assets or provide this well-understood and easily recognizable wrapper to this new asset class.
“I’m not over fixated on when these things are going to be securitized but it’s gonna happen because it’s a new asset class and the inertia in inevitable.” - Chris Burniske
“The crypto economics of every system are going to be crucial to whether or not it survives because these are basically little economies that you’re creating and trying to incentivize that different actors in different ways.” - Laura Shin
Markets don’t price assets based on their current utility but with the expectation of future utility. - Chris Burniske
This is rather a technical conversation. Don’t want to go into details huh, No problem.
Read this article “Today’s Crypto Asset Valuation Framework”, and wait for the next edition of the untethered.email - Kevin Liu
Chris Burniske, Crypto and ARK
In September 2015, ARK became the first public fund manager to make a direct investment in Bitcoin through Grayscale’s Bitcoin Investment Trust -this ultimately led him to do a lot of research, writing, and speaking around the space.
How did he see Bitcoin and Cryptoassets change, his career change
Chris feel blessed that he was ramping out the space and doing his due diligence on Bitcoin back in 2014 - 2015 (Bitcoin fell hard during this time), which made him come in the space with open and rational mind. This eventually led him to explore the space as crypto assets as opposed to Bitcoin as a single cryptocurrency.
@ARK, there is no hype. It really is just deep investigation of the technology and the merits of Bitcoin as money over Internet Protocol. It led him to do things like writing the paper he first put out called “Bitcoin Securing the Network”.
Ark’s approach was to develop deep conviction in the technology, the price of bitcoin, and the potential for appreciation which allowed them to develop a robust base that is free from all the hype.
Fast forward, Chris realized that there isn’t really much he could cover in the crypto asset realm that would be suitable for Ark as an investment.
He had to find himself from the business development perspective and did a lot of work with different infrastructure providers and regulators - it is an important work but a very slow-moving process.
He realized that if he wanted a direct fast-moving exposure to the crypto asset ecosystem, he would have to leave Ark. It is not because Ark lacks innovation but because he wants to work directly with the developers who are making this ecosystem come to life.
How is an asset class defined
Four main areas to look for in an asset class:
The asset class needs to be sufficiently investable
Supply schedule - this is where crypto assets are extremely different in how the supply is mathematically metered compared to traditional assets
Placeholder Ventures and Why did he choose the name Placeholder
Placeholder Ventures is a venture capital firm that specializes in decentralized information networks.
The simple answer is that their lawyers picked it because they haven’t really settled upon a name during the early days and they were just putting Placeholder in brackets in all of their documents.
As a venture firm, it help the developers and entrepreneurs get off the ground and when their job is done, it no longer have to hold that asset necessarily and it can transition out and pass the asset back to the utility holders. At that point, they’ve just become a placeholder. Hence, the name Placeholder Ventures.
Advice to someone who is trying to figure out the value of these assets
Doesn’t really give away price targets or public investment advice.
Build models to understand what the levers to the value are on a long term basis. Usually it is on a 10-year buy and hold basis.
What is the use of equation of exchange or MV = PQ
MV = PQ is an equation to map the flow of money though an economy.
M - monetary base
The size of the monetary base is necessary to support an economy
V - velocity
Refers to the number of times within a certain timeframe, most typically a year, that a currency will turn hands
“Velocity is one of the hardest ones, and this is why it is very explicitly in assumption in the model.”
“Velocity is kind of been somewhat neglected concept within monetarism.”
P - average price of the basket of goods
Q - quantity of goods
M*V = P*Q (Source: Austere Capital)
This shows that multiplying the monetary base by the number of times that the monetary base turns over in a year (MV) equals the size of an economy in a year.
How does MV = PQ apply to crypto
It applies to crypto network because we can actually think of a crypto network as an isolated economy.
We can use this equation to map the flow of the crypto assets to provision the digital good or service that this crypto economy provisions.
Where does he start when approaching the value of different asset
He always starts at the Supply Schedule which is basically looking at how many units of a certain crypto asset are going to be issued this year and what is the total amount that has been issued over time.
Why does he think the velocity of crypto assets will go higher
Friction is what pulls down velocity and even in traditional physics, friction causes velocity to decrease.
Traditional assets, Gold has a very high friction because he can’t really just carry around his gold bars and give it to someone else.
Fiat currency however, friction has been ameliorated but there is still a fair amount of friction to the physical instantiation of the fiat currency even though most of it is digital now.
Crypto assets, it is our first digital-native asset class and there is no physical representation of it and that is what decreases its friction.
Meaning of HODL
It was originally a typographical error where someone wrote hodl instead of hold which is actually a hilarious piece of Bitcoin history.
Hodlers typically base on an expectation that these crypto assets will have an increase value of utility in the future over now.
Now we get to explain that HODL doesn’t stand for anything and was just some random dude who was too drunk to type straightFebruary 6, 2018Effect of hodling to the velocity of crypto assets
Now we get to explain that HODL doesn’t stand for anything and was just some random dude who was too drunk to type straightFebruary 6, 2018
Well, unless a cryptocurrency has a mechanism built to kind of incentivize people to want to hold or hodl the asset, the velocity could potentially bring the value of these crypto assets down.
An increasing amount of crypto economic systems trying to build a mechanism that would prevent this from happening.
What Discounting is
Discounting from the theory of finance is a basic idea that a dollar today is more than a dollar a year from now.
For example, if someone were to give him a dollar today, he could invest it and maybe get a 5% rate of return. In a year, the $1 would be $1.05. So you either you give him $1 today of $1.05 in year.
Consequently, giving him $1 a year from now would be a bad deal. Fo is someone were to try to give him $1 in a year, he would the divide it by 1.05 because that’s potentially the interest rate he could get.
This is why it’s being widely used within the pricing of assets because markets don’t price assets based on their current utility but with the expectation of future utility.
How quickly does he think the disruption of financial services will happen
This whole progression fits what they classically say with disruptive technologies and innovator’s dilemma where a new open highly disruptive technology comes out and generates a lot of interests but disdains from the incumbents.
The incumbents would then adopt some parts of the new technology that they like and leave out the parts that they don’t like.
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Untethered.email by Kevin Liu