The cryptocurrency, on the other hand, is an implementation of the DLT. The Bitcoin is a simple, yet powerful, example of this implementation.

The “Miners” are the actors that process the cryptographic problems to secure the network and they get incentivized through the Crypto-asset (Bitcoin) to use resources (Hardware + Energy) to maintain the ecosystem’s security.

The problem of Bitcoin today is that its Cryptographic Problems are so hard to decipher, Mining pools were created with specific hardwares which lead to a centralization of the network. 89% of the computing power is owned by the 8 largest mining pools.

Tokens were popularized during the ICO frenzy and are (more generally) hosted on a Turing Complete Blockchain (like Ethereum or NEO). They can have a very focused usage that implements complex rules depending on the use-case. The Blockchain world saw the burgeoning of more than 1600 altcoins. (Yes I heard you say WTF).

With all this noise of good sca… marketers and speculators, how can we separate the good from the bad? From the 1600 existing altcoins what are the few 100 that will survive and thrive?

Monetary theory & DNA of a good crypto-asset

We could strip the word “crypto” from the title as the value of a crypto-asset being a utility coin can be described by the Quantity Theory of money. In monetary economics, the QTM defines the general price level of goods and services as a function of the amount of money circulating or available money supply.

Keynesian economists challenged the theory, based on the fact that the monetary system is not deeply connected to the services and goods market which creates inertia in terms of value fluctuation. Which may hold true in the short run, but the QTM theory always prevails in the long run.

The Fischer’s equation restated by Milton Friedman shows that the quantity theory links the nominal value of expenditures PQ and the price level P to the quantity of money M through this set of equations:

The plus signs shows that a change in the money supply is hypothesized and drives nominal expenditures and the price level in the same direction (for other variables held constant).

Knowing this, you understand that there are at least 3 parameters that should support the value of a crypto-asset in the long term:

Its supply rule; The underlying economy supporting it; Its Velocity.

Not:

Its marketing; Its daily volume transactions; The temporary value perception one community would have.

So the overall problem in the crypto-markets is the community. They rely more on the latter rather than the former. This can be explained by the fact that the current actors (speculators & scammers) are only looking for a quick buck without having any interest in the underlying value of the Blockchain technology, transparency and how it is disrupting the world’s currencies.

So what now? Pareto’s law will take care of the 80% of crypto-assets that have no future. How can we know which coins to hold to? What are the technologies we can bet on? And what bridges can we create to make cryptos assets we can bet on? To be developed in future posts ;)