Financial Privacy and Cryptocurrencies

As I write this blog post, the Australian government has just enacted a decryption bill that according to experts can only lead to systemic weaknesses that will put us all at risk.

Apple is protesting this bill in a letter saying:

“Encryption is simply math. Any process that weakens the mathematical models that protect user data for anyone will by extension weaken the protections for everyone.”

Apple and others are arguing that it is precisely because of the threats from criminals and terrorists that we need strong encryption.

Indeed it was likely software from an Israeli firm sold to governments and used by Saudi Arabia to spy on Jamal Khashoggi’s WhatsApp messages that later lead to his brutal murder.

 MBS and Putin at G20 in Argentina.

MBS and Putin at G20 in Argentina.

Privacy has always been front of mind for the cypherpunks in the digital cash and cryptocurrency community. For many of these people privacy is a basic human right.

With Bitcoin, money for the first time became indistinguishable from speech. This was predicted by cypherpunks decades ago. Timothy C. May, a founding member of the cypherpunk movement, wrote in ’97 that ‘Digital Cash = Speech’. As Bitcoin and other cryptocurrencies are open source software (arguably a form of speech), lines of code are now money.

 Is this a Bitcoin transaction or a classic text?

Is this a Bitcoin transaction or a classic text?

David Chaum and others worked on untraceable digital cash in the 90s. Hal Finney was one of the first people involved in Bitcoin and was also the first receiver of a bitcoin transaction. This was Hal’s first tweet after Bitcoin launched in January of 2009:

1_LSHrGdSm51Qu9H83Hp1eVg.png

Cypherpunks understood that if you like to support (including financially support) the opposition in say Saudi Arabia or Russia — a private means of communication might mean the difference between life and death. 

While Bitcoin is pseudo-anonymous, other cryptocurrencies offer in-built privacy. Dash was an early fork of Bitcoin offering a mixing technology for private transactions. Monero is a well known privacy focused coin using ring signatures which combines signatures to obfuscate the inputs to a transaction.

When Zooko Wilcox, a cypherpunk who worked for David Chaum at DigiCash founded Zcash, it marked a new area in private cryptocurrencies. Zcash uses zero-knowledge proofs to provide absolute privacy. We can think of zero-knowledge proof as a way to proof something without revealing our secret. As an example, when I log-in to password manager Lastpass, that service has stored a hash of my password. Since a hash function as one-way function, it is enough to transmit the hash of the password to Lastpass, not the actual password — in other words, I don’t have to reveal my secret.

 Former CIA, nowadays President of the Freedom of the Press Foundation.

Former CIA, nowadays President of the Freedom of the Press Foundation.

We are now close to the launch of a new technology which combines privacy with scalability. This technology is called MimbleWimble and one implementation of this, Grin, is set to launch next month. A recent episode of the ‘What Bitcoin Did’ podcast gives a good overview of MimbleWimble and Grin. MimbleWimble transactions are based on proofs that input minus outputs are zero, thus very little data needs to be revealed and the blockchain will stay very small.

 Grin is set to launch around January 15, 2019.

Grin is set to launch around January 15, 2019.

We are actively investing in some of the technologies helping to bring financial freedom to everyone in the world. Apollo Capital holds Bitcoin, Zcash, we invested in Orchid protocol which is building a more secure Internet and we look forward to the launch of Grin. For Bitcoin, the Lightning Network being built on top of Bitcoin could potentially provide more privacy there too.

The good news here is that cryptography is a rare technology where it is much easier (and not just a little bit easier) to defend yourself than to attack — due to a fundamental asymmetry behind public-key cryptography.

Open source + cryptography can and will continue to protect speech — both in the form of conversations and digital money. With the advent of encryption laws like we are seeing in Australia — open source software becomes a critical infrastructure for communication and free speech. With cryptocurrencies cypherpunks are extending the roam of free speech to digital money — a development very much still ongoing.

For those of you interested in staying safe online, The Electronic Frontier Foundation provides a good guide for ‘Tips, Tools and How-Tos for Safer Online Communications’.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Crypto Dips & Dives: A Long-Term Perspective

Extreme hype or FUD (Fear, Uncertainty, Doubt) oftentimes drive the price of crypto assets up and down — this presents an opportunity for the long-term investor. 

Preface — Long Term Conviction is Critical 

[Skip ahead for Bitcoin Price Analysis]

Disclosure: I have no idea what makes the price of crypto assets rise or fall in the short term. I’m not a fan of charting, of triangles, of ‘support lines’, or reading tea leaves…

At Apollo Capital, we have strong conviction in a small collection of crypto assets. 

These crypto assets will likely be fundamental to the emerging Web 3.0 stack on which sophisticated applications hosting money, financial services, credit, debt, and derivatives will be built. 

Screen Shot 2018-11-29 at 4.14.19 pm.png

In the above graph, the top layer will consist of millions of applications mostly funded by equity. These will likely remain centralized entities, built specifically for the unique preferences, tastes, and regulatory climate of each target market. 

At the bottom, there will be tens of core blockchains. These are the railroads of the new Web 3.0 stack. Assets such as Bitcoin, Ethereum, and perhaps Dfinity and others will run on and will be funded by crypto assets. 

In between, we will have thousands of middleware crypto assets such as stablecoins, oracles, and file storage. Smart contracts built on top of blockchains will interact with these middleware building blocks. 

For example, in this new decentralized world that we call Web 3.0, a smart contract interacting with a stablecoin and an oracle could provide the basis for an application providing trustless and permissionless lending and borrowing. 

This exists — Dhama and Compound are two leading examples.

We see now that there will only be a few major winners in the core, fundamental blockchain layer. These blockchains will optimize on these key variables:

  Key Properties of crypto assets

Key Properties of crypto assets

The key criteria to evaluate are: 

  • What is the project’s capacity to build the critical network effect?

  • Is the optimization between the different ‘properties’ attractive (listed above) and differentiated enough from other projects? 

Value will accrue to moneyness and governance, not utility tokens. There will be a limited number of successful crypto assets that will be tremendously valuable. 

We will trust these blockchains to run the world’s native crypto assets, decentralized applications, and today’s securities. 

I bring all this up to demonstrate the key attributes of quality crypto assets. 

When investing long-term in crypto, a conviction in the value of your assets is critical — because in this market, weathering multiple 50–90% dips in your asset’s value is a certainty, and it’s how one reacts and responds to these events that is important. 

In the rest of this article, I will go back in time and look at Bitcoin’s price data. I limit this analysis to Bitcoin because it has the largest sample space and is used as a leading indicator for other crypto assets. 

This will demonstrate that we have seen many bubbles and many bursting bubbles in the history of bitcoin. It is part of the course when investing in an emerging form of money. 

I hope that this will make you feel more confident in the longevity and robustness of quality crypto assets over time. 

Bitcoin Price Analysis 2010–2018

July 2010: The first major increase in the price of Bitcoin. The price of bitcoin increases from $0.008 to $0.08 (a 900% increase) in five days.

June 8, 2011: Bitcoin reaches a new all-time high of approximately $30. This is often thought of as the ‘First Bubble’ in bitcoin:

Screen Shot 2018-11-29 at 4.17.21 pm.png

July to October 2011: The bubble then bursts and the price of bitcoin declines by about 95%.

Screen Shot 2018-11-29 at 4.18.12 pm.png

Early 2013:From March to the beginning of April the price of bitcoin soared from$32 to a new record high of $230:

Screen Shot 2018-11-29 at 4.18.49 pm.png

April 2013: Bitcoin then plummeted for about a week — all the way to $68 — a decline of 70%.

Late November 2013: On the MtGox exchange, the price of bitcoin soars to its highest price of approximately $1,100.

February 2014: it was discovered that the price increase over October — December 2013 was partially due to the closure of MtGox and the 800,000 lost bitcoins that were the cause of the start of the bear market.

The price of bitcoin plummeted over the rest of rest of Q1 2014:

Screen Shot 2018-11-29 at 4.20.49 pm.png

The price of bitcoin did not begin to significantly recover again and worsened. In August 2015, bitcoin was trading at approximately $200 — an 80% decline.

There was a slow recovery, and it took until January 2017 for it to reach the $1000 region again:

Screen Shot 2018-11-29 at 4.21.24 pm.png

January to October 2017:the price of Bitcoin climbs to $6000 (a 500% increase):

Early December 2017: Bitcoin surpasses $10,000, marking a 900% increase in price that year.

Screen Shot 2018-11-29 at 4.22.25 pm.png

And it didn’t stop. 

December 17 2017: Bitcoin reached a record high of $19,783, just falling short of $20,000. 

January 2018 — Now: Bitcoin has declined approximately 78.5% from its high of approximately$17,000 to $3700–$4000in recent days. 

We have seen this all before. We have gone through multiple steep, downward corrections in the history of bitcoin. And we will go through some more until this money is freely and widely accepted globally. 

Gold as money has been accepted for millennia —  Bitcoin has only existed for 10 years. These things take time.

Keep in mind one thing: throughout all these turbulent moments, the fundamentals of Bitcoin have not changed. 

If you have conviction in the need of a digital hard money, a global decentralized settlement layer for the internet, for Web 3.0, these short-term price cycles should be seen as a blessing: they present buying opportunities. 

James Simpson is an investment analyst at Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Roubini Rebuttal

Our response to Nouriel Roubini’s October 2018 testimony for the US Senate
(
https://www.banking.senate.gov/imo/media/doc/Roubini%20Testimony%2010-11-18.pdf)

Crypto Bubble (2017) and Crypto Apocalypse and Bust (2018)

Roubini fails to recognise that Bitcoin and other crypto assets have gone through many bubble/bust cycles in the past. Anything that starts at a price of zero would need to go up a lot in price to gain significance. With Bitcoin’s ‘market cap’ at $75bn - it is still very small compared to other assets.

This chart show the price of Bitcoin on a log scale from ~2012.

Screen Shot 2018-11-23 at 5.09.58 pm.png

These are some of the ‘bubble-bust’ cycles that Bitcoin has gone through so far:

Screen Shot 2018-11-23 at 5.10.57 pm.png

As seen, Bitcoin has gone through multiple retracements of 80%+, but the plateaus are getting higher and higher.

Crypto is not money, not scalable

Roubini is right that Bitcoin is not a good currency today or a store of value - it’s too volatile. While I think it might one day be used in payments, there is an increasing view of Bitcoin as a Digital Gold. Purely because the characteristics of Bitcoin is superior to that of gold. The value of the gold market is USD 8-10tr, Bitcoin is at 75bn. The only way for Bitcoin to reach a ‘market cap’ in the trillions of dollars is to be volatile.

The properties of gold is almost entirely inferior to crypto, except that gold has been around longer. Bitcoin and other crypto assets have low storage cost, small physical attack surface (with a ‘brain wallet’, Bitcoin is unhackable), it is divisible etc.

With time and wider acceptance, we expect the volatility to decrease substantially. Once this occurs, it will be able to be used as a unit of account and medium of exchange.

Regarding scalability, there are several solutions being worked on (and implemented) currently including:

● Lightning Network
● Segwit

Just like the early internet was ‘not scalable’ (dial up, slow, little infrastructure), we have seen that these are issues are surmountable.

Until now, Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering.

This is a false statement. In the early days of Bitcoin, Silk Road and other dark markets where active. These have mostly been shut down by regulators and the people behind these markets have faced the legal consequences of running these operations. Bitcoin is far from anonymous, much less so to than cash.

This is what DEA is saying:

https://www.bloomberg.com/news/articles/2018-08-07/bitcoin-speculators-not-drug-dealers-dominate-crypto-use-now

UK Treasury rates Digital Currency risk for money laundering as ‘low’ (the traditional financial system pose a ‘high’ risk): https://www.coindesk.com/uk-treasury-digital-currencies-low-money-laundering-risk

Since the invention of money thousands of years ago, there has never been a monetary system with hundreds of different currencies operating alongside one another.

We agree with Roubini that there will like be one winner in the category for store of value, now it looks like Bitcoin has the highest probability.

What he misses is the point that although crypto assets are known as ‘cryptocurrencies’ they are not all intended to be used as currencies. As an example, Ethereum serves a specific use case as a platform for smart contracts; it’s ‘currency’ ‘ether’ is the fuel of that platform.

There are over 2,000 crypto assets, most of which will not have long term value. There are a lot of experiments going on, but only a limited amount of long term winners in the space.

Worse, cryptocurrencies in general are based on a false premise. According to its promoters, Bitcoin has a steady-state supply of 21 million units, so it cannot be debased like fiat currencies. But that claim is clearly fraudulent, considering that it has already forked off into several branches and spin-offs: Bitcoin Cash and Bitcoin Gold.

Blockchains are based on open source code, the fact that the code can be replicated and new coins can be created doesn’t mean it’s inflationary. If I copy a USD bill in a photocopier, my copy will have no value. If I copy Bitcoin’s software and create ‘Bitcoin-Henrik’, likewise it will not have any value. We believe most of the forked coins will ultimately have very little value precisely because it is not just the technology that is valuable but the network of users.

Bitcoin’s inflation is set in code for anyone to verify. We no longer have to trust central banks not to print more money, or make educated guesses about Gold’s future supply.

Crypto-currencies instead have not and will never have the tools to pursue economic and financial stability. The few like Bitcoin whose supply is truly constrained by an arbitrary mathematical rule will never be able to stabilize recessions, deflations and financial crises; they will rather lead to permanent and pernicious deflation. While the rest – 99% - have an arbitrary supply generation mechanism that is worse than any fiat currency and, at the same time, will never be able to provide either economic or price or financial stability. They will rather be tools of massive financial instability if their use were to become widespread.

This is a Keynesian argument that might or might not be true should the world switch to a currency based on ‘sound money’ or ‘hard money’. If Bitcoin really would be a threat for massive financial instability, Bitcoin would need to be in the tens of trillions of dollars - a huge success.

Below table shows some of history’s period of hyperinflation:

Screen Shot 2018-11-23 at 5.15.18 pm.png

Buterin’s inconsistent trinity: crypto is not scalable, is not decentralized, is not secure

Roubini makes the assumption that this technology will not scale. Considering the number of people from tech giants, universities, etc who have joined the crypto industry in the past 5 years, this is likely a mistake.

Roubini doesn’t mention the ‘second layer’ approach that is very promising. Bitcoin’s Lightning Network could potentially handle millions of transactions per second - that is getting deployed right now. Dfinity is an example of a new blockchain using new cryptography that might be able to scale to thousands of transactions per second while still being decentralised. Many other projects are underway that are attempting to tackle this exact problem. To write off future innovations I believe is a mistake not unlike another economist, Paul Krugman, who in 1998 wrote off the Internet as a fancy fax machine: “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”.

Given these massive security problems of crypto, the solutions to these severe security problems are all variants of going back to the stone age: do not put your long private key – that no human can memorize ever – on any digital device but rather write it down on a piece of paper and hide it in a hole where hopefully no one will find it or no insect or rat will destroy it.

Custody of crypto assets is akin to securely store cash or gold. There are methods to safely store crypto assets using hardware wallets. For institutions, custody solutions are being built by some of the most trusted names in finance such as ICE (NYSE), Fidelity, Goldman Sachs, and Nomura. If all these services already existed, the value of crypto assets would likely be much higher - the fact that custody has and still is a big barrier to entry is an opportunity - not a permanent problem that never will be solved.

There are hundreds of stories of greedy crypto-criminals raising billions of dollars with scammy white papers that are nothing but vaporware and then literally stealing these billions to buy Lambos, expensive cars, villas in the Caribbean and the French Riviera. These large scale criminals stealing dozens of billions make the small and petty Wolf of New York robbing small investors in criminal penny stock manipulation schemes looks an amateur.

It is true that the price bubble last year attracted many people that saw quick and easy money. With prices coming down, a regulatory clampdown from SEC and regulatory bodies around the world - we will hopefully see much less of that going forward.

The main problem is any oligopolistic cartel will end up behaving like an oligopoly: using its market power to jack up prices, fees for transactions and increase its profit margins. Indeed, as concentration of mining has increased over the last year transaction costs of crypto – as measured by miners’ fees divided by number of transactions – have skyrocketed.

This is factually incorrect. The below graph shows the miners’ fee divided by number of transactions, which has been declining all year:

Screen Shot 2018-11-23 at 5.16.29 pm.png

First, miners are massively centralized as the top four among them control three quarters of mining and behave like any oligopolist: jacking up transaction costs to increase their fat profit margins. And when it comes to security most of these miners are in non-transparent and authoritarian countries such as Russia and China. So we are supposed not to trust central banks or banks when it comes to financial transactions but rather a bunch of shady anonymous concentrated oligopolists in jurisdictions where there is little rule of law?

The testimony gives an impression that Roubini believes the miners control Bitcoin. The miners influence of Bitcoin is in reality very restricted. All a miner can do while having less than 51% of the network (hash power), is mine empty blocks - a block without transactions or censor a transaction - both of which are not detrimental to the network. A single miner having more than 51% of the network could in theory do more damage. No Bitcoin miner is that large by a big margin and as Bitcoin and its hash power grows this type of attack wouldn’t make much sense. An attack would require 100s of millions of dollars for the chance of reversing a transaction and potentially be kicked out of the network making the initial investment obsolete. I.e. the miners are incentivised to keep the network secure, not compromise it.

Smaller cryptocurrencies using the same ‘mining algorithm’ could however be in danger and as Roubini points out we have seen attacks happen in these smaller coins.

Fourth, wealth in crypto-land is more concentrated than in North Korea where the inequality Gini coefficient is 0.86 (it is 0.41 in the quite unequal US): the Gini coefficient for Bitcoin is an astonishing 0.88.

This is also factually incorrect. According to DSHR’s blog: ‘The link is to Joe Weisenthal's How Bitcoin Is Like North Korea from nearly five years ago, which was based upon a Stack Exchange post, which in turn was based upon a post by the owner of the Bitcoinica exchange from 2011! Which didn't look at all holdings of Bitcoin, let alone the whole of crypto-land, but only at Bitcoinica's customers!’

We have noted many of these studies include big wallets belonging to companies such as Coinbase and Binance - which in turns have hundreds of thousands of customers.

Blockchain’s boosters would argue that its early days resemble the early days of the Internet, before it had commercial applications. But that comparison is simply false. Whereas the Internet quickly gave rise to email, the World Wide Web, and millions of viable commercial ventures used by billions of people in less than a decade, cryptocurrencies such as Bitcoin do not even fulfill their own stated purpose.

We note that both TCP/IP one of the fundamental protocols for the Internet as well as email was invented in the early 70s and two decades later was still not widely used. A boost in usage was seen in the 90s as Marc Andreessen co-founded Mosaic, the first web browser. Bitcoin is not yet 10 years old. Marc Andreessen sees the similarities to the Internet and in 2014 published the now seminal article about Bitcoin in NYT: https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/

He is putting his money where is mouth is, the VC firm Marc Andreessen co-founded, a16z, a few months ago launch a USD 300M fund dedicated to crypto investments.

Jay Clayton, the chairman of US Securities and Exchange Commission, recently made it clear that he regards all cryptocurrencies as securities, with the exception of the first mover, Bitcoin, which he considers a commodity. The implication is that even Ethereum and Ripple – the second- and third-largest crypto-assets – are currently operating as unregistered securities.

This is an odd statement by Roubini as SEC has made it clear that Bitcoin and Ethereum specifically are not securities. One of the major criteria as outlined by the SEC for a crypto asset to fail the Howey Test (and not being regarded as a security) is to be sufficiently decentralised. As almost all ICOs are not decentralised - they are very likely securities under US securities regulation. Roubini is right that ICOs not complying with regulations are unlawful. We have already seen a big reduction in ICO investments and many of the more serious offerings are operating within security regulation and only open to accredited investors like ourselves.

But now zealot supporters of crypto are pretending that this environmental disaster can be minimized or resolved soon. Since using millions of computers to do useless cryptographic games to secure the verification of crypto transactions is a useless waste of energy – as the same transactions could be reported at near zero energy costs on an single Excel spreadsheet...

We would strongly argue that Bitcoin miners are not performing ‘useless’ games. Their work is necessary, a crucial ingredient in creating a trustless, permissionless ledger that is probabilistic immutable. Gold mining, the global financial system - all human activity consumes energy. Almost by definition the energy consumption reflects the usefulness, miners wouldn’t use all this energy if it wasn’t worth it and they got paid for it.

As for how green Bitcoin is, there any many different opinions, this is one from Bloomberg Crypto contributor Elaine Ou: https://www.bloomberg.com/opinion/articles/2017-12-07/bitcoin-is-greener-than-its-critics-think

Blockchain is most overhyped technology ever, no better than a glorified spreadsheet or database

We mostly agree with Roubini about Blockchain being overhyped. ‘Blockchain’ is not very well defined and it has come to represent no more than a glorified or shared database. We strongly believe the revolution lies in open blockchains that are trustless, where ‘trust’ is the new primitive for applications. We recently published an article on how Blockchain is indeed hyped: https://www.apollocap.io/blog/2018/11/13/blockchain-vs-crypto


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

How the Bitcoin Cash Split Unfolded

Last week marked one of the most dramatic in crypto markets this year. The split in the Bitcoin Cash network unfolded — it rattled wider crypto markets. 

First some background: Bitcoin Cash spun out from Bitcoin in August last year through a hard fork. Hard forks are non-backward compatible changes to the underlying protocol. This contrasts with back compatible changes to the protocol, which are called soft forks. A soft fork is a tightening of the protocol, since these changes will still be valid on older versions of the software. Users can choose to adopt these soft forks or not — an example of a soft fork in Bitcoin is SegWit. Hard forks on the other hands are not opt-in, instead they create a new set of rules and if not everyone upgrades, you have created a new crypto network, and one such network is Bitcoin Cash. Hard forks can come in two forms:

  • Non-contentious hard forks — this is when there is a consensus around an upgrade in the network. Networks like Decred and Tezos are building on-chain voting mechanism to build consensus around protocol upgrades.

  • Contentious hard forks — this is when just part of the network upgrades. An example of this is Bitcoin Cash, when about 10% of the network ‘forked off’ into the new network.

Bitcoin Cash made a non-contentious upgrade back in May. They are planning to continue to upgrade the network every 6 months through hard forks.

The difference this time around was that a competing upgrade proposal by nChain, called Satoshi Vision (‘BSV’), went head to head with the Bitcoin Cash ABC’s upgrade (‘BAB’).

We have been monitoring this situation for some time as it can create interesting arbitrage opportunities. We knew that BitMEX — the world’s largest crypto futures exchange was very likely to follow only one of the new chains. This was also their policy when Bitcoin forked last year. 

We had conviction that BitMEX would only follow one fork in a contentious fork. However, we cannot make money from this view if the market priced that belief in…So, did this occur?

 Bitcoin Cash future at discount to spot Nov 1.

Bitcoin Cash future at discount to spot Nov 1.

No. 

The future was actually trading at a premium to the underlying index. For us, this seemed like a big opportunity to sell the future either against a spot position in Bitcoin Cash (arbitrage) or by itself (risk-arbitrage).

In the week leading up to the split, Bitcoin Cash rallied strongly. We believe the momentum was based on investors anticipating the fork and wanting exposure to the potential ‘dividend’ in form of a new coin. We didn’t anticipate this strong ramp-up in Bitcoin Cash’s price.

 Big pump ahead of the fork.

Big pump ahead of the fork.

What then happened was a situation where many exchanges, wallets, etc. announced initial support for BAB with the possibility of listing BSV at a later date. It was clear that ABC had the majority of the industry on their side. However, this was not going to be just a contentious hard fork, but fork where BSV main supporters Craig Wright and Calvin Ayer announced they would destroy the other fork through a ‘51% attack’. A miner having more than 51% of the hash power has the power to rewrite the ledger or to censor transactions. This could potentially create a negative spiral where price of the coin being attacked declines in value, making it cheaper to attack, leading to an even lower price.

With BSV friendly miners accumulating 70–75% of the hash power of Bitcoin Cash in the week ahead of the split on November 15 the outcome became very uncertain.

The spread on BitMEX exploded in the days ahead of the fork:

 Long the spread might have been the trade of the year.

Long the spread might have been the trade of the year.

This now turned into a ‘hash war’, where miners friendly of BAB needed to gather enough hash power to keep their network intact after a split. Craig Wright threatened to sell Bitcoin in order to fund this ‘war’:

 Empty threat?

Empty threat?

Jihan Wu, the CEO of Bitmain and a supporter of BAB on his side threatened to ‘fight till death!’

 Jihan Wu getting ready to defend BCHABC.

Jihan Wu getting ready to defend BCHABC.

This lead to wider uncertainty and was a potential trigger for the decline in the crypto market that we saw last week.

On November 16 at around 4.40am AEDT the split in the Bitcoin Cash network happened. 

So far no attack on BAB has taken place; for now we have a permanent split in the network.

We now have two new coins side by side. 

Binance CEO CZ on the split:

 Binance CEO, Changpeng Zhao, getting tired of ticker changes.

Binance CEO, Changpeng Zhao, getting tired of ticker changes.

I noted that CoinMarketCap.com still lists Bitcoin Cash, a coin that no longer exists:

 This can be confusing….

This can be confusing….

Thanks to the decentralised nature of crypto networks, social consensus trumps miners’ wanting to control the rules of these open networks:

 Polymath Nick Szabo weighs in on the ‘hash war’.

Polymath Nick Szabo weighs in on the ‘hash war’.

For now it looks like two chains will continue to live side by side, and for some this is a victory. 

Open blockchains are crypto networks which we can choose to join or not. Resolutions are not fought with real weapons but with ideas and free markets (hash power mostly follows the market). 

This is how Vitalik Buterin, the founder of Ethereum, puts it:

 Vitalik on ‘hash war’ as the start of something better to come.

Vitalik on ‘hash war’ as the start of something better to come.

The decentralised nature of these network means many different forms of blockchains can be tested in the open market and in addition different types of governance will emerge — everything from the decentralised governance structure of Bitcoin to the more formal governance of Decred and Tezos. The last week presented some interesting trading opportunities, but perhaps more importantly, it was a test of the anti-fragility of some of these networks — periods of hostility will make these networks stronger and more robust in the years ahead.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Blockchain vs Crypto

“I’m big on blockchain, but I’m not so sure about crypto...”

...is a comment we’ve been hearing often.

There is a great deal of hype around blockchain revolutionising the world. Crypto is a scam, blockchain is robust.

Unfortunately, the hype, and this line of thinking, misses the mark.

Private blockchains are little more than glorified databases. They might lead to incremental improvements, but the greater technological leap forward is crypto networks - open, decentralised markets that allow participants to transact with a new basis of trust.

Blockchain and crypto are inseparable, and require a new, unfamiliar way of thinking.

 Naval is a vocal critic of the ‘blockchain not crypto’ line of argument

Naval is a vocal critic of the ‘blockchain not crypto’ line of argument

Before I explain, let’s make sure the basics are clear.

Screen Shot 2018-11-13 at 10.40.48 am.png

Blockchain is a ledger that keeps track of crypto tokens that are the subject of that ledger.

Let’s dive deeper, using Bitcoin as an example.

The “Blockchain form of accounting” was invented to keep track of bitcoin. When a Bitcoin transaction occurs, the transaction is bundled together with other transactions into a ‘block’. The network needs to validate the transactions, to ensure they are free from fraud and error. Bitcoin miners and market participants prevent double spending by validating the block of transactions using a combination of computational power and mathematical cryptography (the basis for the broader name ‘crypto’). Once the block of transactions is validated, it is added to all previous blocks of Bitcoin transactions. Herein lies the term blockchain - the block is added to a chain of blocks, and we have a blockchain.

Fun Fact: the term “blockchain” was not used in the original Bitcoin White Paper published in 2008.

Crypto (or “Open Blockchains”)

Crypto assets (or ‘cryptocurrencies’, ‘tokens’ or ‘coins’) are traded on a blockchain. In the case of the Bitcoin network, bitcoin is the subject of the transactions. Bitcoin is transacted from one person to another and the Bitcoin blockchain keeps track of the transactions. If we think of Bitcoin as digital money, the system of maintaining the ledger is critically important. A system is needed to introduce scarcity to digital assets, otherwise participants could simply create more money or transact fraudulently, undermining the whole system and inevitably making it worthless. The blockchain solves this problem by preventing double-spending and introducing scarcity to these digital assets.

Crypto networks are a technological breakthrough. Crypto networks redefine trust. For the first time, people can transact peer-to-peer globally, at scale without the need for a trusted third party. Crypto networks are decentralised. Whereas previously a centralised party such as a bank or financial institution was required to process a transaction, now, with blockchain technology, the network processes the transaction. Participants can transact with each other with a new basis of trust. Trust is placed in the open, verifiable system that in turn relies on mathematics and computer code. The removal of centralised third parties removes inefficiencies, costs and has created enormous value.

One of the key takeaways is that crypto networks are open. The network is open to anyone with an internet connection to both transact and validate transactions. The more independent users that take part in the verification, the more secure and decentralised the networks. This openness is related to the trust equation above. The openness lends itself to this new basis of trust.

“As society gives you money for giving society what it wants, blockchains give you coins for giving the network what it wants”


Open blockchains are not without limitations. Open blockchains are not a good solution to store data and they are currently limited by scaling issues. Both of these limitations relate to the structure of an open, decentralised network. Each piece of information stored in a blockchain, such as details of a transaction, sits in hundreds or more nodes around the world (more than 100,000 in the case of Bitcoin). This is in contrast to the alternative - a centralised repository that stores and controls the data. The structure of storing data in multiple places around the world can make open blockchains costly and slow, although it should be noted that some of the world’s best developers are working on ways to solve these problems.

Private Blockchain

A private blockchain seeks to modify blockchain technology for use by a private consortium. A private blockchain does not use crypto tokens or assets.

We have seen in the press a number of stories about how private blockchains will revolutionise the world, increasing efficiencies, saving companies billions of dollars. IBM has developed the “Hyperledger Fabric,” an emerging de-facto standard for enterprise blockchain platforms. Walmart has announced it is putting its lettuce supply on the blockchain, pushing suppliers to use IBM’s blockchain-based software. Global shipping giant Maersk has announced a collaboration with IBM, sharing information about individual shipment events in an effort to reduce shipping administration costs.

While the hype is impressive, it is exactly that, just hype. A private blockchain is a glorified database. There might be incremental improvements for re-structuring the private database, such as improved error checking and validity, but it’s hardly groundbreaking. If people tracking lettuce want to input incorrect information on the blockchain, they can still do it. If Walmart wants to reverse lettuce transactions, it still has the power to alter the data. IBM have taken new technology that doesn’t need a middleman and have made themselves the middleman.

If a trusted third party could administer the ledger, then a blockchain is a “solution in search of a problem.” CB Insights

In 2016, global mining behemoth BHP Billiton announced a program to apply blockchain technology to its supply chain, to enhance security around real-time mining data, including the movement of rock and fluid samples. The hope was coordinating disparate contractors and moving them onto a standardised blockchain based system. In April 2017, the program was abandoned. BHP cited immature technology that wasn’t ready for enterprise adoption. However, I suspect the real reason is a blockchain simply wasn’t required.

The groundbreaking part of blockchain technology is an open system in which anyone can participate, removing centralised third parties and transacting with a new basis of trust. A private blockchain is, by definition, closed and does not offer these qualities.



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Internet vs Intranet


A similar example to crypto versus closed blockchains is the Internet vs Intranet. In the early days of the internet, people used to talk about the intranet as the really big innovation - and the public internet as being untrustworthy and unregulated - "no one will ever bank or shop on an open internet". The rest, as we say, is history. It will likely be a similar outcome - private blockchains will likely exist but will not be nearly as significant as public blockchains.

Why The Hype?

The most obvious reason for the hype is the PR machine. “Blockchain” is like “Artificial Intelligence” and “Medical Marijuana” - it’s a buzzword du jour. At the start of the year, at the peak of the hype, Kodak announced KodakCoin, an Initial Coin Offering to help track photo rights and royalties for digital photographers. The stock price promptly tripled (although since the announcement, the stock price has unsurprisingly dropped back below pre-January prices). It is inevitable that we will continue to see more blockchain hype in the media.

I have developed my own theory as to why people like blockchain, but not crypto. My theory relates to availability bias - failure of logic due to placing more weight on information that is available to the individual. People are familiar with corporations and controlled entities. The idea of a blockchain being controlled by a government or company is easier to digest than an open blockchain. A private blockchain fits within the framework of familiarity. Crypto assets do not. Crypto networks are a new, difficult concept to understand. It’s a frictionless path to gravitate to the familiar, instead of wrestling with the new. I believe this is the main reason why people make the statement at the beginning of this article: “I’m big on blockchain, but not so sure about crypto.

The idea of a blockchain being controlled by a government or company is easier to digest than an open blockchain. A private blockchain fits within the framework of familiarity. Crypto assets do not.

Apollo Capital’s view is that understanding crypto assets requires a different, new way of thinking. An open-mind is a crucial first step. Public blockchains and transparency around transactions is a new concept, at odds with how society has previously functioned with closed, private transactions. Many of today’s crypto enthusiasts took a long time to understand crypto - myself included. We encourage people to keep an open mind, keep learning, reading, listening and following updates from reputable sources like Apollo Capital (#selfplug).

Security Tokens, Explained

 Patrick Byrne an American entrepreneur, e-commerce pioneer and CEO of Overstock.com now also a security token pioneer. Picture from Wired Oct 2014 issue.

Patrick Byrne an American entrepreneur, e-commerce pioneer and CEO of Overstock.com now also a security token pioneer. Picture from Wired Oct 2014 issue.

Qiao Wang, part of the founding team at Messari recently wrote this on Twitter:

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We don’t think Qiao is wrong, in fact we at Apollo generally agree with the view presented here, with the exception of governance. There is significant, and growing value in owning a stake in the governance of a crypto network. 0x, Decred, and Maker are three examples in our portfolio of tokens that derive at least some of their value from governance.

This post will look at at the second category Qiao Wang listed above, namely tokens that give right to cash flow.

By security tokens, we do not mean future utility tokens are issued by a central entity prior to network launch. Note that since the SEC announced that all ICOs they have looked at are securities — many ICOs are structured as securities. The vast majority of these however look to be converted to utility tokens at a later date when the network is live.

Tokens that give right to cash flow

Cash flow to a security token can come in two forms, either as a native digital asset or an off-chain ‘traditional’ asset. I will call these categories Tokenised Securities and Blockchain Native Security Tokens respectively. Let’s start with the former.

Tokenised Securities

Some of the potential benefits include:

  • Illiquid assets — like VC interest, hedge fund interest, real estate etc can become liquid

  • Lower issuance cost, i.e. fundraise at much lower cost

  • Global markets could become accessible with less friction

  • Trade fractions of an asset

  • Overall lower cost, ease of transfer and settlement

  • Potentially enables an open financial system as security tokens become compatible with smart contracts

  • Instant convertibility between crypto assets and currencies (in the future we might be able to pay our expenses with our portfolio of tokenised securities).

Below a simple illustration comparing a crypto asset like Bitcoin and a security token like Robinhood which equity is trading on the Swarm platform:

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There are a number of challenges for Tokenised Securities. Since they are associated with an underlying asset, this means that possession of the crypto token doesn’t equal possession of the underlying asset. If you hold bitcoin and you lose your private key — the bitcoin is lost forever. If you hold equity through a token, the equity doesn’t disappear — a trusted intermediary is needed. That’s a very different value proposition to crypto assets. So far, this category has had limited traction and much work is needed to solve custody, oracles, and the legal enforceability of smart contracts across jurisdictions. 

Blockchain Native Security Tokens

This category may or may not be securities from a legal standpoint as typically these won’t have a company behind them. One example is Maker, a token in the MakerDAO stablecoin system. There is a foundation in Switzerland supporting in the development of the software behind MakerDAO. The Maker token is used for decentralised governance but also receives cash flow in form of a sort of buyback from a fee emanating from the issuance of the stablecoin Dai. This is just one example of a purely software based system that looks and feel like a security by having an on-chain cashflow stream in the form of a dividend or a buyback. Other examples include a set of stablecoins where ‘revenue’ from transaction fees are used as collateral in a two-token system. Yet another example is Binance Coin which represents a middle ground where you have a for-profit company providing cash flow in the form of a quarterly buyback and burn. Importantly, the token itself however doesn’t represent equity in Binance.

Blockchain Native Security Tokens open a whole new playbook where only the imagination of the software developers will limit the construction, functionality and the resulting value creation. Maybe our new generation of ‘companies’ will be software code running on networks like Ethereum and Dfinity with no entity or person behind them. This is a fascinating thought that has the potential to reshape the fundamental structures of our economy and society.

We believe the second category is vastly more interesting than the first category. That’s because the first category is just a traditional asset (like equity) that is traded on the rails of a blockchain but still requires off chain record keeping. On the other hand, Blockchain Native Security Tokens have the potential to transform the very concept of companies.

Finally, for those who would like to explore this area more, here is a list of the major player in the regulated tokenised security space:

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Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.