I originally wrote this for a friend who was looking to get some exposure to this asset class but since then others have asked for it so I thought I’d share a modified version publically.
First: DYOR – Do Your Own Research. The crypto space comes without the guard rails of traditional finance. You can lose everything, easily, instantly and irrecoverably in a large number of ways. Trust, but verify.
Disclaimer: This is not financial advice, just my best understanding based on years of my own research. None of the links in this article are referral links (i.e. there’s nothing in this article for me personally).
Here are the key components in the ecosystem, as I think of them.
- Bitcoin (BTC) – the genesis of crypto as we know it. Decentralised peer-to-peer money – a bit like BitTorrent but for money.
- Ethereum (ETH) – #2 market cap – added programmability to blockchain, allowing for Ethereum Virtual Machine – basically a totally distributed world computer + database combined. The original foundation for DeFi, NFTs and most innovation in the space beyond the original .
- Other large cap coins – you can see the list here https://coinmarketcap.com/ – each is a whole galaxy to go through but primarily consists of protocols as of the time of writing.
- Protocols (basically, blockchains), split into:
- Layer 1 chains – Bitcoin, Ethereum, Solana – the base layer, should be highly secure but expensive to use.
- Layer 2 chains – Lightning network, Polygon, Avalanche – use various technologies to become ‘side chains’ of the layer 1s. Usually allow for much faster performance and/or cheaper fees. Reconcile down to the layer 1’s in various ways to adopt their security profiles.
- Tokens/coins – many projects are entirely token based for more-or-less valid reasons (as opposed to running their own blockchain, they simply use tokens that sit on other blockchains).
- DeFi – a whole ecosystem of decentralised financial services from replacements for traditional services like exchanges, loans through to defi-specific ideas like yield and liquidity farming, all related to the need for automatic market makers. So much to learn here.
- Blue chips include AAVE, Uniswap, Curve, DyDx
- https://app.enzyme.finance/ is an interesting example – basically a DeFi fund that you can buy into/out of – resembles the sort of fund usually only available to accredited investors but this is available to anyone, fully transparent in terms of what actions the fund takes and consists of.
- Stablecoins – a vital part of the ecosystem. Used by traders to buy/sell crypto and move money around within the crypto ecosystem. Two main types:
- Pegged – typically pegged to USD – this includes the notorious Tether but also USDC and many others.
- Backed – either fully or partially by hard collateral (this is the promise for Diem which birthed as Libra, from the Facebook/A16Z world)
- Algorithmically pegged – still work in progress but very interesting e.g. https://coinmarketcap.com/alexandria/article/how-stable-are-algorithmic-stablecoins-flipside-crypto
- Algorithmic – e.g. https://makerdao.com/en/ and https://www.olympusdao.finance/ – not pegged to a dollar but again either backed or algorithmically ‘stable’ (what this really means is that volatility is programmatically discouraged)
- Pegged – typically pegged to USD – this includes the notorious Tether but also USDC and many others.
- Centralised Exchanges – on/off ramps for fiat currency. These are the traditional centralised exchanges of which Coinbase and FTX are the most reputable. Binance is another huge player but plays closer to the edge (and beyond it) and so is riskier. These exchanges typically offer:
- Buy and sell crypto with fiat (government-issued) money
- Trade crypto including derivative products like futures and options
- Stake your coins (basically earn interest) which on FTX is 8% on the first $10k and 5% thereafter which is pretty attractive
- OTC (over the counter) services for bulk purchases
- Custodian services (they hold your crypto for you)
- Airdrops – the act of retrospectively giving tokens to early adopters/community users of projects with the idea that everyone becomes a stakeholder and keeps using the products and their tokens keep gaining value. These airdrops can be very meaningful but of course involves taking on risk in earlier stage projects.
- NFTs – basically digital collectibles that can represent real world items, financial instruments (Enzyme finance mentioned earlier basically fractionalised funds into NFTs that can then be further traded) or purely digital assets like computer game skins. This is all very frothy at the moment but it’s potentially the way that mass market adoption happens. Think football trading cards or in-game items. Zoom into the future a few years to the metaverse and imagine that these items feel as real as the coffee cup in your hand does now. It’s easy to dismiss NFTs but there’s a lot of potential beneath the surface.
- DAOs – decentralised autonomous organisations – essentially software that controls treasury and uses software-based organisations to decide on how to allocate that capital. Loads of fascinating examples, some mentioned in here – many DeFi projects are DAOs.
- Web3 beyond crypto – e.g. Metaverse https://docs.google.com/presentation/d/1LQh37ToLXktXvXaKUEF1vGjCxqSUnM-PRii6L3Pz0DU/ and https://www.youtube.com/watch?v=fSJg9suRs38. Basically if Web 1 was read, Web 2 was read/write then Web 3’s promise is read/write/own.
- Dogcoins/Shitcoins – there is a whole class of ‘shitcoins’ which is a subjective assessment (some Bitcoiners consider even Ethereum to be a shitcoin). These include projects like Doge, ShibaInu and thousands more. These are extremely volatile and being ‘rugged’ (the developer simply stealing all funds) is a pretty common outcome. Most peter out naturally but some (such as SHIB) have broken through to build a community and returned many thousands of % on investment often in a matter of weeks.
- https://www.lopp.net/bitcoin-information.html <- start here, BTC is the original crypto and everything else is to some extent derivative
- https://www.whatbitcoindid.com/beginners-guide <- more on BTC
- https://advisor.morganstanley.com/meridian-point-group/documents/field/m/mo/moore-smith-bassham-piorkowski/Investing%20in%20Cryptocurrency.pdf <- Morgan Stanley guide to crypto, actually decent.
- https://www.3bit-lab.com/documents/citi-bitcoin-at-the-tipping-point_202103.pdf <- similar from Citi
- https://twitter.com/darrenlautf/status/1434877372700901384?s=12 rich thread of resources
- https://www.ledger.com/academy/school-of-block <- general overview
- https://a16z.com/2021/04/02/nfts-readings-resources/ <- good guide to NFTs from A16Z
- https://www.ledger.com/academy/a-beginners-guide-to-defi-decentralized-finance <- more from Ledger this time on DeFi
If you’re going to hold any assets directly, you need to take security very seriously. If you decide to do this, there are loads of good resources out there but here’s some to start.
- This is a decent overview of high level security protocols at different risk levels: https://twitter.com/jacksondame/status/1451173251175026688?s=12
- This is a solid security guide from one of the most popular hardware wallets in the industry: https://medium.com/@ericlarch/ledger-101-part-1-do-you-really-need-a-hardware-wallet-7f5abbadd945
Alternative investment ideas
There are ways to get exposure to crypto markets without directly buying individual projects. Crypto ETFs are available in some markets e.g. Canada.
- If you’re an HNW or institution, you can also become an LP to a VC fund – this often gives you early, private access to promising projects but of course comes with the usual risks of early stage investing
What are traditional businesses doing about it
- Stripe are hiring a crypto team
- Mastercard are going to support crypto
- Tesla bought a bunch of BTC
- Facebook is going big on digital wallets with Novi – I believe this will roll out on FB/Insta/WhatsApp and also support NFTs which will be HUGE
- Microstrategy is buying BTC
- QIC is looking at BTC
- Blackrock is trading BTC futures
- There is new news daily
From my network:
- https://novuminsights.com/ – family office
- https://unchained.com/ – crypto native financial services
Prominent Venture Capital firms
- Multicoin Capital
- Dragonfly Capital
- 3 arrows – the website looks like nothing but Kyle and Su are two of the smartest folks in the industry and their list of investments is insane
- https://blog.innmind.com/top-20-defi-vc-firms-in-2021/ <- more here to save you some Googling
- Some UK investors detailed on here http://analytics.dkv.global/data/pdf/Blockchain-in-UK-Executive-Summary.pdf – it’s a bit old now but VCs tend to move in slower cycles so should still be a good research jump off point.
News/info sites (usually have a decent newsletter)
- https://www.realvision.com/crypto I actually find their newsletters a bit annoying but the guy (Raoul on Twitter below) is an excellent thinker
- https://technicalroundup.com/ very good trading analysis
What about the environment?
Yes, using energy at Bitcoin scale is problematic. But it’s more nuanced than that – good write up here: https://www.coindesk.com/business/2020/05/19/the-last-word-on-bitcoins-energy-consumption/ and further resources here: https://twitter.com/j_r_rockefeller/status/1459564620356665348?s=21. Good example of how using carbon tax credits + crypto can help drive positive climate action here: https://www.klimadao.finance/ – basically by making it possible to include carbon trading within DeFi – e.g. sell an NFT, it gets automatically offset with no middlemen, etc.
My personal position is this:
- The energy use of this tech is not directly the issue: the issue is that we have unsustainable energy sources, the use of which continues to harm us and our environment regardless of crypto.
- That unsustainable energy mix is symptomatic of broken economics that far precede crypto – banks, big energy and government in a corrupt triptych.
- I believe the programmable economics that are intrinsic to crypto and web3 will allow us to address the fundamental causes of unsustainable energy and will drive a clean energy revolution.
- That the short term impact of proof of work algorithms (Bitcoin and currently Ethereum as well as others) is bad but that the story isn’t as simple as made out. Where there are simply negative impacts I believe those costs are worth it.
- I will focus my activities on Proof of Stake-powered protocols (these use far less energy) to minimise my personal contribution to PoW impacts.
What are the risks?
The risks in crypto are many, exotic and varied and range from individual risk to systemic risk.
This is a decent overview of risk factors: https://www.forbes.com/sites/dantedisparte/2018/07/21/beware-of-crypto-risks-10-risks-to-watch/?sh=533f233a5f17
For me personally the risk I think about the most is around Tether. Some good resources on this:
The Tether risk is largely a price action risk, but the second order effects can’t be ignored – which projects and protocols will survive a dramatic draw down in price?
- https://uponly.tv/ – my favourite one. The guys that host it are pretty casual. Cobie is cryptocobain below and ledgerstatus I know from the WordPress space. They’re fools sometimes but they are EXTREMELY well connected in the industry and have some incredible guests on. You could do worse than just listening to their whole podcast backlog.
- Bankless – authoritative and informative.
- There are a bunch more if you like absorbing content this way.
People to follow on Twitter
Crypto Twitter is a thing. It’s where a lot of the conversation happens. Note that these are generally pro-crypto people.
- https://twitter.com/CryptoCobain <- basically a 30 year old guy who got into crypto years ago and is now a billionaire. Irreverent (I think funny) and in the news feeds for the likes of Reuters and Bloomberg. Very good at calling what the market and trends are doing.
- https://twitter.com/Arthur_0x <- good DeFi guy
- https://twitter.com/i/lists/1161540171407511553 <- list of crypto fund managers
- https://twitter.com/magdalenakala/status/1457017007195361284?s=12 <- good overview of influential folks
How do I learn/stay abreast?
- Read a lot (I use Twitter to learn about stuff and then dive deeper when it makes sense)
- Be part of Discord communities for projects
- Listen to podcasts
- Get some skin in the game. Buy some stuff, learn how to use a wallet and make transactions. I’d start off with Solana as it’s accessible, has an ecosystem that includes DeFi, NFTs, etc, low transaction fees and is mild on the environment.
Have a read and digest of this. Tell me if there’s anything more you’d like to know about!