Why Crypto Assets Can be More Valuable than Equity

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We often hear that crypto assets are not equity and therefore not valuable as an investment — i.e. they are great for the issuers as they don’t dilute shareholders. This is not necessarily the case.

Let’s have a look at Binance, whose CEO Changpeng Zhao in a recent interview said he believes their token Binance Coin might be more valuable than their equity. Simplifying somewhat, the company makes money by charging a commission on trades. The equity is a claim on the net profit, after all costs associated with running the exchange, all technology, marketing and personnel cost and so on. The company can choose to reinvest the profit or distribute that to its shareholders. The token, Binance Coin, gives you a discount on the trading fees on Binance. If the discount is 50%, all else equal, then half of all value should be captured in their token, less will flow down to shareholders. If the discount was 100% then no value would be captured by shareholders and everything would flow to token holders. The token holders thus capture value higher up the income statement.

Binance is disintermediating the company Binance in favour of Binance Coin.

Binance is disintermediating the company Binance in favour of Binance Coin.

With Bitcoin there are no shareholders, no CEO, no board of directors. All value is captured in the token, lower case bitcoin. The people working ‘for Bitcoin’ are mostly volunteers contributing to the open source code. There are some exceptions, the for profit company Square recently announced they are hiring Bitcoin and crypto engineers to contribute to the project.

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The crypto landscape has seen the emergence of a new a kind of organisation not driven by shareholders but by a team working on a common project where the economics are centred around a crypto asset. Take MakerDAO as an example. MakerDAO is a decentralised lending facility on top of Ethereum. There is a not-for-profit foundation behind MakerDAO that can sell Maker tokens (currently in the top 20 of crypto assets) to finance the development of the MakerDAO system. The Maker token derives value from users borrowing money through ether collateralised loans — interest payments is made in the Maker token. Thus the Maker token is another example of a top income statement claim. There are no cost items that the Maker holders have to pay before realising value. That’s not a coincidence. The economics of crypto projects are driven by:

  • Open source. These projects need to be open source, otherwise they wouldn’t be ‘trustless’. If they were not trustless, they wouldn’t need to be built on a blockchain to start with. Unnecessary rent seeking in the open source protocol, will lead to a fork — someone will fork out the excess protocol level taxation.

  • All value captured in the token. Since any other value-capture can be forked out, there is no value left for profit seeking shareholders.

In the brave new world of crypto, we see that shareholders are replaced by token holders. Employees are replaced by volunteers, grants or paid-in-token by the protocol contractors. The token becomes a measurement of success, the employees of Binance want to get paid by Binance Coin. The founder of MakerDAO lives and dies by the success of Maker, the token.

In the next bull market, we believe Bitcoin will surpass the market cap of the largest company in the world. I.e. crypto networks can be bigger than a single company and crypto assets can be more valuable than equity. It is definitely not the case for all crypto assets, only the most well built crypto networks adhere to the success formula described here. It’s our job at Apollo Capital to find these diamonds in rough.

Disclosure: Apollo Capital is a holder of Bitcoin, Binance Coin and Maker.

Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.

The Unimportance of Coffee and Cake

When people think of “money”, most think about using it to purchase goods and services. Bitcoin is terrible as a means of payment. It is slow, can be expensive and is not widely accepted. We are often asked, “what you can actually buy with Bitcoin?” The answer is not much.

Crucially though, it doesn’t matter.

Bitcoin offers little improvement for users when it comes to purchasing coffee and cake. It is easy to underestimate the importance of user experience. Often it is the difference between success and failure. The innovation behind a number of successful technology companies is not necessarily the complexity of the technology, but the improvement it offers to the users’ experience. Amazon originally succeeded as a book seller because it allowed customers to browse, purchase and receive books from the comfort of their lounge chair. Uber offers users a superior customer experience as they order a lift from anywhere, track when it is due to arrive and pay with ease. AirBnb offers users a wider range of accommodation options, often for a lower price than hotels.

Bitcoin does not offer customers a better payments experience. In fact, it is far worse and while it might improve with new technology like the Lightning Network, it is unlikely to be a giant leap forward in payments. The bar for payments is currently very high, by design. Existing payments networks are designed to reduce friction for users. Less friction leads to more payments which leads to more profits for payments networks. Visa’s Paywave allows users to buy their coffee and cake with the tap of a card. Paywave is seemingly everywhere. Apple Pay has improved this again by allowing a simple tap of the phone. Any further improvements are likely to be marginal and are unlikely to come from Bitcoin. Bitcoin is slow, difficult to use and does not improve the customer experience.

Bitcoin might be an improvement for merchants. Using Bitcoin eliminates the risk of fraudulent purchases. Global credit and debit card fraud has been estimated at around US$25bn, a great deal of which is worn by merchants. Bitcoin is a digital bearer asset. Bitcoin can only be spent if the customer is in control of the Bitcoin. There is no room for impersonation. Bitcoin as a means of payment may also result in lower transaction fees to merchants. Credit card issuers charge merchants up to 3% for the privilege of receiving payment. The fees for using the Bitcoin network are typically lower. On the flip side, the Bitcoin network isn’t going to roll itself out to merchants and a middleman is required to build the required infrastructure. Just as Visa and Mastercard charge a healthy commission, it’s safe to assume any middleman will as well. While in theory there might be some improvements to merchants, the customer experience improvements aren’t significant enough to convince customers to absorb the switching costs and start buying their coffee and cake with Bitcoin.

There are two use cases where Bitcoin might flourish as a form of money to make payments. The first is micro transactions. Bitcoin is useful for tiny payments, such as 5c. Credit cards often charge minimum fees per transaction, such as a 30c flagfall, making micro payments impossible. Micro payments could become commonplace for new uses on the web like micro donations or paying for content. Secondly, Bitcoin might flourish for large payments. Transferring $1m to someone else through existing banking infrastructure can be difficult, slow and expensive. Bitcoin happens almost instantly and is relatively cheap. However, the problem of transferring large sums of money is not widespread and Bitcoin’s edge in this regard is unlikely to drive mass adoption.

While Bitcoin struggles as a medium of exchange, many forget that there are other roles of money. There are three roles of money - a store of value, a medium of exchange (buying coffee and cake) and a unit of account.

Bitcoin excels as a store of value - this is where the value of Bitcoin lies.

The following highlights four scenarios in which Bitcoin is appealing as a store of value:

  1. An alternative to gold - Bitcoin is superior to gold. It is easier to divide, transfer, store and secure. Gold has an estimated market cap of $8 trillion and only a tiny fraction is used (in jewellery for example). It is easy to see Bitcoin competing with gold and capturing some of this value.

  2. Offshore banking - it is estimated that $15 trillion is stored in offshore bank accounts such as in Switzerland. There are many different motives for storing funds offshore. It is easy to see Bitcoin competing with offshore bank accounts as an alternative place to store value, outside the purview of others.

  3. Investment hedge - just as many store value in US Dollar or Swiss Francs, many will look to store value in Bitcoin. Storing valuing in Bitcoin is a hedge against macro economic events. Bitcoin is free from association with any country, central bank, political movement or individual. Bitcoin is completely independent and has proven to be uncorrelated to other assets.

  4. In developing economies - for citizens of countries that are ravaged by inflation and political influence, like Venezuela, Bitcoin is an attractive alternative to storing value compared to local currency. For citizens of developed economies, it is easy to underestimate the value of a digital currency that is independent, permissionless and censorship resistant

A common counter argument to Bitcoin as a store of value is volatility. Bitcoin has been highly volatile, which is expected of an asset and technology that is still going through the discovery phase. Bitcoin is only 10 years old. It will take a long time for Bitcoin to be more widely recognised. In the interim, as with any new technology, Bitcoin will be met with both skepticism and enthusiasm. We expect this to continue as the technology and its understanding develops. Gold and fiat currencies have taken a long time to be widely accepted and even today, are at times more volatile than Bitcoin. And volatility works both ways. Just as an investment in Bitcoin may lose value due to volatility, it may increase significantly. Bitcoin clearly has greater potential than gold or fiat currencies.

In most respects, Bitcoin is not a very good form of money. Bitcoin struggles and will continue to struggle as a medium of exchange. People focused on where they can or cannot buy their coffee and cake with Bitcoin miss the point. Bitcoin will continue to break ground as an alternative, superior store of value. Other scenarios to those listed above will likely develop, drawing upon Bitcoin’s groundbreaking properties. There is clearly a large enough market for demand to outweigh supply, as more people learn about and embrace a truly unique form of money.

And if one day it so happens that you can buy a cake with your Bitcoin, well that will be the cherry on top.

Crypto is Cutting the Gordian Knot of a Complex Financial System

Satoshi vs. the legacy banking system.

Satoshi vs. the legacy banking system.

The Gordian Knot is a legend of Phrygian Gordium associated with Alexander the Great. It is often used as a metaphor for an intractable problem (untying an impossibly-tangled knot) solved easily by finding an approach to the problem that renders the perceived constraints of the problem moot (“cutting the Gordian knot”) — Wikipedia

Crypto Assets cut the gordian knot of an increasingly regulated, compartmentalized, balkanized, complex financial system. We think that’s a pretty accurate metaphor for why crypto assets are important.

Before we had crypto assets, individuals had to trust centralised companies, institutions and central banks. Maybe more importantly, in doing business those institutions had to trust other institutions, creating layers of trust with a legal system around it. This has a created financial system that is:

  • Increasingly complex. Financial engineering to manage risk between financial institutions and speculators has created an immense level of complexity.

  • Opaque. Today, no one has a good grasp of the real state of the global financial system.

  • Fragile. The current financial system tends to create great bubbles every 10–15 years with subsequent crashes that affect all of society and that leads to tax payer bailouts of our financial institutions.

Crypto assets can disintermediate the trusted third parties — it not just improves the current system but it can completely cut the gordian knot. 

Here is the most simple example we can think of — how the gordian knot is cut in an international bank transfer:

From Apollo’s Educational Deck.

From Apollo’s Educational Deck.

In the latest financial crisis of 2008, undetected derivatives exposure lead to the collapse of the financial system and too big to fail financial institutions had to be bailed out by tax payers. That event ironically lead to even more complexity. The Economist notes in an article ‘Too big not to fail’ that: ”The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long.”

Dodd-Frank created more agencies to overlook the system, more regulation and more complexity, more lawyers and more ways to game the system:

The every increasing complexity of the financial system.

The every increasing complexity of the financial system.

The red tape of Dodd-Frank is in stark contrast to the Open Financial System. We have seen the first glimpses of new financial primitives built on open blockchains, so far mostly on Ethereum. Credit, lending, derivatives markets open to anyone, anywhere. These new crypto powered systems are:

  • Open and transparent. The rules are coded in software. There is no ambiguity about the state of the system.

  • Permissionless. Open to anyone, anywhere. A mobile phone and Internet connection is all that is needed for access, no red tape.

  • Unstoppable. Transactions are uncensorable and have the reach of the Internet.

In addition, since these system are open source, and powered by crypto assets, the stakeholders are more distributed and the financial upside obtainable outside of Wall Street insiders.

Modern society has greatly increased the ability to organise humans on a greater and greater scale. But this social scalability has come at a cost of greater and greater complexity. Crypto networks solves this complexity problem of social scalability. Bitcoin created money seperate from the state. Bitcoin has global reach, without having to trust a third party. Now, other financial infrastructure is being recreated, seperate from financial institutions and the complexity of what Nick Szabo calls ‘wet code’

Building a better financial system is an exciting future which will play out over the coming decade and that we want to be part of.

Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.

Software is Eating Software


In 2011 Venture Capitalist Marc Andreessen wrote an article in the WSJ titled ‘Why Software is Eating the World’. The gist of that article was that more and more major industries and businesses were being run on software. Thus it would makes sense to invest in this new infrastructure despite the market creating a dot com bubble at the end of 90s.

We believe that crypto assets are powering a new generation of software and that this software has the power to disrupt many of today’s industries and businesses which in turn are run on software. However, we are not just talking about a new generation of software that is replacing the current system, we are talking about something much bigger — software that is displacing current business models. Just like Amazon disrupted bookstores, this new generation of software called crypto networks will disrupt some of today’s businesses built on software.

This new paradigm involving crypto assets that ends up with Software Eating Software is likely to play out in a gradual fashion going through different phases. Below I outline a possible scenario how it might play out:

Phase 1 — Software Eating Commodities

Digital scarcity was the first application of crypto assets. Bitcoin like gold is scarce but is superior in many other ways through the power of being based on software. Bitcoin is programmable, can be stored more easily than a physical commodity, it can be sent quickly and effortlessly like an email, it can be easily divided and unlike gold its authenticity can be easily verified with software. 

So in phase 1 of this crypto based revolution we have digital scarce objects and specifically Bitcoin as a digital Gold:

A physical commodity like gold can be displaced with a crypto network like Bitcoin.

A physical commodity like gold can be displaced with a crypto network like Bitcoin.

Phase 2 — Software Eating Contracts

In the second phase we have software performing simple contracts. These have so far centred around certain well defined financial contracts. These have recently gained traction in what has been called the Open Financial System or Decentralised Finance (DeFi). Contracts range from lending, borrowing to derivatives prediction markets and decentralised exchanges. 

This is still a young market and many of the first services have just been launched in the past 6 months.

Contracts can be replaced by software in crypto networks.

Contracts can be replaced by software in crypto networks.

Phase 3 — Software Eating Software

In the third phase software primitives that have been developed and battle tested in phase 1 and 2 will be combined and reiterated over to create whole new applications that disrupt current businesses.

There will be new services built on the building blocks of the Open Financial System that will take market share from current centralised businesses for lending and borrowing. The first users will be those that value a permissionless and censorship resistant service. Many might be based in the developing world where access to financial services is limited.

Likewise, Decentralised Exchanges will take market share from more centralised brokers and exchanges with customers who value the obvious benefits of no or little counterparty risk.

Those who value a social network free from censorship might move to a more decentralised network built on top of a blockchain.

Today’s shared economy companies such as Uber, AirBnB etc could also be built on an open network — with no rent seeking middlemen.

Software based businesses is replaced by open source software.

Software based businesses is replaced by open source software.

These new blockchain based ‘businesses’ can be fuelled by crypto assets and the token-economics of the network act as a catalyst for adoption. No financial institution needs to be behind tomorrow’s lender, no company needs to be behind tomorrow’s Twitter, no platform fees need to be levied tomorrow’s Uber driver. Simply put, these could be the new public utilities built on open source code accessible anywhere by anyone at anytime.

10 years after the Bitcoin whitepaper, there is a growing consensus about the value of Digital Scarce commodities. We are seeing the first iteration of blockchain based contracts. Over the coming 10 years we will see crypto networks disrupt current businesses which in some cases will be replaced with open source software which for the first time can replace third parties and middlemen with open networks — this is the exciting new era of computing.

Still we face many challenges. Blockchains are slow, and in some cases they have proven to be insecure due to too much centralisation. Just like after the dot.com crash people are focusing on the bubbles and crashes that markets create and not on the breakthrough innovation.

Many of today’s crypto networks will fail to live up to the expectations. Still we see some of the best engineers working on solving some of the current challenges — that’s a huge opportunity and where we are putting our money to work.

Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.

Crypto as a Force for Good

Index of Economic Freedom

Index of Economic Freedom

As crypto investors we are sometimes faced with the question about the usefulness of crypto. While we believe crypto assets can be the foundation for a new kind of trust infrastructure not just for money but more generally for contracts — we will here think about crypto as a form of money.

Living in Australia or another developed country in Europe or North America it can be hard to understand how important it is not having to trust the whims of the ruling party, a king or a brutal dictator with your money.

Holocaust survivor Ruth Weitz writes in “Flares of Memory — Stories of the Childhood during the Holocaust”:

Hoping to escape from the concentration camp, I had sewed coins inside the waistband of my dress before going there. Within the hem of my dress I sewed my mother’s engagement ring, and I secured a gold chain inside my long braid of brown hair. I knew the consequences were death if I were caught, but I wanted to be prepared.

Imaging if the jews trying to flew the holocaust had a means to protect their wealth by just remembering 12 words or a passphrase instead of hiding gold and risk being caught. 

With cryptocurrencies like Bitcoin that becomes possible, a potential store of wealth which is becoming speech. Uncensorable speech free from political influence, and not possible to confiscate.  

A current example of a country where people are really suffering under a brutal regime is Venezuela. Despite being a country with great natural resources its people are now struggling to survive. Due to poor governance, the inflation rate in Venezuela averaged over 32% from 1973 until 2017 before exploding in the last couple of years to over a million percent.

Fast collapsing Bolivar.

Fast collapsing Bolivar.

Carlos Hernandez, a Venezuelan economist, describes how Bitcoin has saved his family by keeping all his money in Bitcoin and only exchanging it for Bolivar when needed. He also tells the story how for anyone leaving Venezuela having money that is borderless and can be stored with just a passphrase in your head prevents people from getting their money seized by the military.

LocalBitcoins.com was founded in Finland in 2012 and has since then been a major peer-to-peer platform for buying and selling Bitcoin. The volume as measured in Bitcoin in Venezuela just hit a record on LocalBitcoins:

Data from coin.dance.

Data from coin.dance.

Cryptocurrencies in addition to becoming a store of value that is unseizable are programmable money that could potentially provide checks and balances for dictators which has throughout history made off with great fortunates:


It’s our belief that crypto assets is a new computing platform for trust. Specifically as money it has some important traits that humans have been valuing for millenia. It has the same kind of robustness and scarcity that gold has. We can now for the first time do scarcity in a digital form, going the full circle:

Source: Apollo Capital, Nick Szabo.

Source: Apollo Capital, Nick Szabo.

Cryptocurrencies are not yet private enough to protect us against all adversaries — maybe it most pressuring weakness. Supporting the opposition in a dictatorship using cryptocurrencies is still dangerous if you’re not very technical oriented and even so it is very hard to be sure that your transaction can’t be traced. There is still a lot of work to be done to make digital currencies as trustless, permissionless and as censorship resistant as possible.

Clear, however, is that as a store of value that can’t be seized or deflated by an irresponsible government is, as Carlos Hernandez puts it, “more than a buzzword when you live in a collapsing dictatorship.” 

At least when it comes to the digital dimension we finally have an opportunity, thanks to crypto assets, of moving the discussion from “don’t be evil” to “can’t be evil”.

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.

Test Driving The Future of Finance

In June 2017, Binance raised $15m in an ICO for Binance Coin (BNB). At the time, it wasn’t exactly clear what the value proposition was for BNB. BNB offered traders a discount on trading fees on Binance’s exchange, but this wasn’t exactly groundbreaking.

Fast forward 2 years and Binance is spearheading some impressive and innovative efforts. The most pressing is the creation of Binance’s Decentralised Exchange (DEX), which will be powered by Binance Coin.

Apollo Capital sees decentralised exchanges as exciting developments and crucial infrastructure in the world of decentralised finance promised by crypto assets. Decentralised exchanges promise minimal counterparty risk, lower costs and censorship resistance. We thought it would be an interesting exercise to sign up for the testnet and take our readers on a test drive through the future of finance.

Binance’s Testnet is only available to current Binance customers that have a minimum of 1 BNB. Perhaps this is a savvy marketing ploy, but the first step was creating a Binance account and purchasing 1 BNB (I was interested to observe that the only thing required to create a Binance account was an email address: no ID or anything else is required).

1 BNB Required.png

Next I needed to fund the account where I could receive 200 free testnet BNB sent to my wallet on the DEX.

Funding BNB.png
Funding Secured.png

The exchange looks similar to Binance’s main exchange. There are similar buy and sell ‘panels’ in the bottom right hand corner. There are markets on the left hand side and market depth on the right hand side. The noticeable difference however is there is very little activity. I’m not sure how much feedback Binance is receiving from people using the testnet, but I’d imagine it would be limited until there is a critical mass of users. The lack of activity is understanding, albeit a little frustrating for enthusiastic users like us. I placed an order to buy some BTC for BNB and despite being the lowest ASK, my order remained unfilled for a number of hours. A stark difference to the experience on Binance’s main exchange.

DEX Homescreen.png
BNB Buy:Sell.png

While it is promising to see the launch of the testnet, it appears that the real test will come with the launch of the exchange. As is often the case with crypto projects, given the immutable and censorship resistant nature of blockchains, teams tend to take their time to make sure everything is working perfectly. When considering the irreversible nature of transactions and the value of assets at stake, there is little room in crypto to “move fast and break things”.

Binance’s impressive record over the past 18 months in growing the world’s largest crypto exchange shows that it is highly capable of developing large projects at scale.

Readers might question why Binance would seek to disrupt its hugely profitable exchange, with another exchange that is decentralised. Aside from the immortal words of Steve Jobs, “if you don’t cannibalise yourself, someone else will,” part of the reason is answered by the new business model of crypto.

Traditional business models often revolve around extracting as much revenue as possible out of customers. Crypto assets can offer a new business model whereby the founding team is rewarded with a large allocation of tokens. The team then works on the project, encourages early adopters to look at and invest in the project and seeks to increase the value of the token. All going well, the team is rewarded by an asset that increases in value, as are the early adopters. The key difference of this new business model is alignment - all participants in the network are aligned to increase the value of the token. Binance seems to be a working example where the team have a large and early interest in increasing the value of its BNB holdings, even if this is at the expense of its main exchange. Perhaps it is telling that the team is willing to cannibalise its hugely profitable existing exchange, in place of something which may be even more valuable.

Disclosue: Apollo Capital is an investor in Binance Coin