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Lego man sitting at a desk.

The $7.5 Billion Blockchain Investment

Lego man sitting at a desk.

The trend known as DeFi, or Decentralized Finance, is taking the blockchain world by storm. As of this writing, the total amount invested (or “locked”) in DeFi is about $7.5 billion, and growing. This is either a blockchain breakthrough, or a blockchain bubble. (Turns out, it’s both.)

I recently went in deep on DeFi. My goal was to see if there’s real value there, and to understand why people have bet $7.5 billion on its future. Is DeFi worth the investment? Read on to find out what I learned … and the easy way for ordinary people to invest.

What the DeFi

At a high level, DeFi (or Decentralized Finance) is a set of websites and apps where digital assets (like Ethereum) can be used to create new financial products like loans, index funds, and derivatives. That’s a mouthful to explain, so here’s a simple example.

In a traditional bank, let’s say you want to take out a loan to start out a new business. Applying for this loan will require hours of time and mountains of paperwork. You might have to put up your house as collateral – if you can’t pay back the loan, in other words, the bank can take your house. If you’re approved, the bank gives you the money, then you gradually pay back this loan (with interest).

This is what we call traditional or centralized finance – it’s managed by a central institution (a bank), which itself reports to a bigger central institution — what we literally call the “Central Bank.”

With a decentralized loan, this model gets flipped on its head: you’re borrowing not from banks, but from other users. You buy digital assets (like Ethereum), then use simple, one-click apps like Compound to take out a loan, using that Ethereum as collateral. Behind the scenes, the app finds lenders — not banks, but other investors who are earning interest by lending to you.

If you can’t pay back the loan – or the price of your original Ethereum drops suddenly – the app will sell your original Ethereum (just as the bank might seize your house). This is one reason DeFi apps are incredibly risky, and you should be prepared to lose 100% of your investment.

Centralized Finance Decentralized Finance
Run by banks Run by users
Slow and cumbersome Instant and fun
Relatively safe Highly risky

That said, there is definitely something important going on with DeFi, and it is actually the banks that should be afraid. The banks should be very afraid.

DeFi Step-by-Step

In a nutshell: most DeFi apps work on Ethereum. So the process is:

  • Buy some Ethereum (through a service like Coinbase);
  • Transfer that to a wallet (like MetaMask);
  • Connect the wallet to these services (here’s a list of the top DeFi apps).

Using these DeFi apps is like flying an alien spacecraft. The spaceship is so easy to steer that it flies with the power of your mind – but you have no idea how the technology works, and you might crash into the surface of Saturn.

On one hand, these apps are so easy to use that they make the banking system look like an outdated relic. This week, my traditional banking website was down (they never explained why), while Compound was giving real-time feedback on how much I was earning with my Ethereum loan.

On the other hand, the user manual for these apps is pretty much non-existent. This is bleeding-edge financial technology, so you are pretty much on your own to figure it out: you can either sit through long-winded YouTube instructional videos, or wade through difficult technical documentation.

Once you’re in, though, I must confess it is incredibly fun to watch the real-time numbers flowing around. It’s like you’re in a casino, because you’re not playing with “real” money, you’re playing with chips — but of course the chips represent real money, so ultimately your real wealth is on the line.

After hours of working on this process of converting and sending tokens, a few things became clear.

  • DeFi apps are really good at taking your money. It is creazy (or crazy easy) to send your Ethereum over to these apps – you don’t even need a username and password, they just hook up to your Metamask wallet and drain it directly.
  • DeFi apps are really good at charging fees. You pay these fees in the form of service fees, or “gas,” required to make transactions on the Ethereum network. Additionally, these apps generally tack on their own service fees. These fees are subtle and insidious: just to get in, you’ve already lost wealth.
  • This is all funny money. Until you convert it back into a stable store of value, you are earning an imaginary return on imaginary money. It’s a house of sand, or castles in the sky. So the $7.5 billion invested in DeFi is misleading: it’s not like $7.5 billion in U.S. dollars, but rather $7.5 billion of multi-layer money (which we will abbreviate as MLM).

Let me give you an example of MLM. Joan buys $100 worth of ETH, puts it into her MetaMask account, then deposits it into Compound, where she can buy an additional $50 worth of some other token — which she can then take over to another DeFi platform, and do the same thing. Again and again.

Financial assets built on top of other financial assets are nothing new: they’re called derivatives. But this “money built on money” — MLM, or multi-layered money — can be a house of cards: if the table shakes, the whole thing comes crashing down.

I’m pretty sure that after all the work I did on DeFi, I lost money. (It’s a research expense.) Still, there is something very interesting going on here: easy-to-use financial applications that are not being run by banks, but by individual users and software. Here are a few takeaways.

Financial asset dashboard
After all my hard work, I managed to earn a -6% interest rate (meaning I was giving away money).

5 DeFi Investing Principles

First, if you’re going to put money into DeFi applications, do not invest more than you are willing to lose 100%. These are early-stage applications, so they’re vulnerable to hackers. The entire market could crash overnight. Your parrot could eat your passwords. Ask yourself, “If I lost 100% of this money, would it be OK?”

That said, consider investing a little bit into DeFi. Even if it’s just $100, you’ll get your feet wet. The process of using these applications will teach you a lot. You’ll see the opportunities for this stuff: that someday soon we will be trading stocks, bonds, real estate, sports teams, pop stars, and everything else on these platforms.

Next, keep track of what you’re doing. It is so easy to throw money into these platforms that you can quickly lose track of what you own, how much you invested, and how much you’ve paid in fees. At minimum, keep an Excel sheet or Google sheet with each transaction, the platform, and the fees.

On that point, watch fees carefully. Fees are the silent killer. There’s no use earning 5% interest on your Ethereum if you’re paying 6% in fees to transfer it in and out. To reduce gas fees, for example, consider making transactions during night time hours, when the Ethereum network is not so congested.

Finally, be vigilant. Because we are dealing with MLM (multi-level money, similar to multi-level marketing), a sudden crash in the blockchain market can have a domino effect through the entire system. As Selena Gomez explained this concept in The Big Short:

With DeFi, we are building new layers of MLM, which in my view is not a good thing. It’s risky and dangerous. However, that MLM is funding a new generation of financial products, which will completely overhaul the current financial system, which in my view is a good thing.

Ultimately, the free flow of value is good – especially the free flow of value to where it is most needed. When we can get money to an entrepreneur in Mombasa, or a relative in Iceland, or schoolchildren in Beirut – instantly, and without financial gatekeepers – we will be on our way to a fairer world. Human progress will accelerate faster and faster.

Also, let’s be honest: banks are generally difficult, bureaucratic, and unfriendly. My bank holds all my money, but they never call me on my birthday. They tell me how friendly they are, but it takes forever to get someone on the phone. The banking industry is about due for a shake-up.

There is one super-simple way to invest in DeFi: invest in Ethereum. Nearly all of that $7.5 billion is invested in apps that are built on Ethereum. Like investing in the early days of Microsoft, when everyone was trying to figure out what an operating system was, Ethereum is quietly eating the banks.

Ethereum is emerging as the de facto standard for DeFi.

As I’ve said in previous columns, investing in Ethereum is not investing in a company. You don’t own shares of stock. But as the value of the Ethereum network continues to grow, the value of the Ethereum token (ETH) will likely continue to grow. When you buy Ethereum, you are betting on the future of Ethereum.

Today, that future looks brighter than ever.

You will hear plenty of get-rich-quick stories about DeFi in the months ahead, but that’s not our style. We’re here to help you build a lifetime of health, wealth, and happiness – by delivering value to where it is needed most.

Even though DeFi is an enormous bubble, even though it’s a massive MLM, this software-based, peer-to-peer model of finance is going to radically disrupt the traditional financial industry. So if you have a little money to spare, consider playing around with these apps – but remember, the simplest DeFi investment is to buy and hold Ethereum.

John Hargrave is a board member of the Boston Blockchain Association. Click here to join as a member.

Libra displayed on a phone.

Investing in Libra: How to Buy Into Facebook’s Digital Currency in 2020

Libra app displayed on a phone.

One year ago, Facebook announced its new cryptocurrency, called Libra. We gave them one year to decentralize it. One year later, we have an update – as well as some happy financial results, for those of you who invested.

That Escalated Slowly

The most surprising thing is how slowly the Libra project has moved forward. Facebook’s slogan, of course, is “move fast and break things,” but that doesn’t work when it comes to reshaping the global economy, where the project has been mired in scrutiny from regulators around the world.

The escalated slowly

First, I should be clear that it’s not a Facebook project: it’s technically owned by the Libra Association, a separate organization set up in Switzerland , which now includes 27 members: mostly tech companies like Uber and Spotify, plus VC firms like Andreessen Horowitz and Union Square Ventures.

But it started at Facebook.

That’s why regulators have raked Facebook over the coals. As I pointed out a year ago, Facebook has over 2.5 billion users — a third of the planet — and introducing a new digital currency would make Facebook a global economic superpower overnight. (Now, that’s thinking big.)

TL;DR: Regulators have put the brakes on the project, scaring off original Libra partners like PayPal, Mastercard, and Visa. In response to these concerns, Libra has posted a new version of its white paper to address some of these concerns — we’ll call this .

Libra 2.0: How it Works

Imagine that you have a Libra “wallet” – like a bank account – that you set up through Facebook. You can “load it up” with your own national currency, then use it to buy products and services on Facebook—as well as many other partners, like Lyft or Shopify.

But you might choose to keep your Libra in the wallet. It’s easier to transfer to friends and family (like Venmo). It’s easier to transfer internationally (like sending an email). It hides all the complexity of exchange rates and transfer fees – it’s just one currency, Libra.

But you might keep your money in Libra for other reasons. Maybe you get a better savings rate than your bank can give you. Maybe it’s easier to take out loans. Maybe it’s just a better experience than your bank. (In fact, maybe the bank itself starts to look old-fashioned and out of touch.)

As it stands today, then, Libra 2.0 looks more like a digital payment system built on a blockchain platform. This makes it more like a competitor to PayPal, but built on blockchain (and as we all know, blockchain is better).

Over the last year, the Libra Association made a few important changes to the original whitepaper:

1) Stablecoins. In the new roadmap, Libra uses stablecoins tied to specific currencies (like a US dollar coin), in addition to the “basket” of currencies they used in their original proposal. Importantly, these stablecoins are backed by “real” assets: they will only mint a Libra USD if they have a dollar backing it up. Instead of a dollar sign, these will be written with the Libra logo and then the currency:

USD, EUR, GBP
Libra will become the “meta money.”

2) Increased compliance. How do you keep Libra from being used for money laundering? In plain English, you’ll be able to use Libra only by going through a “custodial wallet or exchange” (like a bitcoin bank), or a do-it-yourself “Unhosted Wallet” which will have some kind of automated KYC/AML built in. It will be hard to use this anonymously (which is an improvement over cash).

3) More tightly centralized. The original plan was to move Libra to a permissionless (i.e., open or decentralized) system within five years. Regulators said that a public blockchain would be too hard to track bad actors, so Libra has now abandoned those plans, and made it a private blockchain – with plans to vote more members into the private Libra Association at regular intervals.

In summary: Libra is becoming a kind of payment network, based on a private blockchain. It is backed by “real” currencies — they have money in the bank to back it up — but it will be far easier and cheaper to transfer money than today.

This is all a net positive, though it’s not decentralized, which is a big negative. Because without decentralization, who primarily benefits?

Facebook.

How to Invest in Libra: Invest in Facebook

You can’t buy Libra today, but you can buy Facebook stock. For those who bought Facebook stock (full disclosure: I did), here’s the performance over the last year:

Facebook stock performance

From $193 to $235: that’s an 18% increase in one year. In my view, it’s not too late to hop on the Libra bandwagon. In fact, the CoronaCrisis has only increased the need for speed in our financial system.

The big challenge is that Libra is still theoretical. Although they have a working prototype, and developers are running testnet transactions, no one is “using” Libra in a practical way. We don’t know how long that will be, but my bet is that once the financial dominoes start to fall, things will move quickly.

We need to upgrade our monetary systems. As the Fed prepares banks for the perfect economic storm that may be coming, there has never been a better time to upgrade our financial infrastructure. Depending on how bad things get, we ordinary investors may need to transfer money quickly and easily, anywhere in the world. We will want options.

I’m disappointed that it’s not decentralized, but there are always ways for prophets to profit. If you peer hard into the future, think about where things are going with Libra – and who’s likely to win at the end of this movie.

At the beginning, many people called the Libra project “Zuck Bucks,” as if it was Mark Zuckerberg’s personal money. But who do you trust to roll out a global digital currency more successfully: Mark and his team of Libra insiders, or the central banks?

P.S.: Be sure to check out our original guide, Facebook Coin: How to Invest in Libra, Facebook’s New Cryptocurrency.

Health and wealth portfolio

The Coronavirus Stock Portfolio

Health and wealth portfolio

Today we’re proud to introduce THE HEALTH AND WEALTH PORTFOLIO. It’s four companies that we think will do exceptionally well in the coming years, in the aftermath of COVID-19.

In brief, these four companies are The Clorox Company (CLX), Amazon.com (AMZN), Zoom Video Communications (ZM), and Netflix, Inc. (NFLX).

We’re all about blockchain investing, not stock picking. But you’ll recall that our Blockchain Believers Portfolio (which is looking better than ever) has the majority of holdings in stocks and bonds.

As the stock market implodes, there is more opportunity than ever — provided you are willing to buy and hold for the long term. (It’s going to be quite a while before the smoke clears.)

As we continually preach, you’ve got to zig while everyone else is zagging. Right now, everyone is zagging for the exit. Time to zig.

To beat the market, you must bet against the market. This is common sense. Here are four bets you might want to consider.

The Coronapocalypse

First, a quick story. I was due to speak at several events this week as part of Boston Blockchain Week, including the Boston Fed. All canceled.

Next week, I was scheduled to speak at the Global Blockchain Expo, the huge technology event in London. Canceled.

From there, South by Southwest in Austin … you get it. EVERYTHING IS CANCELED.

So I had an inkling this was coming before everyone else. And I see a bigger picture: It’s not that the cancelation of these events will hurt the local economies. It’s that without those events, deals don’t get done. No new connections. No new sales leads. No new business investment. Everything slows down.

Now we’re all going to be working from home for the foreseeable future, and — let’s be honest — worker productivity goes down when people telecommute. On top of that, all the kids are home from school and college, so parents have to babysit.

All this against a backdrop of uncertainty: no one knows how long the Coronavirus pandemic will last, and our nationalistic approach to solving it means we don’t have a good global response. So spending slows down, demand slows down, productivity slows down – all the makings of an extended recession.

I say this all this with no trace of fear. I’m not afraid of the virus. I’m not afraid of recession. I’m not afraid of death. I’m not afraid of losing my job, my business, or my home. I see opportunity everywhere.

SMART INVESTORS SEE OPPORTUNITY EVERYWHERE, ESPECIALLY IN TIMES OF CRISIS.

Note I said “opportunity,” not “opportunistic.” Our mission is to find investing opportunities that bring “health, wealth, and happiness,” as I’ve been signing off every one of my columns since Bitcoin Market Journal began.

I hope the impact of COVID-19 is short-lived. But I believe this is an economic tidal wave that will hit us in stages. So as everyone is fleeing to get out of town, let’s start laying down some sandbags and looking at companies that are not only likely to survive — but to thrive.

The Clorox Company (Stock Ticker: CLX)

Two words: Clorox Wipes.

Every building I enter now has a container of Clorox Wipes and an industrial-sized squirt bottle of Purell hand sanitizer. How can we possibly estimate the sales growth these two companies are going to see this year? There’s one big difference: Purell is a private company. Clorox is public.

(For new investors, that means you can buy shares of Clorox stock using any online brokerage like E*TRADE – but know that we do not provide investing advice, only ideas. Do your own research and never invest more than you’re willing to lose.)

34 Percent

Courtesy Clorox Annual Report

We spent some time digging through the Clorox business, which encompasses a number of household brands — from Glad trash bags to the magnesium supplement Natural Calm (which people are also going to need).

But it’s Clorox-branded products that make up a third of their sales: bleach, spray, wipes, disinfectants, and even the Total 360 System, which looks like something they’d use to disinfect an alien spaceship.

Way back in 2014, the company put together a 2020 Long-Term Strategy, with a 3-5% annual growth target. As of 2019, they were at 2.4%. Given the vast quantities of Clorox that will be consumed in the fight against COVID, I’ll let you decide whether the company will make their goal by the end of 2020.

My vote: Clorox is going to clean up.

Netflix (Stock Ticker: NFLX)

People are being sent home by the millions. Workers. Students. Adults. Children. Babies.

They’re going to get bored.

Parents need a way to babysit the kids? Netflix.

Students finished your three hours of study? Netflix.

Adults trapped at home, can’t go out to eat or the movies? Netflix.

Sure, there are plenty of other streaming video options, not to mention videogames and plain old broadcast TV. But Netflix has a streaming product unlike any other, customized to your viewing preferences, with an enormous amount of quality original content. They’re the leader.

We also looked at other streaming companies, including Disney (whose streaming Disney+ memberships will likely take off), but the closure of Disney theme parks may offset these earnings. Netflix is a pure play: although they still have a small legacy DVD-by-mail business, the real business is streaming.

Netflix’s streaming memberships have increased year over year for the past 3 fiscal years, and so has their average membership fee, as you can see here:

Global streaming

Courtesy Netflix annual report

Netflix also reports strong seasonality: when customers buy internet connected devices, they watch more. That’s why Q4 (when everyone is buying new devices for the holidays) and Q1 (when they’re continuing to watch them) are their strongest seasons. Expect that trend to pick up during COVID.

Finally, Netflix is even stronger internationally than it is in the U.S. International memberships make up about 50% more than domestic memberships, making it a great company to capitalize on the international audiences staying at home during COVID-19.

(Funny how the virus doesn’t recognize national or political borders. It just sees one human species.)

Zoom Communications (Stock Ticker: ZM)

There are plenty of videoconferencing systems out there. In my experience, they all suck, except Zoom.

We do a lot of video calls with clients, and we’ve found that most videoconferencing software takes forever to install, doesn’t connect you properly, loses the connection randomly, and just generally provides a terrible experience.

Zoom, in our experience, just works.

As the company said in its offering prospectus, this causes a kind of “viral enthusiasm” among its customers. (If only they knew how literally that phrase would come true!) Over the last week, I have heard so many people — from churches to schools – say, “We’ll Zoom in.” It’s becoming a verb.

Yes, Zoom is a newly-listed company. But it has had a 5x growth in three years:

Zoom annual report

Courtesy Zoom Annual Report

It’s the only pure-play videoconference company in the Gartner Magic Quadrant, where it ranks with industry behemoths Microsoft and Cisco. And it has the highest user ratings on the aggregator site G2Crowd:

Stars

Courtesy Owl Labs. (Note we also looked at Slack, but found it too young and unproven.)

The Zoom business model, like the Netflix model, is a subscription-based service. The SaaS model means more predictable revenue, since you can look at their number of subscribers, subtract their estimated churn (i.e., lost subscribers), and project their future growth.

Everyone is going virtual. Some people will try to use Google Hangouts or GoToMeeting. But when they get frustrated, guess where they’ll Zoom to next?

Amazon.com (AMZN):

If you think of Amazon as an e-commerce company, you’re wrong. It’s a logistics and infrastructure company. And now is Amazon’s time to shine.

Amazon has one of the most advanced warehousing and distribution networks in the world, not only of physical goods (the stuff you get delivered to your door), but also of data (the stuff you get delivered to your computer).

I know, you thought Amazon had already conquered the world, but you haven’t seen anything yet.

  • Think about how com sales will grow, as they deliver millions of packages to people who are staying indoors, electing not to go to the store.
  • Think about how Amazon Prime will grow, as people see the opportunity to save on delivery by joining Amazon’s membership service.
  • Think about how Amazon Video will grow — like Netflix — as people rent more movies and get access to Amazon’s library of original content.
  • Think about how Amazon Web Services will grow with all the videoconferencing, streaming, and online meeting traffic. (For some context, both Netflix and Zoom use AWS.)
  • Even Whole Foods, Amazon’s grocery chain, may see a lift, as consumers opt for healthier food options (though the coming economic recession may mean a hit for higher-priced groceries).

The big question is: can Amazon handle the demand?

Year ended

Courtesy Amazon.com Annual Report

For years, Amazon has invested heavily in logistics and infrastructure. Think about the Amazon lockers in your neighborhood, the Amazon Web Services business (which owns about half of the cloud infrastructure market), the endless stream of Amazon packages you see delivered to your neighbors.

Amazon, perhaps more than anyone else, is positioned to profit. They’ve built the pipes that are going to bring us all the essential goods — both physical and virtual — over the coming months and years.

Health, Wealth, and Happiness

This is a time of rare opportunity.

While everyone is running around with their pants on fire, we can calmly assess the market and look for great buying opportunities – either as part of our Blockchain Believers Portfolio, or just as standalone investments.

These are not get-rich-quick opportunities; these are ideas for long-term investments. The full economic effects of the Coronavirus are going to have a “lag factor.” They’ll take a while. Things will likely get much worse before they get better. But eventually things will change: they always do.

Markets are moody. It’s their nature. But we can use reasoned analysis to profit from the market’s moods.

In putting our money into the companies that will help us get through the Coronavirus, we’re also doing something good: we’re investing our money where it’s needed. We’re putting our money to work. And we’re signaling long-term confidence in the stock market.

Of course, the easy way of holding stocks is to simply buy an index fund that tracks the entire stock market (such as VTSMX). But if you’re interested in finding a few winners — especially in times of rare opportunity like this one — then this gives you a few ideas to get started.

I wish you health. I wish you wealth. And above all, I wish you happiness.

(For more big, bold, blockchainy ideas, apply to become a member of the BBA).

Stablecoins: What They Are and Why They Are Inevitable

“PROCEED AS IF SUCCESS IS INEVITABLE.” This quote is attributed to Anonymous, who penned a great many famous sayings. That dude was a genius.

I often use this quote when talking about blockchain industry. “Inevitable” is one of my favorite words, because it really does seem to me that in our Internet Age, blockchain—the Internet of Money—is inevitable.

In a recent interview, Patrick Harker, the president of the Federal Reserve Bank of Philadephia, said that stablecoins are “inevitable.” From his Wharton interview:

“Without getting into the details of bitcoin and Libra, I think there’s a real advantage in having a stablecoin. It’s hard to have a currency that’s bouncing around all the time, so when you go to Starbucks, you don’t know how many of whatever coins you’re going to have to use that day. Clearly, that is an area that will have an advantage over time.

That said – and it’s only my opinion, and I think I’m a minority opinion on this right now – I do think we, the central bank, and central banks around the world, need to seriously start thinking about central bank stablecoin currency.

In my view, it’s inevitable. Technology is evolving. We’re not going to stop that … I do think that it is inevitable, and we should start contemplating it now.”

He’s right: stablecoins are inevitable.

Stablecoins—blockchain-based digital currencies that maintain a stable value (unlike bitcoin, whose price changes daily)—are inevitable, for two reasons.

Why We Need Stablecoins: Reason 1

Tether name and icon displayed on a phone.

Changing money between “traditional” currencies (like dollars) and “digital” currencies (like bitcoin) is still slow and expensive.

“If we’re creating a new digital currency,” people often ask, “why should that digital currency be pegged to an existing currency, like the U.S. dollar? Why not just use dollars?”

The first reason is that it’s slow and expensive to change money from fiat to crypto. Here we have a real-world case study, with the booming success of the Tether stablecoin in China.

The legal status of cryptocurrencies in China is complicated, but the simple explanation is they’re legal to own, but difficult to purchase. This makes it impractical for high-volume users (like digital traders) to constantly be selling RMB and buying bitcoin, or vice versa.

What Chinese crypto traders do instead is store value in stablecoins. A trader might move all her money into stablecoins at night to catch some sleep – in the same way a bank puts all its loose cash in a vault at night. Traders know when they wake up in the morning, the stablecoin value will remain, well, stable.

As reported by CoinDesk, Tether (USDT) volume has surged to an all-time high, led by Chinese traders—who are not just a fringe use case, just the early adopters. So in a sense, Harker’s prediction that stablecoins are “inevitable” is actually understating the case: they’re already here.

Traders are on the leading edge of this economy, a sign of things to come. As digital assets get in the portfolios of more money managers, stablecoins like USDT are going to be not just an interesting innovation, but “the way things are done.” This, too, seems inevitable.

TL;DR: Exchanging money between fiat and crypto is slow and expensive; stablecoins provide a way to hold value in crypto, which is cheaper and easier than going back and forth.

Why We Need Stablecoins: Reason 2

Leather wallet with a gold coin.

One money for one world.

Despite today’s political rhetoric, most of us understand that we live in a global economy. What affects one country, in one way or the other, affects all countries.

This is why the economy is such a notoriously difficult thing to predict: every national economy affects every other national economy. It’s like a science experiment with 200 different variables, all constantly echoing and rippling back on each other, like raindrops on the smooth surface of a pond.

Occasionally someone will throw a rock into the pond (trade war!), and we can see how it echoes throughout the world economy. Lock this into your mind: the mental model of a global economy (a single pond), not a series of disconnected mini-economies (separate puddles).

In this view, why do we need different currencies? Money is moving around the globe, quite literally, at the speed of light. Changing money between Euros and dollars and renminbi is a vestige of a time before the Internet, when we had to communicate with telegrams, and make ocean voyages on steamships, when gentlemen wore bowler hats and ladies carried parasols.

In the words of President Harker:

Look, the vast majority of money in the world is digital right now. It’s central bank money and so it’s not a great leap. The difference is in creating this kind of a stablecoin approach. Again, I’m not sure how to do that. I’m not sure when we would do it. But at least we should start seriously thinking about it.

I really should be paying President Harker for all these great quotes, but the payment would have to be in stablecoins.

Harker tells an interesting story about a business leader who was considering moving his supply chain from China to Mexico, due to the current trade relations between the U.S. and China. When he heard that the U.S. might impose more tariffs on Mexico as well, he was “exasperated.”

We’re living in a global economy. What affects one of us affects all of us.

Stablecoins are needed now more than ever, because we need one money for one planet. We need a single currency for a single species. We need a global currency for a global economy.

As Harker says, the vast majority of money is already digital. It’s not paper money you hold in your wallet, it’s numbers shooting across the Internet. What’s different is that instead of constantly converting those numbers from one tribal system to another, we simply make a single system.

If instead of dollars and Euros, we used beads and stones, we could easily see how inefficient our system is. Our current systems are like beads and stones. We need a global standard that works across all tribes: “Earth Money” for the people of Earth.

A single stablecoin standard will open up trade, provide access for the unbanked, and unlock a new era of prosperity and wealth. With a blockchain-based “Earth Money,” we can create a digital currency for all Earthlings everywhere—and we all will benefit.

TL;DR: A stable, global, digital currency makes the flow of money easier and simpler—which will help our global economy thrive.

Taking the Lead

Person typing on a laptop computer.

Harker falls short of calling on the United States to take the lead. (That’s why he’s only president of the Philadelphia Central Bank.) This is where the culture of banking and finance makes odd bedfellows with the culture of technology.

I’ve often described blockchain as the Venn diagram of where finance (the suits) meets technology (the hoodies), and there are few people that understand both worlds. Blockchain is where the suits meet the hoodies.

In the technology hood, there is little room for second place. If you have the speed and vision of a Microsoft, you lead the PC software revolution. If you have the speed and vision of a Google, you lead the information revolution. If you have the speed and vision of an Uber, you lead the ride-sharing revolution.

In the tech world, if you wait for someone else to lead the technology — if you’re hesitant or unsure — you are frequently doomed to second place. This is because technology has network effects, as I explain in my book. In simple terms, it’s like a snowball that picks up speed until it’s too heavy and fast to stop.

Blockchains have network effects, big time. China is widely reported to be launching its own digital currency, which will likely siphon away all those Tether users as it becomes easier to trade between fiat and crypto. Among economic superpowers, China will likely get the snowball rolling.

Talk about inevitable: once China gets into the digital currency game, it seems inevitable that other major economic powers will follow. Because China will be the first, it is also likely China will also be the biggest (due to the snowball of network effects).

From there, it seems inevitable that each country will rush to mint its own blockchain-based digital currency, in the same way that everyone realized the value of the Internet in the 2000s. You can’t afford to be left out. But this is still only half the battle, as we want a global blockchain standard.

Here again, we can learn from blockchain projects to date. Those who form strong international coalitions — such as Hyperledger and Enterprise Ethereum Alliance — tend to get the snowball rolling, while those who “go it alone” tend to go nowhere.

What is needed is a strong international coalition of financial leaders to begin working on a universal stablecoin, one money for one world. The United States has an opportunity to take the lead, but so does every other country.

As to the country that takes the lead in establishing this universal stablecoin – this “Earth Money” – consider moving there. As Anonymous said, proceed as if success is inevitable.

(For more big, bold, blockchainy ideas, apply to become a member of the BBA).

How to Convert Bitcoin to Real Estate (With the Government’s Blessing)

Gold coin with bitcoin symbol.

Let me tell you a story about Wally Whale.

Wally bought 125 bitcoin back in the day, when the price was just $125. Those 125 bitcoin are now worth $1 million and Wally can’t handle the stress. He’s tired of HODLing a million dollars of bitcoin, which might be worth half a million one day and two million the next. He wants to diversify.

In other words, Wally would like to sell the bitcoin and reinvest the $984,000 profit in a more traditional, stable investment—say, real estate. But this means he will have to pay tax on the profit, which will be around $200,000. 

What if I told you there was a way to reinvest your bitcoin into real estate, completely tax-free, with the government’s blessing?

Because this works with new U.S. tax law, it is only applicable to U.S. investors. But for all the bitcoin skeptics out there, this is a perfectly legal, government-sanctioned way of transferring your bitcoin to something “real” – real estate.

Introducing the O-Zone Layer

The Tax Cuts and Jobs Act of 2017 was created to spur investment in economically distressed areas—to “spread the wealth” into regions that need more businesses and investors, by providing them with a huge tax advantage. They gave these areas the sexy name of “Opportunity Zones” (or the even sexier “O-Zones”), and the payoff is exciting. Stick with me to the finish.

Normally, if you sell any asset for a profit, the IRS takes a cut of that profit. If you bought Apple stock five years ago at $109, and you sell it today at $262, the IRS gets a cut of your $153 profit. This applies to any asset, whether it’s fine art, a classic car, or bitcoin. If you make a profit, you pay tax on the profit.

Under the new law, you don’t pay tax if you reinvest that profit back into one of these new “Opportunity Zones.” Let’s say you sell your Apple stock, then reinvest the $153 back into Parramore Oaks, an energy-efficient apartment building in Orlando, Florida. You roll over the entire $153, and you don’t pay tax.

This is what an O-Zone looks like (courtesy NCSHA).

If you keep your investment in the building for at least five years, then cash out, you get a 10% discount on the original tax you owe. If you keep your investment for at least seven years, you get a 15% discount.

Here’s the math: 

This tax advantage “expires” on December 31, 2026, so many investors are rushing to get into this deal before December 31, 2019, so they can take advantage of the full seven-year discount.

Let’s go back to Wally Whale, who has made a $984,000 profit on his original purchase of 125 bitcoin. He sells the bitcoin, rolls over the $984,000 tax-free into, say, the Teachers Village Fund, which invests in schoolteacher housing within Opportunity Zones in Newark, NJ.

If Wally cashes out of that investment after five years, he only then pays the tax, at a 10% discount. If he cashes out after seven years, he gets a 15% discount. He pockets his $800,000 and change—a jaw-dropping return on his original $15,000 bitcoin investment.

Obviously this works best for investors who are willing to be patient and do their homework (both things that we preach over and over at Bitcoin Market Journal), but it’s a terrific way of building wealth while helping build underserved communities. By converting digital assets into real estate, you’re moving blockchain into buildings, crypto into communities.

I had the opportunity to go visit one of these communities. I was impressed with what I saw.

An Example Opportunity Zone

Downtown Quincy.
Downtown Quincy, Massachusetts.

Quincy is one of the top 10 cities in Massachusetts, with easy access to Boston: it’s just a twenty-minute subway ride into Boston’s Blockchain District (formerly known as our Financial District). The Stop & Shop supermarket chain is headquartered there, as are major offices of State Street Corporation and Blue Cross Blue Shield. John Adams, the second president of the United States, grew up there. (Don’t hold that against them.)

Traditionally, Quincy was a manufacturing town, with granite quarries and shipbuilders. When those businesses dried up, Quincy went into a bit of a decline. In 2013, the median household income was about $62,000—well above the national average of $53,000 but well below the local average of $85,000.

The local government began investing heavily to attract businesses out of Boston and into Quincy, where rents were much more affordable. It invested in new housing, gentrified the downtown area, and attracted new restaurants and shops, creating what the Patriot Ledger newspaper (also headquartered in Quincy) called an economic boom.

The Hancock Adams Common in downtown Quincy.
The Hancock Adams Common in downtown Quincy.

Walking through Quincy, you don’t exactly feel like you’re in a wealthy suburb, but it’s not bad. We had a nice lunch at an upscale Japanese restaurant, then took a tour of a new co-working space called QUBIC (Quincy Business Innovation Center), located beneath a huge Citizens Bank branch (one of the conference rooms is literally an old bank vault). You can see Quincy profiting from the Boston boom.

The Bank of America building in Quincy Center.
The Bank of America building in Quincy Center.

Quincy is also home to these “Opportunity Zones.” So, if Wally Whale believes that Boston is growing (it is), and this growth is pushing out to the suburbs (it is), and Quincy is well-positioned geographically and politically to take advantage of that growth, then this is an Opportunity Zone well worth consideration.

Let’s say Wally sells the bitcoin, reinvests the profit in new real estate development in Quincy (it has to be either new construction, or “significant improvement” to an existing property), and sits on it tax-free for seven years, during which time it benefits from the Boston blockchain boom. Wally gets a more stable investment (real estate), helps build a local economy (Quincy), and enjoys his free money (tax discounts and deferrals).

The ancient alchemists sought to turn metal into gold: Wally is turning bitcoin into buildings.

Please note I am not endorsing any specific investment or city. I’m literally not selling you anything! I am using Quincy as an example of how an investor might think about 1) diversifying investments, 2) doing the homework, and 3) investing for the long term. I’m giving you ideas.

Now, what if we could take this approach to invest in not just one piece of real estate, but to an entire portfolio of properties? That’s our final piece of the puzzle.

The Bitcoin Real Estate Fund

Miniature model of a home with gold coins that have bitcoin symbols.

Imagine that Wally Whale can now reinvest his profit into a fund that has investments in buildings across the United States, strategically located in promising Opportunity Zones like Quincy. For example, the fund might invest in Ox Fibre Apartments, a historic warehouse in Maryland that’s been converted into residential units. Or The Tappan, a mixed-use building in Cleveland, OH with 95 apartments and a 2,000 square-foot bakery. Anywhere there’s the promise of future growth.

There are already over 150 of these Opportunity Zone Funds, many of which are open to anyone (not just accredited investors). In other words, anyone can cash out a bit of bitcoin, then reinvest it back into one of these funds, tax-free. You can convert bitcoin into buildings.

That’s why this law was passed: to attract investment to these underserved areas. The government doesn’t care where that money comes from. And by offering another place to park your money, you diversify your portfolio, always keeping no more than 2-10% in digital assets, as we explain in our Investor’s Manifesto.

The only thing that hasn’t been done yet is to formalize this with a name. While you can sell your bitcoin or cryptocurrency, then reinvest the profit into any of these funds, I’d love a fund called the “Bitcoin Real Estate Fund,” specifically targeted to investors like us.

In this hypothetical fund, we’ll invest in real estate projects in promising Opportunity Zones located near technology hubs like San Francisco, New York, and Boston – or in promising blockchain hotspots like Wyoming, Miami, and Puerto Rico. In a sense, we’re getting the best of both worlds: betting on the rise in technology, which will in turn lift the value of the surrounding real estate. Anyone can invest, but we’ll make it an easy “off-ramp” for people who want to cash out bitcoin and into real estate.

I am grateful to the Boston blockchain angel investor group Chain Reaction for explaining Opportunity Zones at an excellent Meetup, and for arranging the tour in Quincy. With this idea, we can literally power a new real estate revolution with bitcoin, in the places that need it most. That’s doing well and doing good.

We can convert bitcoin into buildings.

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Bitcoin

How to Navigate the Bitcoin Rabbit Hole (with Downloadable PDF)

Bitcoin

“I bought some bitcoin, then I fell down the rabbit hole.” Has that been your experience too?

In this article, you will learn how to navigate the bitcoin rabbit hole so that you can make sense of the opportunities that blockchain technology has to offer.

Navigating the Bitcoin Rabbit Hole

If I had a bitcoin for every time I’ve heard someone say that, I’d be as rich as Satoshi. The idea of a “rabbit hole” — a complex network of branching tunnels that take you ever deeper underground — is a recurring theme in blockchain. What starts as a passing interest ends up with us diving deep into cryptography fundamentals, or geeking out on the history of economics.

The more we get excited about this technology, the more we try to explain it to other people, the more our answers sound like Neil DeGrasse Tyson drunk at a party. Like Alice falling down the rabbit hole in Alice in Wonderland into a nonsense world of anthropomorphic creatures, or Neo taking the red pill in The Matrix, the rules of reality in blockchain get turned upside down and twisted topsy-turvy.

Over the past two or three years, we’ve been mapping the rabbit hole. Just like Morpheus training Neo to live in the Matrix, or Alice with a little GPS tracker, we’ve had our flashlights out, exploring every nook and niche of the rabbit den. We explain the strange creatures you’ll meet in this burrow, how to make sense of their logic, and how to stay safe.

Now, we’ve put everything into one easy-to-read overview: How to Build a Blockchain Ecosystem, which you can download at the bottom of this page for free!


Blockchain Ecosystem ebook cover.

What’s Inside

Based on our learnings over the last two or three years, How to Build a Healthy Blockchain Ecosystem explains all the pieces that need to be in place to make blockchain thrive. It’s a guide for investors, entrepreneurs, companies, government regulators — and you.

It’s got large-print, easy-to-read font, with plenty of eye candy like charts, graphs, and illustrations – perfect for your boss, your friends, and those with limited attention spans. We explain:

  • The four parts to a healthy blockchain ecosystem
  • How to start building each part, with practical examples
  • Valuable lessons learned from building our Boston blockchain ecosystem

Think of it like a fully-illuminated rabbit hole, with a tour guide. We’ve got the entrances and exits well-marked. There’s a gift shop at the end.

We’ve been writing a series of these pamphlets, printing them by the thousands, and handing them out at industry conferences — an idea that is as old as America. What we’re finding is that these little printed pieces are powerful, especially in the age of Twitter. This is counterintuitive, but like so many things in blockchain, up is down and black is white. Print is persuasive.

Slowly but surely, we’re creating a valuable body of work mapping out this new industry, so it’s no longer a “rabbit hole” but an “underground network.” We’re classifying the creatures, making sense of the madness. And in the process, we’re building the world that we want to live in.

Best of all, we’re making this new download available for free. Feel free to share it like rabbits!

Download the How to Build a Blockchain Ecosystem Report!
(For more big, bold, blockchainy ideas, apply to become a member of the BBA).
Author: Sir John Hargrave

Security tokens

Security Token Offerings Explained Simply

Security tokens

At a recent meeting of the Blockchain Investors Supergroup, we had a very special guest: Richard Kastelein—or as I call him, “The Man Who Launched 100 ICOs.”

As the publisher of Blockchain News, Richard was one of the first to learn about Initial Coin Offerings, and he quickly became a master of this new form of fundraising. As his knowledge and influence grew, he became one of the industry’s top thought leaders and advisors.

At our live event, Richard spoke about how the early days of ICOs were infused with idealism. With blockchain, we could democratize fundraising! Everyone could invest in blockchain projects that they cared about! In this spirit, many early ICOs were set up as nonprofit foundations for the public good.

That changed with the ICO craze in 2017 and 2018, when the big money moved in. Richard explained the difficulty of launching an ICO today—especially in the United States, where they remain in a regulatory grey area. (“My advice on launching an ICO in the United States?” Richard said. “Don’t.”)

Which brought us to the topic of security tokens.

ICOs vs. STOs

The concept behind security tokens is simple: it’s a security on the blockchain. (Think stocks and bonds.) Instead of buying traditional Tesla stock, for example, let’s imagine a Tesla security token that would let you buy Tesla stock, and have that purchase recorded on the blockchain. (Hypothetical for now.)

Though security tokens are all the rage in the blockchain space, the idea is still being worked out. Here’s a first pass at how the two might be compared against each other:

Security tokens

Think of security tokens as “smart stocks,” because they can be programmed to do different things—like helping shareholders communicate with each other more easily, or streamlining shareholder voting. Just as smart contracts improve on paper contracts, smart stocks improve on paper stocks.

Security Token Offerings may replace Initial Coin Offerings, because as an investor, they let you actually own something. Let’s unpack an example to see how it might play out.

The IPO Model

The traditional tech fundraising model goes like this: an entrepeneur gets a little seed money from an angel investor, builds a prototype, then gets subsequent rounds of funding from VC firms, each time growing the company and the valuation, until finally she launches an Initial Public Offering.


Security tokens

The ICO Model

The Initial Coin Offering process has evolved into a similar model: an early fundraising round, followed by ongoing “presale” funding rounds, with an eventual ICO. The difference is that while the IPO typically has a real company with real revenues, the ICO is typically still just an early-stage startup.


Security tokens

The STO Model

A Security Token Offering will still require a seed/angel round, because it’s expensive to get these things going. You have to develop a team, a prototype, a business plan. (And the lawyers. Lots and lots of lawyers.)

Let’s say you’re an entrepeneur with a great idea for a new blockchain project. You find an angel investor who’s willing to commit $50,000 to get you started, and you give up 5% of the company. (At $50K/5%, you now have a $1M company. Congratulations!)


Security tokens

With your $50K, you develop your blockchain prototype, get the pitch deck ready, and spend a ridiculous amount of time with your lawyer. Now you’re ready to do raise some real money. You create a pool of 100 blockchain tokens, and transfer 5 of these to your early investor (who owns 5%).

Now let’s say you offer another 10 tokens to your next round of investors, in exchange for the next 5% of the company. These tokens cost more: let’s say $100,000 each. Now you’ve raised a total of $1,050,000 and given up 10% of the company, giving you just over a $10M valuation.


Security tokens

With this money, you open an office and do some hiring. You find a bunch of developers, a product person, a nacho bar. Let’s say your angel investor wants to sell his original 5 shares: he can do this at any time, with that transaction being recorded on the blockchain. (This is important.)

Now your company is cooking. You’ve got a product, you’re adding users. You have to expand the nacho bar. As you show traction, you can go after larger rounds of funding, building more valuation in exchange for selling more tokens.


Security tokens

Finally comes the public sale—or as we used to call it, the Initial Public Offering. Let’s say you’ve now got a $100M valuation, and you still own 40 of the original 100 tokens (40% of the company). You want to offer 20 of your remaining 40 tokens to the general public. And here’s where things get interesting.

What is the market price for your public offering? It is whatever your investors have been paying to buy and sell those tokens privately.

Remember, there is no “dark market” with this blockchain model. There are no back-office dealings. It’s all transparent. If your early investors are buying and selling their tokens, it’s all on the blockchain, for everyone to see.

Think about how this will revolutionize Wall Street! With traditional IPOs, shares are priced so that early investors can quickly sell out their shares at a profit—and many do. With this Security Token model, we have security (hence the name) that everyone is getting the market price.

If you want to help this vision become a reality, join our open-source token project. This is a radically better way of doing public stock offerings. Smarter stocks, indeed.

Blockchain investors

Are We Worth a Billion Dollars Yet?

Blockchain investing

How much is a superpower worth?

How much would you pay to be able to fly, or to become invisible? Let’s say $200 million. You could easily make that $200 million back with a superpower. Shrink to the size of an ant, cure cancer, boom. $200 million, easy.

Now, how much would you pay for fivesuperpowers? A billion? (You could probably negotiate a lower rate for the five-pack.)

Blockchain assets—bitcoin, altcoins, and tokens—are a new investment class. It’s like the early days of the stock market, with tons of golden opportunities. But understanding how to navigate the world of blockchain investments is like possessing a superpower.

Over the last year, we’ve worked tirelessly to build a framework for blockchain investors—a way to think about these new altcoins and tokens, within the context of their IRA and 401(k). And in the process, we have acquired knowledge that is incredibly rare and valuable.

In building a framework for blockchain investors, here are five superpowers that we’ve acquired—and passed on to others. Call it a billion dollars’ worth of superpowers.

Superpower 1: Understanding How It Works

One year ago, we started a meetup for Boston blockchain investors. The first meeting, maybe a dozen people showed up. The next month it was a few dozen. The next month, we had to move to a bigger space. By March we had over a hundred investors.

The demand for investor education was insatiable. People wanted to know how this stuff works.

Blockchain investing

And in return for providing all this free education, we got something in return: information. We got to hear how investors made decisions, and what they were investing in. We learned their average blockchain investment ($11,000), and how much they had in non-blockchain holdings ($150,000).

By helping investors understand blockchain, we greatly accelerated our own knowledge. So much of my blockchain education has come from talking with other smart investors, thinking about their questions, and figuring it out together. And there’s still so much to learn!

Blockchain investing

Superpower 2: Qualitative Analysis

It became obvious that investors needed a framework to evaluate the thousands of tokens and altcoins that were flooding the market. How do you decide if a new blockchain project is worth your money?

We developed the Blockchain Investor Scorecard, an academically-published, peer-reviewed framework for evaluating new blockchain projects. Answer a few simple questions in five important categories, and it gives you a 1-5 star rating on whether to consider investing.

This provides a way for investors to compare wildly different blockchain projects. Whether it’s a supply chain project, a prediction market, or an energy token, you can use the Blockchain Investor Scorecard to compare “apples to apples.”

We built out a team of outstanding analysts and journalists, who use the Blockchain Investor Scorecard to rate and review new opportunities each week, serving up the best to our Pro Newsletter subscribers.

Our hope is the Blockchain Investor Scorecard becomes the industry standard. Feel free to use it and improve it: it’s open source.

Superpower 3: Quantitative Analysis

We needed better numbers.

When you’re considering investing in a stock, you have all kinds of metrics: Earnings Per Share, P/E Ratio, and so on.

Blockchain investors had one metric: price.

If bitcoin is trading at $4,000, is that overpriced or underpriced? Should it really be worth $1, or $1,000,000? Who knows?

When you’re only looking at price, it becomes a “hall of mirrors” where the only thing you can refer back to is price. It’s an infinite loop.

We developed new quantitative metrics for valuing blockchain investments, including Value Per User (which I wrote about last week), and others (that we’ve made available to our Pro Newsletter subscribers).

Blockchain investing

Our hope is these metrics become industry standards, just like stock valuation metrics. Use them and improve them: they’re also open source, for the good of the community.

Superpower 4: Portfolio Construction

We saw that many blockchain investors were in it to get rich quick. Our goal was to convert these “crypto bros.” into “blockchain pros” by helping them think long-term, like more sophisticated investors.

At the same time, we needed a way for ordinary investors—the 99% who’ve never heard of blockchain—to get on board. This is essential for this asset class to grow.

So we created our Blockchain Investor’s Manifesto, which outlined a philosophy of investing. It was based on “value investing”—the same philosophy that built Warren Buffett’s fortune—updated with blockchain.

Blockchain investing

We haven’t been able to print enough of these manifestos. We go through them by the suitcase. Investors are hungry for a sensible strategy.

We also began explaining how blockchain can be viewed within an overall investment portfolio. Just as you’d diversify your 401(k) with stocks and bonds, you can diversify your investments further by adding just a little bit of bitcoin (between 2-10%).

Blockchain investing

These are three sample portfolios that would have returned a whopping 81%, 326%, and 823% in just three years. What’s more, since bitcoin does not behave like stocks and bonds, these portfolios actually diversify risk.

Blockchain investing

We’ve outlined these portfolios in detail to Pro Newsletter subscribers, who have also acquired these superpowers.

Superpower 5: Changing the World

What will we do with all the wealth that’s being created? We have a once-in-a-lifetime opportunity to fundamentally reprogram some of our biggest human institutions with blockchain. This work is happening now:

Government: Boston startup Voatz is putting elections on the blockchain, so we all have transparency into our electoral process.

Investing: Blockchain is making investment opportunities open to everyone—not just the 1%—through  projects like our open-source Equity Token Project.

Law: Consensys-backed OpenLaw is mashing up smart contracts with legal contracts, greatly simplifying legal help, and making it more accessible.

Energy: Boston startup Swytch is making blockchain-based energy markets for solar power—helping us switch the entire world onto solar.

Poverty: By making it instant and free for people to send money overseas, projects like Boston’s Tunnel are opening the flow of capital to developing nations, and helping lift the world out of poverty

The Superpower Stack

We’ve developed these superpowers so that smart investors like you will also be able to acquire them—today,before the rest of the world has caught on. Not just one superpower, but all five: the superpower stack.

A future is coming when blockchain will be part of everyone’s portfolio. It’ll be offered through Fidelity, and you’ll add it to your 401(k). It’ll just be the way things are done. Together, we’ve developed the framework for how we’ll get there.

And we’ve done this in a year!

Imagine what we’ll do together in the next two to three years. It’s incredible to think about the wealth that will be created, and how we’ll use it to change the world.

When you look at it that way, a billion dollars seems like a bargain.

At the Boston Blockchain Association, we’re building the next generation of blockchain superheroes. Apply to become a member.

How to Value Bitcoin Using VPU (Value Per User)

Bitcoin Market Journal

Blockchains have network effects.

The classic example of network effects is Facebook: every person who gets on Facebook makes the network a little more valuable for every other person on Facebook.

As the number of users in a network grows, the more ridiculously valuable the network becomes. That’s why the most powerful companies in the world today are network companies: Facebook, Apple, Google.

The old-school “blue chip” companies don’t have the benefits of network effects. (When a new customer buys your toothpaste, it doesn’t make toothpaste more valuable for everyone else.)

Blockchain assets (like bitcoin) are essentially networks. The more people who use a blockchain asset (like bitcoin), the more valuable that blockchain becomes.

One way that analysts value network companies (like Facebook and Twitter) is by looking at Value Per User. We take their market cap, then divide by their number of Monthly Active Users.

Value per user
Data as of 11/20/18. Sources: Omnicore Group, Yahoo Finance

In plain English, Facebook has a price on your head. Although I believe you are a precious and irreplaceable human being, Facebook values you at about $175. Twitter values you at about $75.

Of the top social media networks, the Value Per User generally ranges from $25 to $250. These values have fluctuated over time, but they give us some guard rails. (We haven’t seen Facebook valued at $10,000 per user, or at $1 per user.)

With blockchain assets like bitcoin, we can also calculate Value Per User by taking Market Cap and dividing by number of Monthly Active Users. It looks like this:

Value per user
Data as of 11/20/18. Sources: Bitinfocharts, CoinMarketCap

Of the blockchains we can track, the Value Per User is typically $1,000 and $5,000 per user. This makes sense, as we would expect blockchain VPU to be higher than social media VPU, since blockchain users are much more valuable—they’re not just mindless ad-consuming machines, like on Facebook.

Here’s the best part: Blockchain Value Per User has stayed relatively consistent over the past year. Take a look at the “crypto mania” in November 2017 vs. the “crypto depression” in November 2018:

Value per user

In plain English: more people were actively using bitcoin a year ago, so the overall market value was much higher. Although prices have dropped, so have the number of monthly users, so the overall Value Per User has stayed in the $4500-5000 range.

This is good news. It means there is a rhyme and a reason, a method to the madness.

It also means the way to increase the value of blockchains is to get more people using them. That means making them faster, cheaper, and better. The blockchain is about people. People have to use them!

In summary, Value Per User can be used to value networks like Facebook (typically between $25-250 per user):

Value per user

It can also be used to value blockchain networks (typically between $1,000 and $5,000 per user):

Value per user

The caveat is that Value Per User depends on knowing Monthly Active Users, which is not available for all blockchain assets. Blockchains that have this level of transparency will have better valuation metrics, which means they will become more trusted, and thus more highly valued.

Value Per User will become an industry standard metric, because the blockchain is about users. To increase the value of your blockchain, increase the number of users.

That’s common sense. And now common sense has a formula to back it up.

At the Boston Blockchain Association, we’re helping companies build their blockchains, one user at a time. Apply to become a member.

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