Edmond Chan

Think of cryptocurrencies as a massive horse race like the Grand National

chanman · Dec 26, 2017 · Leave a Comment

Bear with me on the metaphor…!

The Grand National is one of the most famous horse races in the world. It’s a steeplechase which is a gruelling run across often boggy ground and in which the horses have to successfully navigate and jump over the huge fences.

There are a lot of horses that fall at these fences and lots of other horses that are pulled up during the race and most don’t complete the course.

At the start, there’s 40 horses (runners) and they all have a chance (albeit different chances) of winning the 4 mile race.

Before the race, there’s a favourite. The favourite is the horse that to the market has the best chance of winning the race.

There’s also outsiders (less fancied horses) that start the race at huge odds (say 66-1 or even 150-1).

These odds will change and fluctuate during the race. So, for example, if the favourite starts at 7-1, but falls behind during the race or starts to look a bit tired, then the odds will start to drift and get longer (maybe out to 33-1 or even 50-1). This is the market’s assessment of that horse’s chances of winning the race. Equally, if the horse starts to improve, then the odds will shorten to reflect this.

So how does this relate to the world of cryptocurrencies?

So many riders/cryptocurrencies that could win

With the Grand National, it could be the favourite. Or it could be the rank outsider. You don’t know. It’s a difficult course that throws up unlikely winners.

With cryptocurrencies, we’re in the very beginnings of the race. It could be Bitcoin or it could be a cryptocurrency that isn’t even in the top 100 by market capitalisation on coinmarketcap.com. We just don’t know.

So how do you give yourself the best chance of victory?

You’ve got to diversify

The chances of you picking a winner from so many riders/cryptocurrencies is very slim. In the same way that I wouldn’t recommend putting all your money on the 25-1 shot, I wouldn’t recommend that you put all your money into ADA. It might win but it much more likely it won’t.

If you were thinking about betting £50 on the Grand National, I would recommend splitting this into 5 different bets of £10 each.

If you’re thinking of putting £10,000 into cryptocurrencies, I’d recommend splitting this up into 5 bets of £2,000 each (you could give this a different weighting).

Stay alert and watch for unconsidered riders/cryptocurrencies that are coming up strongly

In the opening stages of the Grand National, all the riders are generally still in the race. As the race progresses though, horses that you’ve never considered get into the frame for possible victory. You can still bet on these in-play. Suddenly, their odds will drop. Get on before the odds get too short.

It’s the same with cryptocurrencies. If you see that Verge (for example) is moving up the rankings day by day. Then there’s possible good news (such as rumours that it’ll be listed on a major exchange), then you might want to buy some before the price goes crazy.

Conclusion

Cryptocurrencies are like a massive, exciting horserace. Bet on them just like you’d bet on a massive, unpredictable horse race like the Grand National. Give yourself the best possible chance of victory.

Let me know what you think in the comments below.

Be careful with the amount of fees you pay when playing with cryptocurrencies. It could get painful.

chanman · Dec 10, 2017 · Leave a Comment

I was calculating my returns in my cryptocurrency portfolio. Something wasn’t quite adding up though. I couldn’t reconcile the amount of Bitcoin that I’d bought in total with the amount of Bitcoin that I had in my three Bitcoin wallets.

I thought maybe I’d put some in another wallet that I couldn’t remember having. Uh oh.

I went through every transaction. All purchases. All transfers. All switches into other altcoins. I was still 0.05 BTC out.

Then it dawned on me. These must be the fees I’ve paid to move Bitcoin around. 0.05 BTC!!

Even 6 months ago, at those prices for a Bitcoin, it works out as a large sum of money. At USD 2,000/BTC, that 0.05 BTC is 100 USD!

At USD 15,000, that’s 700 USD! (Apologies for all the exclamation marks, but that’s a lot of money! Can you imagine how painful that would feel at USD 50,000/BTC? That would be USD 2,500! Just to move money around.)

Hmm. This needed further investigation.

So for a flavour of how much Bitcoin transaction fees are, I went into my Electrum wallet and started to look at the transaction fees I’d paid for every transaction I’d made out of the wallet.

Check out the below spreadsheet where all units are in mBTC (which are 1/1000th of a full Bitcoin):

So the actual amount I’d paid when transferring Bitcoin was nowhere near the figure that I thought it was. Stranger and stranger. Curiouser and curiouser.

Where was the remaining 0.0435 BTC?

It must be the fees paid when exchanging Bitcoin to other cryptocurrencies.

Let’s look at the Changelly and Shapeshift transactions. (I did the Shapeshift transactions through the Exodus wallet).

I’ve done three transactions through Changelly:

3 x 0.05 BTC to Monero (XMR)

And I’ve done three transactions through Shapeshift:

1 x 0.05 BTC to OmiseGo
1 x 0.05 BTC to Augur
1 x 0.05 BTC to LTC

That’s 0.3 BTC exchanged to altcoins.

Let’s look at what the missing 0.0435 BTC is as a percentage of the 0.3 BTC:

0.0435 / 0.3 = 14.5 %

That’s a huge chunk!

Let’s look at what Changelly’s fees comprise of.

From their website:

If we take the DOGE fee first. That’s 1980 DOGE / 396,000 DOGE = 0.50%. Which isn’t that big.

This means that of the 14.5% we saw we lost from the Changelly fees (above), 14% was down to the exchange rate.

Is this so different to the exchange rates we see on Poloniex (an actual exchange where you can see live buy and sell orders)?

Maybe not.

Here’s a live price (BTC to LTC) from Changelly:

and here’s a live price (BTC to LTC) from Poloniex:

(to calculate the BTC to LTC price above, divide ‘1’ by 0.00980755 to get 101.9622638.

So Changelly on this occasion, offered less Litceoin for BTC than was available on Poloniex.

Changelly offered 101.3905 LTC/BTC.

Poloniex offered 101.9622638 LTC/BTC.

That’s a fair difference. On Poloniex, you get 0.56% LTC more for your BTC, than you do for your BTC on Changelly.

Conclusions

Inconclusive. I’m still not 100% sure where my 0.0435 BTC went.

To be continued.

Can anyone help? Please let me know in the comments below!

Profile and resources on Olaf Carlson-Wee, Founder of Polychain Capital

chanman · Dec 2, 2017 · Leave a Comment

One of the most well-known investors in the cryptocurrency space is Olaf Carlson-Wee, the founder of crypto-hedge fund Polychain Capital.

The first video I watched about him was a podcast from Y Combinator, between Aaron Harris and Olaf Carlson-Wee:

In this video (posted on 19 July 2017):

[02:25] Olaf talks about how hard it is to use traditional hedge fund strategies such as Long/Short and techniques such as margin trading when it comes to cryptocurrencies/digital assets (Olaf prefers the term ‘digital assets’ over ‘cryptocurrencies’ because he thinks that the blockchain technology has many more applications than just storing value and as currencies). Because of these difficulties, Olaf invests long-only and for the long-term. Most of his time is spent reading research papers.

[03.20] Rebalances the portfolio every 90 days. Goal is to keep positions for years.

[5.30] Olaf explains what he’s looking for when he’s reading white papers.

A novel idea, a new application. Something that’s never been tried in a crypto framework.
A fork of an existing idea is not that attractive for him.
Something written from the ground up. “Ethereum was not a fork of Bitcoin.” and eg Tezos.
Bets on people with great ideas.

[09:40] Likes Filecoin – a decentralised, distributed server architecture.

Likes ITFS (InterPlanetary File System).

[14:00] We can’t really picture what Web 3.0 (a decentralised web) will actually look like. What are the use cases for Web 3.0? What will be the components and architecture for Web 3.0?

[19:35] Thinks DAOs will be big over the next few years.

[29.40] Really goes in hard on Tezos (unfortunately, given their legal woes. Although, this might not detract from the project itself)

[40.00] really seems to be against traders and speculators, particularly when it comes to ICOs. He concedes that maybe long-term speculators are okay. 🙂

[44.50] Which protocols/projects is Olaf excited about right now?

Ox (pronounced Zero X) 0xproject.com
Maker and StableCoin makerdao.com
(Mentions Augur and OpenBazaar)

[52.11] What blogs does he recommend people read if they want to dig deeper? He thinks most people haven’t done their research. He likes the IPFS team’s blog (I couldn’t find the blog he was referencing with Jesse?) as well as CoinList, a collaboration between AngelList and IPFS.

The next resource I listened to was Forbes’ Laura Shin interviewing Olaf for her excellent podcast Unchained

(Unchained is simply excellent and I only found it after googling Olaf to find out more about him. Definitely worth a deeper dive into this podcast very soon).

To find Laura’s podcast with Olaf, scroll down this page to Episode 17 | MAR 7, 2017 | 56:08
Why The First Employee Of Coinbase Launched A Hedge Fund

[19.00] How Olaf got into working at Coinbase. He was the sole front-line customer support until 250,000 users (!). He used an automated initial reply called Roger to help cope with this volume. Then hired support teams using a tough assessment test on Bitcoin (The Bitcoin SAT). (I found this on Olaf’s original Reddit post looking for new staff. Here’s the test. I’d love to see the answers to this!)

[28.50] Becomes Head of Risk at Coinbase.

[30.00] Got deep into the Ethereum ecosystem.

[32.00] Really starts to get excited and Olaf is excited about Golem (a peer-to-peer renting processing power protocol).

[35.00] Laura asks why these projects are creating tokens and not just using Ether or Bitcoin? Olaf argues that these tokens have beneficial network effects in that they help promote the project they relate to. Almost like having shares in the project. Like being an equity owner in a private company. (My interpretation: Their value appreciation is tied to the success and growth of the project. There are also returns such as dividends from some of these tokens etc.)

[38.00] How to decide what are legitimate or good tokens?

Read white papers religiously – does it make sense?
Looks at the codebase on Github
Looks at Github ‘forks and stars’ (are other developers playing with this protocol?)
Talk to founding team

[42.00] What are the reasons that you might pass on an investment?

Where the token doesn’t make sense for the project it’s from. (Is this building network effects or is it not? If not, then it doesn’t make sense)
Where the token’s success is tied 1:1 with the success of the project

[43:40] What are the projects/tokens that he’s excited about right now?

Golem
Tezos

[47:20] There is regulatory risk facing the crypto space.

[49:00] GREAT QUESTION. How do you keep your digital assets secure? Bitcoin, Ether etc.

Industry standard cold storage. Totally new computers that don’t ever touch the internet. Sending a crypto from online to totally 100% offline storage.

[51:10] Why did a VC invest in a hedge fund? This is a unique asset class.

Bitcoin companies have raised 1.4bn in VC funding.
Ethereum-based companies have raised 300m in non-VC money.

Essential advice to my friends and family asking about Bitcoin (BTC)

chanman · Nov 30, 2017 · Leave a Comment

I’ve had quite a few conversations about Bitcoin in the last few days with friends and family, and not surprisingly.

“Is it too late to get in?”

Absolutely not. Yes it’s around USD 10,000 right now but you would have asked the same question when BTC was at USD 5,000 or USD 7,000. In my opinion, Bitcoin’s possible price moves from here could be huge. It’s not a stretch to think that Bitcoin could get to USD 25,000 at some point next year.

“Won’t it all just crash?”

Perhaps. There’s some possible headwinds ahead. If the project lost trust (say through a huge hack like Mt. Gox in 2013), then sentiment would turn from positive to negative.

So that is a possibility. But remember, that’s just one of the possible scenarios.

A good friend of mine talks about the ‘fan of probabilities scenarios’.

What is this? Think of a huge range of possible outcomes and think of these as like a hand-held fan, where there are ‘spokes’ or ‘lines’ that emerge from the centre of the fan.

Bitcoin in the next year or so has the following ranges (non-exhaustive):

It surges to USD 100,000
It surges to USD 50,000
It surges to USD 25,000
It stays at USD 10,000
It drops to USD 5,000
It drops to USD 1,000
It goes to zero.

Each is a possibility and each has a probability.

The tough part here is to judge what the probability of each possible scenario is, and do so objectively.

So, for example, it could go to USD 100,000 but the probability of this happening is smaller that the probability of it getting to USD 50,000 and that scenario has a smaller probability than the chances of it getting to USD 25,000. And so on.

I’m NOT saying, for example, that it WILL get to USD 100,000 in 2018.

But what I AM saying is that I can’t rule it out. It is possible and given the price moves this year and the tailwinds behind Bitcoin, who’s to say that it WON’T happen? It is though definitely LESS likely than the price staying closer to where it is now.

Go in with your eyes open

Bitcoin is NOT an investment.

Bitcoin is a speculation play.

You could make a lot of money, and you could lose a lot of money.

Know this and you may restrain yourself from making some big financial mistakes.

“Maybe it’s better to be in it?”

Okay, I get FOMO. And I’m guessing if you’re asking me about Bitcoin, then you get some FOMO too! You’re looking at the huge price moves and thinking that you want some of those gains.

FOMO is an emotional response. Be aware of this and don’t be swayed by emotions such as greed and lust.

But if you do want some exposure, this leads onto the next piece of advice:

Don’t risk more than you can afford to lose

I’ll repeat: Do not risk more than you can afford to lose.

This is SO important.

Please don’t borrow to buy or trade Bitcoin.

Please don’t sell your house to buy Bitcoin.

Please don’t risk more than if you lost all of your investment, that you’d be in tears about it. It should sting enough to be meaningful enough that your gains are worth it. But not hurt so much that it destroys your life.

Educate yourself

There’s a classic line in investing/speculation: Do Your Own Research

Speak to people who know something about it. If you’re a beginner, ask me about it!

The following articles I’ve written about previously might be helpful:

This is my understanding of how Bitcoin works (simple)

What is Bitcoin? (the beginners’ guide)

It’s just as important to know the limitations and arguments against Bitcoin. I’ve written posts before about ways that Bitcoin might not reach mass adoption, and in which case, Bitcoin might not become the dominant/winning cryptocurrency:

The biggest obstacle I can see that might block mass cryptocurrency adoption

Learn about storing your Bitcoin and keeping it safe

Storing Bitcoin is an essential part of owning Bitcoin. Without a wallet, you literally can’t hold Bitcoin.

Read the following articles re Bitcoin storage:

The 3 best Bitcoin wallets for storing your bitcoin (BTC)

This Wired article shows how difficult it can be to store your Bitcoins securely

Enjoy the ride!

Don’t get too serious about this. It’s a fun ride! We live in an amazing time where technology like the blockchain and cryptocurrencies are available. Soak it up and savour the fact that we live in such fascinating times!

Any more questions, please let me know in the comments below!

This Wired article shows how difficult it can be to store your Bitcoins securely

chanman · Nov 18, 2017 · Leave a Comment

I read this great Wired article by Mark Frauenfelder which was linked to from Autonomous NEXT‘s superb newsletter.

The article is a cautionary tale of how hard it is to store large amounts of Bitcoin safely.

It highlights one of the main differences between traditional fiat currencies and cryptocurrencies.

In traditional finance, if you lost access to USD 30,000, then you would contact your bank and they would verify that it really was you and give you back access to your money.

In cryptocurrencies however, you and you alone are responsible for your cryptocurrencies. If you lose access to them or they’re stolen or whatever, then you have no recourse to recover your funds.

It’s extreme personal ownership and responsibility.

I’ve written before about the possible barriers to mass adoption of Bitcoin and other cryptocurrencies. This is one of those barriers. Imagine that you invested USD 1,000 into Bitcoin tomorrow and in 5 years’ time, that investment was worth USD 25,000. But then you couldn’t access it because you lost your wallet and your passwords and your recovery seeds. You’d be gutted wouldn’t you. Plus, who wants to be responsible for securing sums of money of that size?

This Wired article describes this personal responsibility perfectly, right down to the pit of the author’s stomach and in his sleepless nights.

It also highlights just how important wallets and storage solutions in general are and will be in the future. How many Bitcoins have been lost since 2008? Millions and millions of dollars worth (at today’s prices!).

If anyone is looking for a great opportunity to build something in this space or to invest in in this space, then it’s definitely in the wallet/storage area. If you could build a safe wallet that’s easy to use and can store lots of assets on there, then you’d have a winner.

At the moment, I like Exodus a lot and Trezor a lot too.

Unlike the author of the Wired article, I won’t be keeping USD 30,000 (!) on a single wallet. That’s the challenge as this space matures and prices rise. (that USD 30,000 was actually 7 BTC, which at today’s prices is around USD 50,000!)

How would you store USD 1,000,000 worth of Bitcoin?

Answers and suggestions below please!