Investing in Cryptocurrencies and Digital Assets (eBook)

A Guide to Understanding Technologies, Business Models, Due Diligence, and Valuation

Keith H. Black (Autor)

eBook Download: EPUB

2024
530 Seiten
Wiley (Verlag)
978-1-394-26864-1 (ISBN)

Infos

A must-read roadmap to analyzing, valuing, and investing in cryptocurrency and other digital assets

In Investing in Cryptocurrencies and Digital Assets: A Guide to Understanding Technologies, Business Models, Due Diligence, and Valuation, alternative investments expert Dr. Keith Black delivers a compelling and straightforward roadmap for analyzing, valuing, and investing in crypto and other digital assets. You'll learn how to buy crypto directly - and how to keep your new digital assets safe from hacks and fraud - and how to invest indirectly, using stocks, futures, options, and exchange-traded funds.

You'll also discover how to conduct extensive due diligence to reduce technology and compliance risks, as well as how to understand the business models that underlie and power these novel technologies. The book also offers:

• Accessible discussions of and introductions to blockchain and distributed ledger technology, stablecoins, Bitcoin, Ethereum, and other foundational concepts
• Ways to differentiate between investing in digital assets for the long term and risky, short-term speculation

An essential new playbook for institutional, professional, and retail investors involved with digital assets and cryptocurrency, Investing in Cryptocurrencies and Digital Assets is the comprehensive and up-to-date guide to the sector that you've been waiting for.

KEITH BLACK, PHD, CFA, CAIA, FDP, CDAA is the Managing Director of Education at RIA Channel, where he creates web-based content on cryptocurrencies and alternative investments. He teaches courses on cryptocurrency investments and investment manager due diligence at the University of Massachusetts.

He previously served as the Managing Director of Content Strategy at the CAIA Association, where he was a co-author of the second, third, and fourth editions of the Level I and II CAIA curriculum. At Ennis Knupp + Associates, Keith advised foundations, endowments and pension funds on their asset allocation and manager selection strategies in hedge funds, commodities, and managed futures. Prior experience includes commodities derivatives trading, stock options research and Cboe floor trading, and building quantitative stock selection models for mutual funds and hedge funds. Dr. Black has served on the faculty at Illinois Institute of Technology.

Dr. Black has written or contributed to over 30 books and refereed journal articles, including The Journal of Wealth Management, The Journal of Trading, and The Journal of Alternative Investments. Dr. Black earned a BA from Whittier College, an MBA from Carnegie Mellon University, and a PhD from the Illinois Institute of Technology.

Textauszug

CHAPTER 1
Money, Banking, and Inflation

Cryptocurrencies are one portion of the digital asset universe. Digital assets include cryptocurrencies and tokenized assets, including real estate, tickets, art, music, equities, and others that can be viewed as money. Let’s discuss some very traditional money and banking economics that describe the current banking system. Later, we will see how cryptocurrencies and digital assets have the potential to improve today’s global banking system.

Our discussion starts with fiat currencies and the history of money.

Thousands of years ago, trade relied on the barter system, which did not build the most efficient economy. Those who worked as farmers produced meat, milk, eggs, or grains as their contribution to the economy. Under the barter system, farmers needing clothing must find another participant in the economy willing to trade clothing for the farmer’s produce. This barter system has a significant search cost, as participants couldn’t always find someone who wanted to take the goods or services they were offering in exchange for the goods or services that they needed.

These high search costs caused many farmers to also chop wood and make clothing, and perhaps some clothing makers to grow their own food. People who weren’t able to trade for everything they needed would produce those needed goods or services on their own. This was a relatively inefficient way to trade.

Eventually, market participants agreed on a definition of money, as it was easier to sell the food for money and use the money to purchase the clothing. This reduced the time it took to search for the person willing to trade for whatever goods or services you had to offer. Marketplaces grew with each merchant selling their goods or services for money in a common location, dramatically increasing economic efficiency and allowing market participants to specialize in the good or service where they exhibited the most skill or enjoyment.

The first form of money was based on commodities such as seashells, gold, silver, corn, or tobacco. Of course, once the form of money was defined in an economy, some market participants stopped making food or clothing and set out in search of gold or seashells. Ideally, the commodity money was relatively scarce, but not too scarce that there was not enough money supply to support the desired level of economic activity.

Money is defined as whatever is generally accepted in exchange for goods, services, and debts. Today, fiat money is currencies defined and produced by governments, such as US dollars, Japanese yen, or Euros. While gold or corn may have some intrinsic value, or use beyond exchanging for the goods and services consumers need, fiat currencies have no intrinsic value. The banknotes and coins only have value because the government says they have value.

Efficiencies increase as an economy moves from the barter system into a commodity money system, and increase again as the economy moves from commodity money to fiat money. Consumers don’t spend time searching for barter partners, and workers can specialize in the goods they produce most efficiently. As specialization increases, productivity increases, and the economy has a greater quantity and quality of all goods and services available.

There are three characteristics of money. Money is a medium of exchange, a store of value, and a unit of account. A medium of exchange is the characteristic of being able to use money to buy goods and services. When consumers arrive at the market, prices are denominated and listed in money: gold, silver, seashells, or US dollars. Consumers with sufficient money can trade it for whatever goods and services can be procured within their budget. Transactions become more straightforward, and the economy benefits from the division of labor.

Money as a store of value allows producers to save the proceeds of their labor and transfer purchasing power from one time period to another. This is easier with fiat currency and commodities such as gold, but harder with perishable commodity money such as food or tobacco. Those who don’t spend their gold or dollars today will be able to buy goods and services at a future date rather than spending all of their income in the current period. Holding commodity money or fiat currency in the form of banknotes does not allow savers to earn interest.

Money is also a unit of account. The listed prices for goods or services are the number of monetary units that the seller will accept for their produce. Consumers have to choose which goods and services to purchase while keeping to their current holdings of money. Producers must determine the price that will be charged for their goods or services in the marketplace. Comparing prices and reducing costs brings economic efficiency into the market.

Once prices are listed in monetary units, economists can track those prices over time. If the price level of goods and services rises over time, there is inflation in the economy and consumers are encouraged to spend their money quickly because rising prices will reduce the future level of goods and services that can be purchased.

Bankers arose to pay interest to savers while lending money to borrowers. Savers were being paid to wait to consume while borrowers were paying more to consume today. Ideally, savers can earn enough interest to offset the decline in purchasing power through inflation, while bankers can earn a positive net interest margin by charging borrowers a higher interest rate and paying depositors a lower interest rate.

Historically, precious stones, gold, silver, seashells, corn, fish, and other foods were used as commodity forms of money. The US was on the gold standard from 1934 to 1971.1 During this period of time, US dollars were convertible into gold at a fixed price of $35 per ounce. The US did not print dollar bills unless there was sufficient gold in the vaults to guarantee this conversion. From 1934 to 1971, dollars could be exchanged for gold at $35 per ounce, as the dollar was a gold-backed currency. Dollars were inherently worth something because they could be traded for ounces of gold.

This limited ability to print money kept the rate of inflation low but also capped potential economic activity. The gold supply was relatively fixed over time, while the demand for economic activity continued to increase. In 1971, as inflation started to increase, President Richard Nixon ended the gold standard. Without its direct convertibility into gold, the US dollar became a fiat currency unbacked by any store of value. Inflation skyrocketed to more than 11% by 1974 and to more than 13% in 1980. Gold moved away from its fixed price regime and was allowed to trade at a floating price. With gold priced at more than $2,000 per ounce in 2024, the US dollar has lost more than 98% of its value as denominated in gold in just 53 years. The price of most other goods and services in the US also rose sharply over the last 50 years, reducing the purchasing power of a single US dollar. Each dollar now buys less milk, fewer eggs, fewer gallons of gas, and less value in the housing market. Each dollar is worth less as the economy-wide level of prices continues to rise.

The paper dollar bills that consumers have in their wallets or bank accounts are not backed by any physical asset. There’s nothing to back those dollars except for the full faith and credit of the US government. The US construct is that dollars are legal tender, meaning that dollars are accepted for US tax payments and for all goods and services sold in the US. Legal tender means that US dollars are required to settle all trades in the US.

Therefore, a vital focus of the cryptocurrency and digital asset community is avoiding inflation or the debasement of fiat currencies. Ideally, this new type of digital money will not have this type of inflation. Cryptocurrencies and digital assets can potentially serve as a stronger store of value than a fiat currency subject to substantial value debasement through the accumulated effects of price inflation over time.

Fiat currencies, such as dollars, euros, and yen, are exchangeable for valuable goods and services because the respective governments declare them to be valuable. It costs governments very little to print currencies, as printing presses can continually crank out $100 bills or 500 euro notes. The ability of governments to print money without limit is mocked by crypto memes, such as “Money printer go Brrr.”

Fortunately for US consumers and investors, the US has a relatively strong financial system. The dollar serves as a hard currency or a safe haven given its history of strong global demand during economic crises. Relatively few currencies serve this role, including dollars, euros, Swiss francs, and British pounds. Even though the dollar has been deemed a strong currency, its value has fallen by more than 97% over the last 50 years due to inflation. Investors need to earn 2% to 3% per year on their savings to maintain the current level of purchasing power over time.

While an average annual inflation rate of 2% or 3% in the US or Europe debases the value of currencies over long periods of time, countries with excess inflation and weak currencies can see purchasing power decline much more quickly. In some emerging markets, governments seek to repay debts or increase spending by increasing the money supply quickly and printing fiat currency without limit. With inflation compounding at more than 600% per year in Zimbabwe or totaling more than 50,000,000% from 2016 to 2019 in Venezuela, people lose trust in the value of the fiat...

Produkt-Details

• Erscheint lt. Verlag: 2.10.2024
• Reihe/Serie: Wiley Finance
• Sprache: englisch
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Schlagworte: alternative digital investments • Alternative Investments • crypto due diligence • crypto investing • crypto risk mitigation • crypto valuation • digital asset due diligence • digital asset investing • digital asset valuation • Investing in Crypto
• ISBN-10: 1-394-26864-5 / 1394268645
• ISBN-13: 978-1-394-26864-1 / 9781394268641