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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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