PDF Summary:Cryptoassets, by Chris Burniske and Jack Tatar

Cryptoassets provides a comprehensive overview of the digital asset ecosystem, from the foundational blockchain technology that enabled Bitcoin to the diverse landscape of cryptocurrencies, cryptocommodities, and cryptotokens that followed. Authors Chris Burniske and Jack Tatar examine the unique characteristics and challenges surrounding cryptoassets, including market volatility, security risks, and the complex factors that impact an asset's value.

The book offers insights into navigating this emerging investment class, detailing strategies for portfolio diversification with cryptoassets and analyzing their potential to revolutionize numerous industries. Whether you seek to understand the origins of Bitcoin, grasp the intricacies of blockchain security and governance, or explore the future financial possibilities of decentralized networks, this guide provides a thorough examination of digital assets.

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Context

• Tulipmania occurred in the Dutch Golden Age during the early 17th century, where the prices of tulip bulbs reached extraordinarily high levels before dramatically collapsing. It is often cited as one of the first recorded speculative bubbles, illustrating how market prices can be driven by irrational exuberance rather than intrinsic value.
• This field studies how psychological factors affect economic decision-making. It explains why people might irrationally believe that "this time is different," ignoring historical precedents.
• Experienced investors often focus on the fundamental value and long-term potential of assets, rather than short-term price movements, to avoid the pitfalls of speculative bubbles.
• Human emotions like greed and fear play a significant role in speculative bubbles. Greed can drive prices up as investors rush to buy, while fear can cause sharp declines when the bubble bursts.
• Financial markets often operate in cycles characterized by periods of rapid growth followed by downturns. This cyclical nature means that after a period of intense speculation and price increases, a correction or crash often follows, leading to a decrease in asset values.
• Continuous improvements and innovations, such as the Lightning Network, aim to increase Bitcoin's transaction speed and reduce costs, enhancing its practicality for everyday use.
• The rapid dissemination of information through media and social platforms can amplify speculative behavior, as news and rumors can quickly influence investor sentiment and market dynamics.

The steadiness of markets dealing with cryptoassets often varies during their development.

The authors note that a variety of elements help to steady the variations in value as the cryptoasset markets mature. They propose that the fundamental aspect is the heightened simplicity of trading, demonstrated by the expansion of exchange locations, a more diverse array of pairings encompassing both conventional and digital currencies, and a significant rise in the quantity of purchase and sale transactions. The authors note that as markets mature, the impact of significant trade volumes on price volatility lessens, and there's a reduction in the sharp fluctuations in value that are influenced by the sentiments of the market.

A significant factor in reducing volatility is the progression from value supported by speculation to value derived from practical use. In the early phases of a cryptoasset's life, as highlighted in Chapter 9, its market value is greatly affected by the anticipated future uses and the likelihood of the asset's prosperity. As the technology becomes more widely used and demonstrates its value through practical applications, its valuation increasingly reflects its actual utility rather than speculative factors. The authors remind investors that while the general trend is towards decreasing volatility as cryptoassets mature, significant price swings can still occur due to factors beyond market dynamics, such as government regulations, hacks, and significant technological developments.

Context

• As markets develop, a wider range of participants, including retail investors, institutional players, and international traders, can contribute to a more balanced and less volatile market environment.
• Similar patterns of reduced volatility have been observed in other asset classes, such as equities and commodities, as they matured and became more widely adopted and understood by investors.
• Mature markets tend to have more participants, better infrastructure, and more reliable information, which can lead to more stable pricing as assets are evaluated based on performance and utility rather than hype.
• The pace and success of ongoing technological development can influence expectations. If a project is seen as having a strong development team and clear roadmap, it may boost confidence in its future applications.
• The value of a cryptoasset can increase as more people use it, due to network effects. This means that as the user base grows, the asset becomes more useful and valuable, similar to how social media platforms become more valuable as more users join.
• The growth of derivatives markets, such as futures and options for cryptoassets, allows for better hedging strategies and risk management, which can help stabilize prices.
• Security breaches in cryptocurrency exchanges or wallets can lead to significant losses of funds, causing panic among investors. High-profile hacks, such as the Mt. Gox incident in 2014, have historically led to sharp declines in market prices as trust in the security of cryptoassets is shaken.

New risks are surfacing within the realm of cryptoassets.

This subsection explores the risks associated with investments in cryptoassets, emphasizing the importance for proactive investors to recognize and comprehend these risks, carry out comprehensive assessments, and develop strategies to mitigate potential obstacles. The authors aim to provide crucial tools for investors to protect their financial assets.

Security vulnerabilities, fraudulent schemes, and attempts to manipulate markets arise in settings where strict regulations are absent.

In Chapter 11, the authors highlight the vulnerability of the cryptoasset space to a range of cyber threats, fraudulent activities, and attempts to manipulate market prices, which is largely due to the nascent nature of its regulatory structures. The decentralized, pseudonymous nature of these markets can obscure the identities of bad actors, allowing them to operate with less fear of reprisal.

The authors highlight the risks associated with centralized systems' weaknesses, underscored by high-profile security compromises at platforms such as Mt. Gox and Bitfinex. The robust security demonstrated by blockchain technology does not prevent applications and exchanges on these networks from becoming targets for hackers. Cryptoasset schemes that are deceptive lure individuals with promises of guaranteed returns, by distributing funds from newer participants to those who were involved earlier. The writers emphasize that the field of cryptoassets is prone to such schemes due to the enthusiasm surrounding the technology and a lack of adequate regulatory oversight. Entities that collude often manipulate the market by inflating the worth of an asset prior to selling their stakes to unsuspecting purchasers. Cryptoassets with smaller market caps are particularly susceptible to manipulation because they often experience limited trading activity.

Context

• The early days of the internet saw similar issues with scams and fraud due to a lack of regulation, which eventually led to the development of cybersecurity laws and consumer protection measures.
• The fast-paced innovation in the crypto space often outstrips the ability of regulators to keep up, leaving gaps in oversight and enforcement.
• Cryptocurrencies are often used on the dark web for illicit activities due to their pseudonymous nature, further complicating efforts to track and identify bad actors.
• Centralized exchanges often store large amounts of cryptocurrency in "hot wallets" (online storage), which are more vulnerable to cyberattacks compared to "cold wallets" (offline storage).
• While some exchanges have improved security by implementing measures like two-factor authentication, multi-signature wallets, and regular security audits, these practices are not universally adopted across all platforms.
• Promoters often exploit psychological tactics, such as creating a sense of urgency or exclusivity, to entice individuals to invest quickly without due diligence.
• The technical complexity of blockchain and cryptoassets can obscure understanding, making it easier for fraudulent schemes to appear legitimate to less knowledgeable investors.
• While less regulated, such activities can still be illegal and subject to prosecution if they violate existing securities laws, though enforcement can be challenging.
• Investors in smaller market cap assets may have less access to information or may be less experienced, making them more vulnerable to manipulation tactics.

Conducting thorough investigation and analysis is essential to differentiate legitimate cryptoasset businesses from deceptive investment schemes.

Burniske and Tatar stress the importance of conducting thorough due diligence before investing in any cryptoasset, especially those associated with new projects or ICOs. Investors are presented with numerous inquiries and warning indicators to evaluate the legitimacy of a cryptoasset.

The authors emphasize the importance of understanding the background and skills of the creators. Are the creators recognized for their deep expertise and reliability in the field of cryptoassets? Is there sufficient disclosure about the team's previous experiences and their roles in historical initiatives? Concerns should be raised at once if the operation's transparency is not evident or the identities of the development team are hidden. The authors recommend that investors conduct a thorough examination of the project's foundational document to confirm that it clearly outlines the project's goals, provides a comprehensive understanding of the blockchain infrastructure, and specifies the potential uses for the digital currency. Should the white paper contain vague commitments, omit detailed technical information, or appear overly promotional, this indicates the need for a more thorough investigation. The authors recommend that investors exercise caution with respect to the distribution method used by the project for its assets. Was the distribution of the cryptocurrency executed in a transparent and fair way? Does the concern exist that premines or instamines might result in a small group of early participants possessing a disproportionate amount of the total ownership? A well-designed system for distributing new units should promote broad participation and guarantee a fair distribution of the cryptoasset.

Practical Tips

• Create a checklist of red flags for crypto investments by researching common characteristics of fraudulent schemes online and then monitor any potential investment against this list. For example, if a cryptoasset company promises guaranteed returns or displays a lack of transparent information about their team and processes, these could be potential red flags to avoid investing.
• You can deepen your appreciation for creative works by researching the biographies of artists before visiting a gallery. Before your next gallery visit, choose a few featured artists and spend time learning about their lives and the skills they developed. This background knowledge can enhance your understanding of the art, as you'll be able to connect personal and historical context to the works you see.
• Host a virtual open house using video conferencing tools where team members can present their roles and discuss the project's progress. Invite colleagues, friends, or family to attend, fostering a culture of openness and allowing for feedback from a diverse audience.
• Create a visual roadmap of your project to accompany the white paper, using free online tools like Canva or Lucidchart. By visualizing the project goals and technical details, you can make the information more accessible and understandable for stakeholders who might not be technical experts. For example, use icons and flowcharts to represent different project phases and technical processes.
• Support and use decentralized exchanges (DEXs) and platforms that facilitate wider access to cryptoassets. DEXs often allow for more democratic access to tokens, as they don't have the same listing requirements as centralized exchanges, which can favor larger, more established projects. By using and promoting DEXs, you contribute to a more level playing field where a diverse range of tokens can be accessed and owned by a broader audience.

Keeping up with the evolving regulations and guidelines pertaining to cryptoassets is crucial.

The writers acknowledge that the ever-shifting regulations governing cryptoassets inject a level of unpredictability that may impact the long-term viability of various projects. The establishment of regulatory frameworks for cryptoassets is in its initial stages, involving multiple agencies and jurisdictions which are implementing diverse approaches to their classification and oversight.

Cryptoassets are categorized as property by the Internal Revenue Service, which influences how they are taxed, while the Commodity Futures Trading Commission views them as commodities, resulting in a unique set of tax regulations. The SEC's position on cryptoassets remains unclear, however, it appears that certain Initial Coin Offerings might fall under the category of securities, which would require adherence to more stringent regulatory standards. The authors recommend that investors stay informed about regulatory updates, consult with legal and tax professionals, and consider these uncertainties when evaluating investments in cryptoassets.

Other Perspectives

• Overemphasis on regulation can stifle innovation, as startups and entrepreneurs may be discouraged by the complexity and cost of compliance.
• Regulatory changes can also create opportunities for innovation, as projects that adapt quickly may gain a competitive advantage.
• The idea that regulatory frameworks are in their initial stages might not fully acknowledge the efforts and advancements made by international regulatory bodies and coalitions that are working towards harmonizing regulations across jurisdictions.
• The diversity in approaches could be seen as a temporary phase, with the potential for convergence on common standards and practices as the industry matures and best practices are established.
• The property status of cryptoassets may not be consistent internationally, leading to confusion and potential tax conflicts for users engaged in cross-border transactions.
• The CFTC's view on cryptoassets may evolve over time as the market matures and new types of cryptoassets emerge, which could render current tax regulations outdated or inappropriate.
• The SEC has taken enforcement actions against certain ICOs, which provides a form of clarity through precedent, indicating under what circumstances the SEC views ICOs as securities.
• The term "more stringent" is subjective; what is considered stringent for some may be seen as a necessary level of oversight to ensure market stability and investor protection for others.
• The cost of consulting with legal and tax professionals to navigate these updates may outweigh the benefits, particularly for smaller investments.
• Over-reliance on professionals could lead to a lack of personal understanding and engagement with the regulatory environment, which is also important for making informed investment decisions.
• The impact of regulatory uncertainties on investment evaluations can be mitigated by diversification, where the risks associated with regulatory changes are spread across a variety of assets.

Cryptoassets are emerging as a distinct category for investment and strategies for portfolio diversification.

This section suggests incorporating digital assets into the portfolios of investors. The authors detail how this new class of assets, with its unique attributes, can enhance an investment portfolio by fine-tuning the equilibrium between potential returns and associated risks.

Utilizing the principles of Modern Portfolio Theory to assess the value of cryptoassets.

This subsection advocates for the recognition of cryptoassets as a unique asset class within the context of Modern Portfolio Theory. The aim of Burniske and Tatar is to assist the reader in understanding the ways in which this class of assets can enhance a portfolio, including providing diversification, increasing value, reducing volatility, and yielding higher risk-adjusted returns.

Assessing the steadiness and performance of cryptoassets when adjusted for risk.

Burniske and Tatar emphasize the importance of applying modern portfolio theory principles to evaluate the potential of cryptoassets as investments. The sixth chapter explores the principles of Modern Portfolio Theory, highlighting the necessity of understanding each asset's distinct risk and return characteristics within a portfolio and how their collective returns interplay to determine overall portfolio performance. The goal of Modern Portfolio Theory is to construct an investment portfolio that maximizes returns while minimizing risk. To achieve this goal, it is essential to carefully allocate investments among assets exhibiting behaviors that do not correlate with one another.

The authors propose that bitcoin stands out as a unique class of asset, primarily because of its prominent market presence and its status as the most recognized cryptoasset. The returns from Bitcoin have consistently outperformed those of traditional investment assets like gold or real estate. By evaluating its performance through the Sharpe ratio, Bitcoin demonstrated outstanding risk-adjusted returns in 2016. The Sharpe ratio is a metric that evaluates an asset's performance by assessing the returns relative to the associated risk, and this is determined by dividing the asset's excess returns by its standard deviation. An asset that offers more favorable returns in relation to its risks is characterized by a higher measure of risk-adjusted return. Burniske and Tatar illustrate that when considering returns adjusted for volatility, bitcoin has outperformed major U.S. stock indices and swiftly growing technology stocks, maintaining its advantage even for investors who entered the market at bitcoin's highest value in late 2013.

Practical Tips

• Start a monthly investment club with friends or family where each person contributes a small amount of money and together you decide on investments for the collective pot. This not only allows for shared risk but also encourages learning from each other's research and perspectives, potentially leading to a more balanced and diversified investment approach.
• Start a risk-return journal where you record your emotional and financial reactions to market changes. Note how you feel when an asset performs well or poorly and how this affects your decision-making. Over time, this can help you understand your risk tolerance and whether your portfolio aligns with it.
• Implement a 'seasonal shuffle' strategy for your investments. Every quarter, review global economic reports and trends to identify industries or sectors that historically show low correlation with your current investments during that period. For instance, if you typically invest in technology stocks, you might look into utilities or healthcare as seasonal counterbalances.
• Experiment with using Bitcoin for small, everyday transactions if available options exist, such as paying for coffee at a café that accepts cryptocurrency or purchasing gift cards. This hands-on approach will give you practical experience with Bitcoin's functionality as a currency and its acceptance in the market.
• You can track the performance of your own investments using the Sharpe ratio to understand their risk-adjusted returns. Start by calculating the average return of your investment portfolio, subtract the risk-free rate (which could be the return on a 3-month Treasury bill), and then divide by the standard deviation of your portfolio's excess return. This will give you a hands-on understanding of how your investments are doing compared to less risky alternatives.
• You can create a simple investment tracking spreadsheet to monitor the performance of your assets over time, including any cryptocurrency investments. Start by listing the date of purchase, the amount invested, the price at the time of purchase, and current value. Update this spreadsheet regularly to observe trends and make informed decisions about holding or selling your assets.

Cryptoassets contribute to the strengthening of portfolio diversification by providing advantages due to their low correlation with conventional asset classes.

Bitcoin and a range of other digital assets have showcased a compelling combination of risk and potential returns, primarily due to their minimal correlation with the movements of traditional market trends when included in a diversified investment strategy. In the ninth chapter, we delved into the idea of correlation, a statistical method that uncovers how closely the value of one asset moves in conjunction with another, investigating whether both assets appreciate simultaneously or if one declines while the other escalates. When one asset appreciates by 10 percent and is perfectly correlated with another at +1, the second asset will also see a 10 percent appreciation, while a perfect negative correlation of -1 means a 10 percent increase in one asset will lead to a 10 percent decline in its counterpart. Assets exhibiting complete independence fluctuate without any correlation to one another.

Adding assets to an investment collection that demonstrate little to no correlation, or that even behave in opposition to the other holdings, can stabilize returns by reducing the collective volatility of the investments. Diversifying investments across a range of assets that don't move in tandem can lead to superior outcomes compared to a portfolio composed of assets that behave similarly, because such diversification lessens the total risk of loss by minimizing the general fluctuations in value. The authors present data showing that bitcoin's movements are not closely linked with those of conventional investment vehicles like equities, government securities, property, and precious metals, highlighting its distinctiveness as an asset class that can enhance the diversification of investment portfolios. The authors also foresee that as Bitcoin gains wider acceptance and becomes a more common component of conventional investment portfolios, the currently minimal correlation is expected to increase because of the expanding intersection of individuals investing in Bitcoin and those investing in traditional asset classes.

Context

• In modern portfolio theory, the goal is to optimize the balance between risk and return. Cryptoassets can play a role in achieving this balance by providing a unique risk-return profile that is not available through traditional assets alone.
• Traditional market trends often refer to the performance of stocks, bonds, and other conventional investments. These markets can be influenced by economic indicators, interest rates, and geopolitical events, which may not affect digital assets in the same way.
• The correlation coefficient is a numerical value between -1 and +1 that quantifies the degree to which two variables are related. A value of +1 indicates a perfect positive correlation, 0 indicates no correlation, and -1 indicates a perfect negative correlation.
• Volatility refers to the degree of variation in the price of an asset over time. High volatility means the asset's price can change dramatically in a short period, increasing risk. By including assets with low or negative correlation, overall portfolio volatility can be reduced, as the price movements of different assets can offset each other.
• In the context of MPT, the efficient frontier represents the set of optimal portfolios offering the highest expected return for a defined level of risk. Diversifying with uncorrelated assets helps in achieving a position on this frontier.
• The demographic and psychological profiles of Bitcoin investors can differ significantly from those in traditional markets. Many Bitcoin investors are tech-savvy individuals or institutions looking for high-risk, high-reward opportunities, which can lead to different investment behaviors and reactions to market events.
• Bitcoin can be accessed and traded globally, 24/7, without the restrictions of traditional market hours or geographical limitations, offering unique liquidity and trading opportunities.
• Increased participation by institutional investors, who often hold diversified portfolios, could lead to Bitcoin being traded in conjunction with traditional assets, thereby increasing correlation.

Approaches for responsibly allocating cryptoassets within a balanced investment portfolio

The authors caution against the perils linked to pursuing gains and deciding on financial matters without sufficient knowledge. Decisions are especially challenging when dealing with cryptoassets, a category of assets characterized by extreme price fluctuations and rapid changes. The authors recommend that individuals integrate cryptoassets into their investment portfolios through a structured approach.

Individuals considering investments must understand their own capacity for risk when evaluating their comprehensive investment strategies. They recommend a thoughtful and meticulous approach regarding incorporating digital assets into a traditional investment portfolio.

The authors advise the implementation of a unique structure for the allocation of cryptoassets. An investor contemplating a conservative investment portion might find a balanced approach attractive. By adding a carefully selected, small assortment of cryptoassets to their investment mix, investors might achieve greater diversification, similar to allocating a small segment, like 1 percent, to their stock investments. They demonstrate how incorporating a small portion of bitcoin into one's investment mix could have improved the outcomes.

Investments in bonds are typically represented by a proportional share. The authors emphasize the necessity of frequently modifying the allocation within investment portfolios.

Investors should ensure that their investment in cryptoassets corresponds with their established risk tolerance level.

Practical Tips

• Implement a "learning first" rule for new ventures by dedicating a set period for education before action. Suppose you want to renovate your home; commit to one month of learning about home improvement. This could involve watching tutorials, reading DIY books, or attending workshops. This ensures you're better equipped with knowledge before you start tearing down walls or buying materials.
• Create a decision-making flowchart for crypto investments to navigate volatility. Start by identifying your investment goals and risk tolerance. Then, add criteria for when to buy, hold, or sell based on specific triggers like market trends, news events, or price changes. For example, you might decide to buy when a certain crypto drops 10% in a week, hold if it fluctuates within a 5% range, and sell if it spikes 20% in a day.
• You can start by creating a "cryptoasset corner" in your monthly budget to allocate a small percentage of your income to cryptocurrencies. Begin with an amount you're comfortable with, such as the cost of a weekly coffee, and use a budgeting app to track this new category. This helps you ease into the market without significant risk and gets you in the habit of considering cryptoassets as part of your financial planning.
• Use a financial simulation app that allows you to model investment scenarios based on different risk levels. By inputting your current financial situation and goals, you can see potential outcomes of conservative versus aggressive investment strategies without risking actual money.
• Create a personal investment timeline by mapping out your life goals and associating them with potential investments. Start by listing your major life events, such as buying a home, funding education, or retirement. Next to each event, note the approximate time frame and consider what types of investments could align with these time horizons. For example, if you're planning to buy a house in five years, you might look into more liquid assets that you can convert to cash without significant loss.
• Engage in micro-investing in digital assets through platforms that allow for small-scale investments. This approach lets you dip your toes into the digital asset pool with minimal risk. You can allocate a tiny portion of your disposable income to purchase fractional shares of digital assets, thereby gaining firsthand experience in managing and balancing them within your broader investment strategy.
• You can use a mobile app with a portfolio rebalancing feature to adjust your investments periodically. By setting up alerts for when your asset allocation deviates from your target, you can make timely adjustments without having to constantly monitor the market. For example, if your target allocation is 60% stocks and 40% bonds, the app could notify you when the actual allocation reaches 65% stocks and 35% bonds, prompting you to rebalance.
• Create a risk tolerance questionnaire tailored to cryptoassets by including questions about volatility, technology risk, regulatory changes, and market trends. By answering these questions, you can gauge your comfort level with the various risks unique to cryptoassets. For example, ask yourself how you would react if your crypto investment lost 50% of its value overnight or if a new regulation significantly impacted the market.

The potential of blockchain technology to transform numerous industries is significant.

This subsection explores how blockchain technology transcends its groundbreaking beginnings and can transform industries.

The domain of financial services is undergoing changes that have an impact reaching beyond its traditional boundaries. The development of applications operating on a decentralized network is revolutionizing the financial industry. Advancements are charting the course for our progress. This development is frequently described as the emergence of Web 3.0.

Established companies are responding to the possible upheavals blockchain technology could bring about.

The authors discuss how companies across various industries are updating their strategic approaches to incorporate the potentially transformative effects of blockchain technology into their current operational structures. They highlight the challenges that incumbent firms face when adapting to emerging technological advancements that might at first appear trivial and typically underperform compared to existing market products, a concept articulated by Clayton Christensen.

The authors detail the ways in which existing companies are adjusting to the transformative impact of blockchain technology through investments or endorsements of new enterprises, forging industry alliances, and creating centers dedicated to innovation. Each approach, however, carries its own distinct set of hazards. Upon being absorbed into the larger corporate structure, promising startups might find that their initial excitement wanes. Industry participants may struggle to adapt swiftly and frequently encounter obstacles in reaching consensus among diverse stakeholders who have conflicting interests. While innovation labs can nurture creative ideas, their separation from the core activities of a business may limit their capacity to completely leverage the revolutionary potential inherent in blockchain technology.

Other Perspectives

• The challenge of adapting to emerging technologies can be overstated; some companies might find that these technologies fit neatly into their ongoing digital transformation strategies.
• Some companies may not have the necessary expertise to properly vet blockchain ventures, leading to poor investment decisions.
• Companies in alliances may become overly reliant on collective action, which could reduce their individual capacity to innovate and adapt independently to blockchain and other emerging technologies.
• There is a risk that these centers create solutions in search of problems, investing resources into blockchain applications without a clear demand or market need.
• The excitement within a startup can be rekindled or maintained through strategic autonomy, where the acquiring company allows the startup to operate independently while providing support and resources.
• The pace of adaptation may vary across industries, with some sectors such as finance and supply chain management showing rapid integration of blockchain technology, suggesting that the struggle is not universal.
• Some stakeholders may have aligned interests or mutual incentives that facilitate easier consensus than anticipated.
• Innovation labs, when well-integrated with the company's core business units, can effectively leverage blockchain technology by serving as a bridge between cutting-edge innovation and established business processes.

The rise of applications on decentralized networks, often referred to as dApps, is closely associated with the idea of significant foundational protocols.

The writers highlight the significant role of blockchain technology in the development of decentralized applications, commonly referred to as dApps, which have implications reaching far beyond just the financial industry. Digital contracts that execute automatically upon the fulfillment of specified conditions enable decentralized applications to offer a variety of services that function without centralized oversight. The book explores a variety of applications that are either operational or in development, including those created for insurance, predictive marketplaces, social media platforms, and transportation-sharing services.

Burniske and Tatar leverage Joel Monegro's "fat protocols" idea to highlight the transformation in value creation brought about by blockchain technology, distinctly moving away from the period characterized by the ascension of the Internet. The underlying financial models required to maintain the functionality of applications built on blockchain differ significantly from those of traditional internet companies like Facebook and Google, which build value at the application level without incurring expenses by leveraging standard protocols. The foundational value of a cryptoasset is determined by its protocol, providing a solid foundation that supports the development of practical applications.

Practical Tips

• Start using a browser that integrates blockchain technology, such as Brave, to understand how blockchain can enhance privacy and security. Brave offers an ad-free experience while allowing you to earn cryptocurrency for viewing privacy-respecting ads. This will show you a real-world application of blockchain in everyday internet use.
• Use a dApp to manage personal data securely, such as storing important documents or managing identity information. Research dApps that offer personal data vaults or identity verification services. Once you've chosen a service, try setting up your own secure data storage, uploading documents like your resume or a copy of your ID. By doing this, you'll experience firsthand how dApps can provide more control over personal data and potentially reduce the risk of identity theft.
• Explore the use of digital contracts by participating in a decentralized finance (DeFi) savings program. DeFi platforms often use smart contracts to automate interest payments and asset management. By putting a small amount of cryptocurrency into a DeFi savings account, you can experience firsthand how these contracts operate without central oversight. This will give you practical insight into the security, efficiency, and potential risks associated with digital contracts.
• Automate a small aspect of your life using IFTTT (If This Then That) to create a simple "decentralized" application. While not blockchain-based, IFTTT allows you to set up conditional statements (applets) that trigger actions across your internet-connected devices. For instance, you could set an applet to automatically save attachments from emails marked as 'important' to your cloud storage, giving you a taste of how automated conditions work.
• Start using a transportation-sharing service that incorporates real-time data and predictive analytics to optimize your commutes. By choosing a service that predicts vehicle availability and traffic patterns, you'll not only save time but also contribute to the data pool, which helps improve the system's accuracy for all users.
• Engage with blockchain technology by participating in a decentralized autonomous organization (DAO) related to a cause you care about. DAOs are member-owned communities without centralized leadership, run on blockchain. Joining a DAO will allow you to see how blockchain can facilitate collective decision-making and value distribution, contrasting with traditional organizational structures.
• Create a digital content piece, like a blog or a video, discussing your experience with using a blockchain service. Choose a blockchain-based application that offers a service you're interested in, such as a decentralized marketplace or a digital art platform, and document your journey of using it. Share your content online to engage with others who are also learning about blockchain, and to reflect on the differences in user experience compared to traditional internet services.
• Consider investing in a protocol layer blockchain asset, such as a cryptocurrency that powers a network, rather than just an application built on top of a blockchain. This will give you a direct stake in the protocol itself and allow you to observe how changes to the protocol can affect the value of your investment, as opposed to applications that might be more susceptible to market trends and user adoption rates.
• Use a protocol to streamline your grocery shopping process. Before you go to the store, make a protocol that includes making a list based on your meal plan for the week, organizing the list by store sections, and setting a budget. When at the store, follow your protocol by sticking to your list, avoiding aisles that don't contain items you need, and keeping track of your spending as you add items to your cart. This method helps you shop more efficiently, reduce impulse buys, and manage your food budget better.

Pioneering investors can capitalize on the evolution of blockchain technology for their advantage.

Chris Burniske and Jack Tatar recommend that investors look beyond the hype surrounding digital currencies and recognize the significant potential for blockchain technology to transform traditional industries. They emphasize the opportunity for investors skilled in identifying and supporting companies that can innovate and introduce unique offerings by effectively harnessing this technology.

The authors emphasize how distributed ledger technology revolutionizes the way startups secure funding, offering investors new opportunities to support emerging companies in their early stages through crowdfunding platforms, including mechanisms like initial coin offerings. They underscore the necessity of thorough investigation to separate legitimate ICOs from the growing number of scams and Ponzi schemes, offering a comprehensive structure for investors to evaluate an ICO's worth. The writers argue that the emergence of blockchain technology will result in both winners and those who do not keep pace. Investors with a deep understanding of this technology and the ability to assess the critical elements impacting the value of blockchain endeavors can identify the leaders in this space and capitalize on the impending transformations.

Practical Tips

• You can start by educating yourself on blockchain basics through free online courses and resources. Understanding the fundamental concepts of blockchain, such as decentralization, smart contracts, and distributed ledger technology, will give you a solid foundation to recognize its potential in various industries. For example, platforms like Coursera and edX offer introductory courses on blockchain that can be taken at your own pace.
• Create a personal scoring system for evaluating blockchain companies based on criteria such as team experience, technology uniqueness, market potential, and partnerships. Use this system to assess and compare companies before deciding to invest. This methodical approach can help you make more informed decisions by focusing on the factors that may contribute to a company's success in the blockchain space.
• Engage with online communities focused on blockchain and startup funding. Platforms like Reddit, Discord, or specialized forums host discussions where you can ask questions, share observations, or simply read about others' experiences with blockchain funding. This can provide you with a diverse range of perspectives and real-world examples of how blockchain is impacting startup funding.
• Create a personal due diligence process that includes reaching out to blockchain experts on social media for their opinions on specific ICOs. By engaging with knowledgeable individuals, you can gain insights that are not readily available through basic research.