Pricing Loans on Cryptocurrency Assets

The early stage of the cryptocurrency lending market has dramatically changed in the short time since the birth of the industry. These changes were driven by a combination of digital asset volatility, increased competition, an influx of financial products, and correlation to traditional market events. Investors and lenders are still struggling to find equilibrium pricing on interest rates against the backdrop of high price volatility and reduced demand during the protracted cryptocurrency bear market. Below, we review traditional loan pricing fundamentals and extrapolate what lessons can be applied to this dynamic, emerging asset class.

Loan Fundamentals Review1


Loans are typically priced as a percentage of par value (per $1,000 in most cases). Discounts reflect percentages less than 100% and premiums reflect percentages greater than 100%. Discounts to par indicate that the buyer of the security requires some level of return when they are repaid their principal balance. For example, a buyer of a loan may pay 99% of par ($990) to get $1,000 at some point in the future when they are repaid by the borrower. This specific structure would reflect a return of 1% ($1,000 / $990 – 1) over that period. If the yield of 1% is generally attractive for this type of loan, it would be considered the yield to maturity; i.e., the expected rate of return. If the rate is too low, lenders will not underwrite the loan. If the rate is too high, competition will quickly bring prices down.

The yield to maturity (YTM) is considered the ‘discount rate’ for loans. Generally speaking, the lower the YTM, the lower the risk. The ‘risk free rate’ represents a theoretical return with zero credit risk. In the US, US Treasury rates are typically used as a proxy2. The difference in the YTM for other assets (assuming securities other than Treasuries have greater than 0 risk) above the risk-free rate is considered the credit spread (i.e., credit spread = YTM – risk free rate). 

Coupon Rate

Often confused with the YTM, the stated coupon rate is the interest income paid to the lender by the borrower. The payment can be made in multiple forms:

  • Cash – Reflected as a periodic payment paid as a percentage of the total principal value (i.e., the loan amount) to the lender. For example, an 8% coupon rate on a loan of $1,000 would reflect an $80 payment.
  • Payment-in-Kind – The payment is instead reflected as compounded interest and paid lump-sum on exit. In the example above, the $80 would equal $1,080 total balance due to the investor. These structures typically demand a premium to a cash payment structure given they are utilized by issuers with imminent cash flow needs.
  • Interest Only – Only interest is paid to the lender until the entire principal balance is paid at exit (referred to as a bullet payment).
  • Principal + Interest – Each payment to the lender includes a portion of interest and a portion of the lent capital. This reduces the burden of paying a lump-sum payment at exit. This structure is typical with real estate mortgages.
  • Variable versus Fixed – Interest rates can fluctuate (floating-rate securities are typically used to hedge inflation risk) or be paid in the form of a fixed amount. Historically, the interest rate on these loans are expressed as a rate on top of a floating instrument (e.g., LIBOR, TIPs, etc.).
  • Hybrid – Each of these instruments above may be combined for exotic instruments to fit various needs.

Origination Fees

Fees paid to the lender (or the originator of the deal, I will keep it simple for this post and assume they are the same) for work performed to consummate the deal. The funds go to pay the lender for time spent preparing documents, marketing the loan, covering expenses for legal and accounting, etc. In complex deals, the origination fees are greater.

Origination fees can be paid in multiple forms. They can be paid up front, as a portion of the notional balance (e.g., original issue discounts), or built into some exit fee (usually as a multiple of the amount).

A portion of the interest is paid to a servicer. A servicer performs administrative duties (such as recordkeeping, recording the ledger, etc.) related to the loan. More complex instruments generally require a greater fee. Larger banks may have deals where a lender teams up with a servicer and structures as a revenue-share or a JV model. 

Prepayment Penalty

A penalty imposed by the lender in case there an is voluntary early prepayment of a loan. The fees are assessed on exit; for example, a 1% prepayment fee would mean the lender would need to return 101% of the principal balance if paid before the stated maturity. Exit fees can also be assessed, where a premium or discount is reflected in the final payment. The purpose of these structures is to protect the lender against early repayments, which negatively impacts their ability to find a replacement borrower at the same (or greater) interest rate.

Credit Ratings

A financial scoring system for issuers that provide standardization for risk analysis. S&P’s rating system, for example, goes from AAA down to C. Indices can be measures for loans with the same credit rating to get an average yield. Some of these indices can be observed on the St. Louis FRED system with daily reported yields and spreads3. The ratings typically reflect the probability of issuer default, although more recent models with the advent of P2P alternative lending may reflect a greater breadth of data points (although it is questionable as to which data sets contain statistically significant data with meaningful predictive power).

The intent of credit ratings is to standardize risk and allow for comparability. Typically, both the issuer and the actual loan receive a credit rating. No blockchain-based loan (nor issuer) currently has a credit rating associated with it.

Primary versus Secondary Markets

Primary markets involve the issuance of new securities to investors. Secondary markets involve the purchase and sale of securities after the borrower has sold its shares in primary markets. Secondary markets may reflect updated prices as the YTM changes based on a company’s credit rating over time, macroeconomic changes (such as a liquidity crunch), or demand for a particular issue. Primary market dealers may receive favorable pricing (up to a 50% discount in many cases) for providing liquidity.

Loan-to-Value Ratio

The Loan-to-Value ratio is expressed as the ration of the loan’s principal amount to the value of the firm or asset. For example, a company that takes out a loan of $500 and is worth $1,000 has an LTV of 50.0%. The inverse of the LTV (1 / 50% = 2x) represents the asset coverage ratio.

As the LTV increases, it becomes riskier for the lender and they may compensate by increasing the interest rate or adjusting the loan structure to acquire a greater rate of return.    

Loan Risk

There are four primary risk factors to consider as a lender:

  1. Interest Rate Risk – Loan prices are inversely related to market yields (the coupon rate certainly plays a part in determining price, but the coupon rate is distinct from a YTM). The impact of a shift in rate of return expectations are measured by factors such as duration and convexity (which estimate the magnitude of the change given a change in interest rate expectations). Also, when interest rates decline, lenders worry about the impact of prepayments on their portfolio.
  2. Inflation Risk – The risk that the interest you earn as a lender is less valuable considering future inflation. This risk factor helps us understand why a rate of return is expected even on ‘risk free assets’ such as T-Bills.
  3. Market Risk – Represents the systematic risk of the loan market (e.g., a liquidity crunch).
  4. Credit Risk – An asset specific measure, standardized risk buckets are estimated by credit rating agencies. This factor is more commonly referred to as default risk.   

In order to deal with the risk factors above, derivative contracts have become popular. These contracts are either embedded within loan structures (e.g., calls/puts) or traded in the form of OTC products (e.g., interest rate swaps or forward contracts). Borrowers utilize these contracts to either create more predictable cash flows (e.g., swapping floating for fixed payments) or speculating on future rates (e.g., swapping fixed for floating payments).  

Loan Valuation Methods

Loan valuation techniques are primarily based on cash flow analysis. Given that the structure of the cash flows is predetermined based on the credit agreement (as opposed to estimated in an equity valuation), modeling the cash flows is a relatively straightforward exercise. The key input used to value these loans is the discount rate (i.e., the yield to maturity). The YTM can be extrapolated based on the factors explained above; however, the general build-up to a discount rate will look like (not intended to be drawn to scale) the image below. Like the capital asset pricing model used to calculate the cost of equity, the cost of debt is built using the risk-free rate as the base. On top of that, layers of risk are added based on various, mutually-exclusive risk factors. In the chart below, the YTM is comprised of the risk-free rate, a premium for expected inflation, and an asset-specific risk factor. The combination of the tenor and the asset-specific risk is the ‘credit spread’.

The rates of return for bonds by credit rating are posted daily on the St. Louis Federal Reserve database3. In more private transactions, information on comparable yields are typically harder to acquire given investors benefit from the information asymmetry. However, some companies – such as SPP Capital – post average rates for recent transactions4. Either way, increasing yields (referred to as ‘widening’) point to lower credit quality and decreasing yields (referred to as ‘tightening’) point to improving credit quality.

The YTM deciphered for each asset represents an array of risk factors; however, the primary concern for any lender is default risk – i.e., 100% loss of capital.

Extrapolation to Blockchain-Based Loans

The initial model for blockchain-based loans has been focused on providing liquidity for popular cryptocurrency assets such as Bitcoin, Ether, and Litecoin. This conversation will focus on loan products targeted at these assets; however, I note the expansive universe of securitized assets will soon hit the industry. In determining an appropriate yield for blockchain-based loans, it is important consider a few factors:

First, this is a completely new industry. Granted that Bitcoin has been around for more than 10 years, the initial retail ‘splash’ happened late 2017. A true understand of market risk (from the standpoint of traditional financial theories) has not been developed.

Today’s popular blockchain-based loans are effectively margin loans, the same as those you would have access to in a typical brokerage account5. Interest rates are developed based on consideration of trading liquidity (which is exponentially deeper than cryptocurrency markets), algorithmic / high-frequency trading with sophisticated electronic networks, operating expense margins, and an appropriate margin to the cost of servicing the loan. Given that price volatilities today on crypto assets are 3-4x broad equity indices, the need for a lender to have high-quality OTC and exchange relationships with sophisticated trading functions are a priori.

Another consideration involves estimating supply & demand for various security structures, a process typically known as price discovery (i.e., the notorious invisible hand of the market). The market has evolved so quickly that APRs have declined from greater than 20% at the top of the market to below 10% within a year. This decline is the result of greater competition in the space, low interest rate pricing strategies, and further development of portfolio surveillance and monitoring systems. At some point in the future, capital pricing may begin to reflect equilibrium. Until then, pricing competition between firms may reflect hyper competitive behavior as the market continues to discover itself.

There is also a focus on ‘paying down’ points at origination. In real estate mortgage loan structures, the borrower usually has the option to pay an additional amount to reduce the interest rate on their loan. On average, paying the lender approximately 1.0% of the notional balance of the loan will reduce the interest rate by 0.25%. For crypto loans, there are different methods for a borrower to reduce their interest rate such as the traditional ‘paying down’ points method, membership / token purchase staking, or through increasing AUM on a company’s platform. 

The lack of a securitization and secondary trading market contributes to a slower growth profile of blockchain-based loans. Traditional unsecured credit markets were previously disrupted by a slew of new fintech P2P lending models that could still quickly sell their loans given they had the same look and feel of traditional bank loans. Currently, no market exists for lenders to quickly sell / securitize blockchain-based loans, forcing them to be conservative with underwriting and in developing their risk models. Despite being 100% secured and ~2x collateralized, loans against these cryptos are sold at a premium given the nascent stage of the industry.   

The intent of many cryptocurrency advocates is to reduce reliance on traditional central banking influenced economic models. Given the lack of a central authority influencing the cost of the largest cryptocurrencies (although one could argue that the exchanges, operating costs of miners, and primary markets are currently influencing prices for their benefit6), debates about the concept of a ‘risk free rate’ are now emerging. As the market evolves, it will be critical to observe correlations in traditional interest rates with those in emerging cryptocurrency assets.

Finally, the lack of custody and asset insurance solutions has been discussed in depth since inception of blockchain-based loans. Given the lack of these products, potentially billions of dollars are currently on the sidelines7. Moreover, effective custody solutions are just now beginning to emerge, but it will be years before institutional investors begin to see blockchain-based financial products as a common piece of their investment portfolio. Security audits can and should be mission critical items to review during due diligence.

Final Words

Margin loans are quite risky. If underlying assets fall, it could lead to an uncomfortable situation for the borrower as they either need to come up with the money to add LTV cushion, sell assets, or get liquidated – all at a magnified loss given the interest paid on the loan. The future of blockchain-based loans will depend on a decline in price volatility and maturation of institutional investment administration products.     

While no exact science exists today, the bright future for the cryptocurrency industry will compel the creation of new financial products to accelerate liquidity in this burgeoning market. We see an array of products built this year on the back of crypto technology, such as interest accounts, derivatives contracts, custody solutions, and the addition of many more types of digital assets on these lending platforms. Reaching equilibrium will require an optimal balance of supply & demand, and I believe we are on a long path to its discovery.

Finally, I leave you with a short comparison of blockchain-based loans and two similar loan structures: auto loans and stock portfolio margin loans.


  1. The overview is not meant to be robust, but see the following article on Investopedia for a great overview:
  2. Federal Reserve Selected Interest Rate Data – H.15.
  3. FRED (Federal Reserve Bank of St. Louis).
  4. SPP Capital, see the “Market Update” section on the top right:
  5. Data aggregation of various margin Loan rates today:
  6. See the Bitwise report on the difference between reported and actual trading volumes.
  7. Coinbase Reportedly Secures $20 Billion Hedge Fund Through Its Prime Brokerage Services, July 18, 2018. Coin Telegraph.

The Blockchain Industry’s Next Catalyst: Video Games

By: Daniyal Inamullah

Since the introduction of Spacewar! in 1962, technological progress has had an intimate relationship with the growth of the video game industry. In the “Diffusion of Innovation: How the Use of Video Games Can Increase the Adoption of New Technologies,” the authors research the influence of video games on adoption of this tech, they note1:

“it is the degree of acceptance of the innovation that determines its success or failure … it should not only be accepted because it improves efficiency or quality, but it should be able to be integrated into society’s culture.”

Communication channels are a critical component of how fast technological innovation can be absorbed by society and become ‘normal’ in our daily lives. Drawing from the Spacewar! story, several technological revolutions occurred in the 1960s – all of which had a profound impact on revisions to the Spacewar! software code, applications in game console manufacturing, and expanding a programmer’s vision as they look to implement their next idea. These monumental innovations in the 60s include the first computer mouse, the BASIC programming language, LED, DRAM, and lasers2. Video games made innovation sexy (at least for certain segments of the population), and society demanded more following Spacewar!’s viral response.

The growth in popularity of cryptocurrency assets, prompted by the ICO craze at the end of 2017 opened the door for capital and talent to start seriously thinking about blockchain technology as a distinct asset class. I contend that the success of blockchain-based video games and media applications will be a critical driving force in mass adoption of the underlying technology. Let’s start.

A Short History of Video Games and Technology

The Spacewar! story presents the diffusion of innovation via the world’s first digital video game. One of the initial problems with the game includes the lack of computing power to model gravity’s affect on weaponry; however, programmers rushed to update the initial game software code and made improvements like adding the effect of inertia, scoring, explosion graphics, and even an application for games to be played on a VR headset3. The introduction of the game at MIT was observed, studied, and tested in computer labs all over the world. Games like Space Invaders and Missile Command became increasingly popular as people began interacting more with computers and assimilating them in their culture4. Play Spacewar! here.

Spacewar! Screenshot

Pong was a successor in the video game timeline. It was the first system to demonstrate that computers could be used by the average Joe. The game distinguished itself with its competitive element, breaking previous breakthroughs such as Lunar Lander, Mathematical Games, Oregon Trail that were focused on individual achievement. The game was an immediate commercial success and gaming consoles were shipped to bars, computer labs, and retail markets around the world. The success, however, did not come overnight. One of the creators, Nolan Bushnell, had previously built a coin-operated video game named Computer Space, which flopped due to its complicated controls. Pong was the first to combine the critical elements of a simple interface, amusing play, and easy to manufacture technology5. The success of the platform also motivated the release of the home game console in 1975; a hot Christmas item that pioneered a new industry. Play Pong Here.

Commodore 64 (“C64”), released in 1982, was one of the most successful home game consoles in history. The C64 boasted 64 kb of memory, had a large rolodex of games, a high-quality audio system, and was sold at a whopping price tag of $595! The C64 became a gateway for people to the world of computers, it enabled users to “play many games and … learn the programming language of computers …” by changing the way users interfaced with the gaming systems6.  The distinguishing feature with C64 was that you were able to control the processor directly, allowing users to garner an elementary understanding of software and hardware protocol languages. Another difference was with the marketing strategy. The prior norm was to sell video game consoles in computer stores, the C64 was also sold in discount stores, retail outlets, toy stores, and college bookstores. The natural trend from initial adopters spread to the general public – a sign of acceptance, excitement, and increased diffusion of gaming technologies.

Shatner Pitching Commodore

The US introduction of the Nintendo Entertainment System (“NES”) in September 1986 (which followed the 1983 success of Nintendo’s Famicom model in Japan) illustrates how the mass success of prior video game consoles created industry economies of scale for future iterations. The NES retailed for about $90 (plus $10 if you wanted Super Mario Bros). Even the action set (including the duck hunt gun, a controller, and the legendary dual Super Mario Bros and Duck Hunt game pack) retailed at $150, materially lower than C64’s $595 price tag. The Nintendo value offering, not too different from today, was to offer affordable, high-quality gaming. Nintendo imposed strict controls on its branded games and products in order to avoid the pitfalls of Atari’s relatively low quality games7.

In 1989, Nintendo made another splash releasing its 8-bit handheld video game system. What buoyed Game Boy to be one of the most successful products was timing – the late 80s exhibited the first generation of mobile technology (such as the introduction of CDs, the Walkman, cell phones, etc.) and a new generation of media entertainment (cable television, answering machines, personal computers, etc.)8. In just 27 years, the video game industry trended from a small class of individuals (programmers / scientists) to an almost $5 billion (equivalent of ~$9 billion today) global market9.

Since the Game Boy, the industry grew by expanding connection between players, improving graphics processing capabilities, introducing new types of gaming devices, and increasing the speed of game play. Doom’s release in 1993 improved visuals and game play leaps and bounds past its predecessor Wolfenstein 3D10. The catalyst for Doom’s adoption was a feature to play others in a co-op / deathmatch modes over a network. This also coincided with the release of the world wide web in the early 90s; gaming became an incredible bridge to future network architecture.

Along with the expanded network, PlayStation and Nintendo began their war over control of the console market. The competitive decisions from each side demonstrated differing opinions of value on how the technologies could be utilized for a competitive edge. Nintendo built a technically superior machine, boasting a 64-bit CPU chip and 4MB of RAM. PlayStation, by comparison, had a 32-bit system with 2MB of RAM. Below is a comparison of each console’s value offering11:

N64 vs PlayStation

N64 PlayStation
Cartridge CD
Limited storage / shorter games Longer load times
Struggles with texture and CGI Pixelated images
Terrible controller but included an analogue stick + rumble pack add-on More comfortable grip and sturdy
Super Mario 64, The Legend of Zelda, Goldeneye 64, Perfect Dark Tekken, Metal Gear, Tomb Raider, Gran Turismo, Final Fantasy


The debate between the two consoles was shaped by various business models, technological improvements, and game theory. The market’s invisible hand pushed the industry forward by rewarding consumer research and pushing capital towards innovation.

Today, the market is expected to grow $16 billion each year and gamers from around the world will spend an estimated $138 billion during 201811. Given the sheer size of the industry, niche markets can blossom and companies in the space can earn their investors a solid return given the pace of industry growth. Microsoft’s entrance in 2001 emanated a new battle with Sony over who will be crowned king of the home entertainment system market. The competition started with the rush to achieve dual capabilities – play video games and DVDs (this is also the predecessor to the popular adage – Netflix and Chill). This morphed into competing to which system can play Blue Ray, use Netflix, XBOX Live versus PlayStation Network, TV offerings (PlayStation VUE), motion-based gameplay (WII), VR capabilities, mobile gaming (PSP vs new generation Game Boys), and so on.

While I have certainly missed some evolutions in between, one of the current trends is a shift to an online-only model. Games such as Fortnite, BioWare, and Fallout exemplify a shift where gamers have a more intimate relationship with developers. BioWare’s general manager Casey Hudson noted in an interview with The Verge “We thought, what if we have a game where the whole point of the experience is for everyone to talk about what’s going on right now?12

This model also necessitates a re-thinking of a video game business’s economics. The following questions demonstrate how technological breakthroughs can propel businesses to adapt to innovation. How do companies make money when they need to pay for constant updates? How do they keep coming up with new ideas? Does that mean they need to hire a new team, and do I need to structure their compensation differently? Is the world ready for subscription models for the video game industry? What would be the impact of a single bad release? How do we evolve? Will Fortnite’s free user model continue to work in the future or will they also need to adapt? What technologies will emerge in the future that may displace current projects?

The Future of Gaming Technologies

Given the intimate history between technological progress and video games, a short examination of some of Gartner’s top 10 strategic trends may point us in the right direction for the next generation of gaming13:

  • AI – Gamification may enable AI to learn in different ways, researchers at Open AI used a rewards-based system to study the impact of intrinsically-motivated deep learning14.
  • Augmented Analytics – Just as Netflix initially catered to common TV shows / movies and then moved on to produce their own shows by data mining consumer taste and size, these capabilities will likely be implemented to produce better games and interface design for next generation tech.
  • Immersive Experiences – Evidence of this trend is illustrated by the move to VR headsets such as the Oculus Rift.
  • Blockchain – There exist many applications for video games using distributed ledger technologies such as security for servers, digital id applications, and establishing transaction protocol in digital environments. As a result of blockchain technologies, the economics between gamers and developers may start to converge.

How Blockchain Technology Fits

Today’s most popular crypto-related games include Blockchain Game and Alien Run – any of these applications would also work perfectly without any type of blockchain tech. Ultimately, there are three applications of blockchain in video games15:

  • Rewards;
  • Promotional / marketing; and
  • Gameplay modifiers.

The third category – gameplay modifiers – may be a key catalyst for mass adoption of blockchain tech in the video game industry. Dragon’s Tale is a great example of how cryptocurrencies can be tied in to modify gameplay. Dragon’s Tale presents an array of games to the player (some more gambling than puzzles); winning the game earns the gamer a BTC reward. The founder of Dragon’s Tale was quoted on his vision for the MMORPG16:

“What if there were a … world where everything that you see … that you touch … was in fact some sort of game. No traditional slot machines, card games, dice, but an RPG where your character advances by success at games of chance. Bitcoins rekindled that idea…”

Although the game essentially adds a digital poker chip to the equation, it was an early demonstration of how cryptocurrencies can be tied into gaming.

The success of CryptoKitties after its release during December 2017 shows us another example of how blockchain can be added as a gameplay modifier to improve the user experience. The game allows users to breed and trade digital kittens, like Tamagotchi meets Facebook meets E*Trade. By early December, the most expensive cryptokitty sold for 600 ETH (which was worth $170,000 at the time), although the median price was $917. Why? Ask people that bought Beanie Babies or Pokemon cards. More than 41,000 kitties have been sold and the game at one point accounted for almost 15% of Ethereum’s network power usage18. Based on their 256-bit genome, there are over 4 billion possible variations of cryptokitties. This proof of concept demonstrates the power of blockchain – digital identification tech merged with limits built into a game’s protocol opened the door to a new market.

Fortnite’s success demonstrates the potential for digital asset trading being commonplace – about 69% of Fortnite players (a free game to download and play) have spent an average of $85 to purchase in-game content19. The trading of rare items, unique avatars or gaming skins, in-game currencies, and even in-game private lounges illustrate just some of the unique applications yet to be discovered. Establishing a scarce resource with utility will be one of the fundamental drivers of crypto adoption. Imagine the ability to create your own weapons on Call of Duty, design soccer balls on FIFA, breeding a Pikachu that can Kamehameha, and trace cheaters through application of an immutable ledger. Open source software would allow users to create their own digital assets and sell them – forever changing the relationship between developer and gamer.

Why Gamers will be Critical for Blockchain Adoption

Gamers have historically been the first adopters for technological advances, I see no difference for the growth of the blockchain industry. The popularized monetization model takes advantage of bourgeoning demand for in-game items to an almost $50 billion industry20. There were an estimated 2.1 billion gamers worldwide and forecast to grow to 2.7 billion by 202121. The next generation is spending more and more time on their phones for communication, gaming, and business. As discussed in the history section, gamers are a lightning rod for technological progress and facilitate innovation shaping our culture.

Creating digital assets eliminates the need for a middleperson. GameCredits demonstrates how developers could get paid more and exponentially faster compared with traditional payment models. The idea of the project is to accelerate widespread adoption of decentralized cryptocurrency assets and empower game developers. This process can be replicated in a variety of industries such as legal, accounting, and supply chain. Gaming can be an important test case of how users will interface with the technology and how growth will be cultivated in terms of monetization strategy and user experience.

Who Should you Pay Attention to?

The following is a list of interesting crypto projects in the video gaming space. Disclaimer: This is not investment advice.

  • CryptoKitties: Discussed above
  • Enjin Coin: Platform to empower users with true ownership of their video game development project, fraud prevention, and marketing tool.
  • Spells of Genesis: Magic (the card game) on the blockchain.
  • MobileGo: Incentive / rewards system.
  • GNation: GameCredits above.
  • XAYA: Gaming platform to help games scale, prevent cheating, and eliminate fraud.
  • Ethbet: Old fashion gambling platform without house bias and instant awards.
  • FirstBlood: Competing in daily tournaments with an automated experience.
  • Refereum: Allows gamers to earn rewards for completing quests.
  • GTCoin: Allows gamers to buy game titles, hardware, and in-game content. Their Game Tester platform aims to close the gap between players and developers.
  • Loom Network: An application platform for developers to create scalable games and user-facing DApps built on the Ethereum network. Cryptozombies was a fun couple of days.


Catalysts for the next stage of the blockchain industry’s growth will be driven by both gamers and developers. As some of the above projects and others begin to take off, it will be interesting to see how the platforms interact with one another – will we have another Sony versus Microsoft versus Nintendo battle? Will power and resources be re-distributed to developers and the creative artists of our day rather than the brokers? I certainly hope so. In the words of Amir Taaki:

“Bitcoin was created to serve a highly political intent, a free and uncensored network where all can participate with equal access.”


  1. Hernández, J. F., Cano, P. y Parra, M. C. (2017). Diffusion of innovation: How the use of video games can increase the adoption of new technologies. Sphera Publica, 1 (17), 25-46.
  2. Oxford, Tamsin. 6 Technologies to Thank the 1960s For (2009).
  3. Brandom, Russell (2013). ‘Spacewar!’ The story of the world’s first digital playing game. The Verge.
  4. Spry, Jeff. Firsts: Spacewar! Was the World’s First Video Game. Syfy Wire.
  5. Montfort, Nick. The Sweet Pong of Success (2000). MIT Technology Review.
  6. Mihelich, Peggy. Commodore 64 Still Loved After All These Years (2007).
  7. Lupton, Jonny. A Brief History Of: The Nintendo Entertainment System (NES) (2018).
  8. Brain, Marshall. 12 New Technologies in the 1980s. How Stuff Works.
  9. Shapiro, Eben. Market Place; Differing Views on Video Games (1991). The New York Times.
  10. McCauley, Jim. A Brief History of Doom (2015). Prima Games.
  11. Ell, Kellie. Video Game Industry is Booming with Continued Revenue (2018).
  12. Webster, Andrew. Fortnite has the Most Interesting Video Game Story in Years (2018). The Verge.
  13. Garfinkel, Jennifer. Gartner Identifies the Top 10 Strategic Technology Trends for 2019 (2018).
  14. Greene, Tristan. Researchers Gave AI Curiosity and it Played Videos Games All Day (2018).
  15. Chandler, Simon. Video Games and Blockchain: New Experience for Players or More Profit for Developers (2018). Coin Telegraph.
  16. Sagar, Yayanand. Dragon’s Tale: Vision that Became More than Just Bitcoin Gambling (2017). News BTC.
  17. Chong, Nick. World’s Most Expensive CryptoKitty Sold for 600 ETH ($170,000) (2018). Ethereum World News.
  18. Cheng, Evelyn. Meet CryptoKitties, the $100,000 Digital Beanie Babies Epitomizing the Cryptocurrency Mania (2017).
  20. Curran, Brian. Blockchain Games: The Current State of Blockchain Gaming Technology (2018).
  21. SingularDTV (2018).


With December 2018 Rate Hike Locked In, Headwinds Accelerate for Cryptocurrency Exchanges

CME’s Group FedWatch is currently assessing the probability of a 0.25% rate hike in the federal funds rate to be 82.7%. In the most recent FOMC minutes, the group indicated “Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon.” Compounded with the accelerating hacker problem faced by the exchanges, the long popping of the crypto bubble, and an SEC tightening their grips on registration requirements, exchanges are looking at material headwinds to attract capital.

Major Cryptocurrency Exchange / Platform Hacks

Why do Interest Rates Matter?

The response of cryptocurrency asset performance after last 5 or 6 rate hikes (represented by the dotted black lines below) has had a negative impact on crypto price performance.  The chart below demonstrates that the collapse of the crypto bubble during Q1 2018 coincides almost perfectly with the December 2017 rate hike decision. All subsequent rate hikes had a negative impact on crypto asset performance.

Cryptos Versus Rate Hikes

The interest hikes hurt the exchanges in two ways. First, the exchanges are primarily comprised of non-interest bearing deposit accounts. As interest rates rise, traditional deposit accounts will become more attractive. Second, the lack of a futures / forward market for cryptos means the exchanges are forced to be long commodity / crypto volatility with limited choices for risk management. Another item that compounds the issue is that these exchanges lack cash flow diversification such as fee-based services offered by traditional banks.

One area still unexplored is the impact of an inverted yield curve on the price performance of cryptos. Will they become more popular for individuals given the signal of a future recession? Will retail investors try to avoid Federal Reserve exposure by shifting to more digital asset classes? Per the chart above, the 10-2 spread is now sitting at 0.11%. In the past two decades, the 10-2 spread has never reached this level without the yield curve becoming inverted in the near future. The answers to these questions are certainly not going to be answered in the near future; however, observance of these trends may signal future retail investor behavior – especially as regulatory, security, and customer service standards begin to mature.

Change May be Coming

The innovative spirit of the blockchain community has not turned a blind eye to the problem. Coinbase recently invested in Compound, a platform that enables cryptocurrency holders to earn ‘interest’ on their holdings. The goal of Compound is to created tokenized versions of fiat currencies (like the US dollar). Other players such as the Winklevoss brothers’ Gemini Coin, MakerDao, Tether, and other ‘Stablecoin’ projects recognize the importance of creating a digital asset replicating fiat currency. Key features of a winning technology will likely include a secure platform, low volatility, and corporate governance transparency.


Public Blockchain Companies: Understanding Risk for a New Market

Without the advantage of being part of a reputable VC or Angel group, or actively working on early-stage company investments, public market information offers retail investors with the best knowledge to invest in micro and small cap companies. Due to the asymmetric information and profit potential associated with any new industry, there will always be winners, losers, and fraud. Penny stock trading hacks show that this fraud can be depicted in the form of newsletters, sexy new ‘ICO deals’, fake advisors, and fake thought leaders.

In order to understand this risk, investors typically analyze the trading history of publicly traded stocks and form ratios (e.g., beta, volatility, etc.) to compare. Analysts can then split risk into various categories based on size, geography, industry, and so forth. These ratios are often compared against benchmarks such as the S&P 500 and the Russell 2000 to gauge relative risk of each position. Also, in theory, high risk of a particular stock can be ‘diversified’ through the addition of uncorrelated stocks in the context of a portfolio.

Unfortunately, investors in cryptocurrency assets and companies lack a strong public market to assess these industry and operating risk factors that have been traditionally embedded in the trading prices of public stocks. Since the volatile end of 2017 to the beginning of 2018, investors rushed into the asset class to share in the promises of finding the Treasure of Lima. Comments like “Ethereum and Bitcoin seem to be safe given the attraction of institutional money” or “I’m going to take a shotgun approach and see what sticks” built a guise of both stable and rapid growth, both of which have not played out over the last year.

Rather than focus on the drivers of the market, the intent of this post is to analyze publicly traded companies to better understand risk. We analyzed 29 publicly traded blockchain-focused early-stage companies (Exhibit A) that were primarily pre-revenue in the blockchain industry; the companies trade across various international exchanges such as the TSXV, Nasdaq, and CNSX and on the pink sheets. We then calculated a market capitalization weighted index and observed the Crypto Currencies Index[1] to compare traditional ratios against these two benchmarks. It’s important to remember that these two indices represent different estimates of performance. The average market cap method measures the performance of the 29 selected companies. The CCI 30 index represents performance of cryptocurrency assets. While we would assume the indices to be highly correlated during sharp up and down movements, one area of focus was to see whether there was a decoupling effect between the two asset classes (like the relationship between gold and gold-mining companies) in performance after the recent drawdown of cryptocurrency asset values.

The first chart shows the risk-to-reward ratios (based on calculated weekly performance and volatility since the beginning of 2014) of the 29 companies and the indices. The indices also show greater risk-to-reward ratios, indicating potential benefits of diversification. A majority of the positions illustrate a weekly volatility range of 10 to 30 percent. This implies annual industry volatility of approximately 70% to 200%.

Chart 1 — Plot of Publicly Traded Companies

The second chart illustrates the growth of the market cap weighted index and CCI 30 index compared to the total IPO values (calculated as the market cap on the first trading week) over time. The area chart represents the gross invested capital of each position but ignores and fluctuations in the underlying stock. The indices (represented by the line charts) demonstrate the strong performance of cryptocurrency assets through the beginning of 2018, followed by a sharp fall.

The analysis reveals a few items. First, the trend of asset inflation likely contributed a almost $800 million of new IPO money flowing after the new year. Second, we calculated volatility ratios since the beginning of 2014 (or since inception of the other companies). Calculated off weekly performance, the implied volatility figures were significantly greater than those calculated for general market indices such as the S&P 500 (Exhibit B, at the time of this post the VIX index was trading around 19). In addition, we observed differences in risk associated with business strategy. For example, Hut 8 Mining Corp. represents a relatively recurring revenue type business model. On the other hand, Blockchain Technologies, Inc. is an early stage R&D company focused on applications to IoT. As the industry matures, we expect additional differences and sub-industries to emerge. However, for the most part, it seemed that the two asset classes were fairly correlated over the last 1–2 years.

Chart 2 — New Blockchain Companies

Finally, we wanted to note the obvious shortcomings with the analysis, which include (i) the short trading histories above the different companies, (ii) we ignore invested capital from large strategic companies such as IBM or Oracle, (iii) the private capital markets are substantially larger, and (iv) the initial focus for retail investors has been the currency rather than the underlying equity. Over time, we expect new innovations and industry maturity to allow valuation professionals and investors to increase reliance on traditional valuation tools.


[1] CCI30, Source:, Represents a barometer of cryptocurrency asset performance by analyzing the top 30 market cap cryptocurrency assets (index methodology is located on their website).

Local Economic Analysis


Now that we have isolated a specific zip code, we can begin researching the specific location in order to begin formulating an investment thesis for the specific zip code. We are looking for key value drivers, such as:

  • Local government budget (the area we can focus on is Marietta, GA)
  • Job growth
  • Household income
  • Types of occupations
  • Tax rates


To find some additional information, I went to to acquire additional job and demographic information. While some of the earlier sources we utilized also have similar information, I wanted to present another website with some additional job growth forecast information as well. On the website, we can type in the zip code circled here: splash.png

Typing in the zip code “30067” takes us to the following website, with a summary of Marietta, GA. We can select the “Economics” link on the left to take us to the local economics summary. second page.png

Using the data, I first note the future job growth of 36.0% versus 36.1% for the US economy. In general, Marietta seems to be reflective of the median (or slightly less) of the general economy. In order to drill down on an investment thesis, we need to look at some of the information pertaining to the individuals that currently live there. First, we compared the general income ranges for the Marietta population versus the US population:

Comparison of Income.png

As we can see, Marietta’s population is more allocated to income earners below $50,000 per year. This is seen as a positive since we are looking for potential renters rather than buyers. We will research how to find attractive properties for these specific populations in the relevant zip codes at a later date. Now, lets focus on getting a more complete picture. I reviewed the types of occupations in the zip code and highlighted the top 3:


About half of the population focuses in these three areas. Later on, I will look for information related to where these individuals work, travel time to work, and whether there are more jobs opening in these areas.

Now, in order to look for more information about potential home price appreciation, I like to review Zillow home prices & values information to get an idea of how the market is looking at the zip code. Thankfully, it looks like our screening has come through based on Zillow’s predictions. While I would not consider research done at this point, the following from Zillow validates a lot of our work so far:


One thing that immediately concerns me, however, is that prices have increased about 8.3% over the last year. I may have missed the opportunity to invest or find a good deal. However, the market seems to have an upward trajectory for the time being.


We have found some additional facts to consider for our due diligence, and our nearing the process of actually focusing on finding specific deals. For the next lesson or two, we will focus on the local government and finding any indicators we can to hang our hat on. A lot of the websites out there report general information, we are looking to validate market trends. These next steps will require a bit more rigor as the processes cannot be automated like before.