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2023 | Book

Understanding Crypto Fundamentals

Value Investing in Cryptoassets and Management of Underlying Risks

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About this book

Saying that many investors were not convinced by cryptocurrencies in their first decade of existence would be an understatement.

Originally, author Thomas Jeegers was one of them. He looked into this new virtual money more than once and, each time, decided not to invest. Like many long-term investors, he was looking for fundamentals. Crypto had none — or so he thought. This book details why his perspective on cryptoassets has shifted – and why yours should, too.

Recent developments in this field have turned crypto from a speculative financial innovation to a new asset class, one with a new kind of fundamentals that offer real economic value. One that will change finance and investments. One that may be a trigger defining the fourth industrial revolution, the same way steam, electricity, and the Internet were triggers for the first, second, and third industrial revolutions, respectively.

Despite what advocates of the traditional financial establishment like to claim, cryptoassets were by far the best financial investment of the last decade, even risk-adjusted, and could still be so for the coming one. They should not be overlooked, regardless of one’s opinion of them.

This book answers the main questions any potential long-term investor in cryptoassets should ask:

What are cryptoassets and blockchain technology?Why consider cryptoasset investments?When is a good time to invest?Where should one invest? How should one invest? Which valuation methods are appropriate?

Understanding Crypto Fundamentals includes a deep dive into the management of risks specific to cryptoassets, both financial and non-financial, and provides the tools needed for investment success in this new asset class. Upon completing the book, you will have a new perspective on cryptoassets and how you can benefit from them as an investor.

Thomas Jeegers is a CFA Charterholder and Financial Risk Manager (FRM), and has earned an MBA from INSEAD as well as multiple blockchain certifications from institutions including INSEAD and Oxford University. He has worked in finance for 10 years and is a frequent speaker at events on blockchain and cryptoassets.

Table of Contents

Frontmatter

Why Consider Crypto Investments?

Frontmatter
Chapter 1. A Brief History of Money
Abstract
The history of cryptoassets, like this book, begins with money. In particular, with the established monetary system. Understanding what makes money and how it has evolved is essential to understand the value proposition of cryptoassets—Bitcoin in particular. Therefore, let us start with the basics by going back several millennia to identify the fundamentals of money. As you will see, they naturally make a case for what is coming next.
Thomas Jeegers
Chapter 2. Complementary Currencies
Abstract
While Bitcoin makes a compelling case against gold as pristine money, Bitcoin is unlikely to replace gold entirely because of gold’s millennia-long cultural establishment. Instead, a more likely scenario is that they coexist, like television did not replace the radio entirely but only took a share of its market. Given recent developments, it will also likely coexist with national currencies, such as dollars, euros, or yen, as a payment medium. In fact, it is already increasingly doing so. Such a system will effectively have multiple currencies (accepted media of payments) running in parallel. While a multiple-currency model sounds unusual, it is a notion that already exists and whose many benefits have been praised for decades by monetary visionaries. This chapter investigates why it is the case.
Thomas Jeegers
Chapter 3. Blockchain As a Force for Good
Abstract
While the previous chapters focused on money, revolutionary promises of cryptoassets extend well beyond the monetary sector. In particular, the underlying blockchain technology can become a force for the greater good through countless use cases. Here is just a glimpse of possible applications and their likely positive impact.
Thomas Jeegers
Chapter 4. Portfolio Management Primer
Abstract
Let us change perspective and look at cryptoassets from a financial portfolio management point of view. This chapter introduces the basics of portfolio management to assess the financial characteristics of cryptoassets. As the analysis shows, cryptoassets have been the most financially attractive investment of the last decade, even risk-adjusted, and could remain so for the upcoming one.
Thomas Jeegers

What Are Cryptoassets?

Frontmatter
Chapter 5. Birth of a New Asset Class
Abstract
While the first part of the book covered why cryptoassets are worth understanding, this second part dives into what they are in more detail. This chapter introduces how the first cryptoasset came to life, why it was meaningful, and what followed.
Thomas Jeegers
Chapter 6. Blockchain Basics
Abstract
Understanding cryptoassets involves understanding blockchain. The first cryptoasset, Bitcoin, is only possible through blockchain, and blockchain was developed to make Bitcoin possible. While alternative technologies were subsequently developed to make cryptoassets technically possible, blockchain remains the core behind most cryptoassets.
Thomas Jeegers
Chapter 7. Cryptoasset Taxonomies
Abstract
Note this book’s recurrent use of the word cryptoasset rather than the more common cryptocurrency. This distinction is purposeful, as cryptoassets encompass many more assets than only those meant to be currencies.
Thomas Jeegers
Chapter 8. Cryptoasset Investment Types
Abstract
For any investment, buying at a low price and selling at a higher price is one form of return, capital gain. However, it is often not the only way to benefit from the investment. Equity investments (stocks) typically also deliver returns in dividends. Fixed-income investments (bonds) mainly deliver returns through interest. Real estate investments can deliver returns through rent.
Thomas Jeegers

When Is a Good Time to Invest?

Frontmatter
Chapter 9. Crypto Trends
Abstract
Timing is critical for any investor, in cryptoassets or otherwise. While timing an investment well is difficult, it helps to understand macroeconomic cycles, cryptoasset-specific cycles, and ad-hoc calendar adjustments. This chapter investigates these cycles and other cryptoasset trends. Not only will this knowledge reassure investors facing the naturally wild fluctuations of their investments, but it will also contribute to some valuation methods investigated later in the book.
Thomas Jeegers
Chapter 10. Prime Time
Abstract
As of this writing, the cryptoasset market is not mature yet. Nevertheless, trends indicate that the sector’s maturity is rapidly improving as the market evolves. This chapter identifies characteristics temporarily holding cryptoassets back. Improvements in any of these characteristics increase the fundamental value of cryptoassets. In particular, cryptoasset prime time will only happen once these characteristics reach a sufficient maturity level.
Thomas Jeegers

Where Should One Invest?

Frontmatter
Chapter 11. Investment Vehicles
Abstract
Investors in cryptoassets need to choose where to invest. Options are available, from pure investment on the blockchain to custodians investing on one’s behalf. This chapter investigates these options and the benefits they provide.
Thomas Jeegers

How Should One Invest?

Frontmatter
Chapter 12. Investment Strategies
Abstract
Literature on investing is abundant, wildly diverse, and sometimes even self-contradicting. In any case, presenting a complete investing framework is well beyond the scope of this book. Instead, this chapter only briefly highlights fundamental principles for new investors in cryptoassets and reminds some words of caution especially relevant to this asset class. This chapter will likely fall short of the expectations of advanced investors, which are thus invited to skip it.
Thomas Jeegers
Chapter 13. Non-Financial Risk Management
Abstract
To make effective decisions, responsible investors should thoroughly understand financial and non-financial risks related to their investments. These two risk categories are different and likely higher for cryptoasset investments than traditional investments, making risk management even more critical. This chapter covers non-financial risks, and Chapter 14 covers financial risks. Besides describing the risks, these chapters also provide tools to mitigate them.
Thomas Jeegers
Chapter 14. Financial Risk Management
Abstract
Similar to non-financial risk, financial risk is higher for cryptoassets than traditional investments. For example, as introduced in Chapter 4, the most traditional measure of financial risk is volatility, expressed as the standard deviation of returns. Downward volatility is another helpful metric used as an input to compute the Sortino ratio, which was introduced in the same chapter. Both metrics indicate risk levels much higher for cryptoassets than stocks, for instance. These increased risks are only acceptable for investors because the level of expected return is correspondingly higher for cryptoassets. In any case, other metrics are necessary to fully understand the risk profile of cryptoassets; where possible, forward-looking metrics are especially beneficial.
Thomas Jeegers

Which Valuation Methods Exist?

Frontmatter
Chapter 15. Assessment Framework
Abstract
Before measuring the value of a cryptoasset, the diligent investor should ask critical questions to identify whether the asset has value in the first place. While the next chapter dives into valuation methods, this chapter covers preliminary questions to filter out candidates for these valuations.
Thomas Jeegers
Chapter 16. Value Investing in Cryptoassets
Abstract
As introduced at the beginning of this book, value investing, or fundamental analysis, focuses on fundamentals. It identifies and measures the pillars giving real economic value to an asset. Value investors compare the asset’s value with the asset’s price and invest when the latter is significantly lower than the former. Gains materialize for the investor when the price eventually converges toward the underlying value.
Thomas Jeegers
Chapter 17. Concluding Remarks
Abstract
As we venture into the unchartered territory of the digital revolution, cryptoassets and blockchain technology are bringing about a paradigm shift impacting the global economy, redefining trust, and reshaping industries across the board. This book explored a wide spectrum of topics and disciplines to understand this new paradigm. It covered monetary history, economics, game theory, technological innovations, portfolio management, risk management, and valuation methods. Indeed, valuing cryptoassets requires understanding each of these disciplines, as they all substantially impact ultimate valuations. This final chapter summarizes the key takeaways from the book and sets the stage for what comes next.
Thomas Jeegers

Appendices

Frontmatter
Appendix A. Precursors of Cryptoassets
Abstract
Despite being sometimes presented as such, Bitcoin did not emerge in isolation. The first cryptoasset had many precursors that either tried to accomplish the same goal or developed similar technology for other purposes. None of them achieved mainstream adoption like Bitcoin, but they directly influenced how cryptoassets developed, even beyond Bitcoin’s conception.
Thomas Jeegers
APPENDIX B. Bitcoin’s Replacement Cost Valuation
Abstract
Chapter 16 explained how electricity costs could be used as input for the valuation of a cryptoasset based on a proof-of-work consensus mechanism. To not break that chapter’s flow, the following computation-heavy example for Bitcoin’s valuation was moved to this appendix.
Thomas Jeegers
APPENDIX C. Financial Products Applied to Crypto
Abstract
Since financial concepts are not as digestible for all readers intended for this book, the following sections have been moved to an appendix. They cover approaches that investors may be tempted to use, in cryptoasset or otherwise, to benefit from potential investments, though with a different risk profile than traditional direct investments. Note, in particular, the important words of caution related to these approaches.
Thomas Jeegers
Backmatter
Metadata
Title
Understanding Crypto Fundamentals
Author
Thomas Jeegers
Copyright Year
2023
Publisher
Apress
Electronic ISBN
978-1-4842-9309-6
Print ISBN
978-1-4842-9308-9
DOI
https://doi.org/10.1007/978-1-4842-9309-6

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