Make Gold Great Again: Tokenized Gold for Retail Investors Unlocks a Next Generation of Gold Ownership

Gold has historically been recognized as the premier hedge against market volatility. As a store of value, the commodity boasts global recognition – an entire industry has been formed to extract, provide services for, and invest in gold. The next generation of gold’s evolution is here today and being powered by a blockchain revolution just starting to climb the J-curve.

How and Why Retail Investors Participate in Gold Today

Gold has long been recognized as a premier hedging instrument against market volatility. Comparing LBMA benchmark prices for gold and the gold ETF (ticker GLD) with daily price returns of the S&P 500 over the last 20 years demonstrates the consistently uncorrelated nature of gold’s performance:

This performance has not required additional position-specific risk, as gold has been able to somewhat match the overall volatility of the S&P 500:

Examining the daily results, I observed how gold performed on days where the S&P 500 was in the red. Based on the last ~23 years of data, gold outperformed the S&P 500 greater than 75% of the time.

Participation in the value of this hedge, however, is not equal between institutional and retail investors. Today’s gold investment options for high net worth (HNW) and retail investors are starkly different, which contributes to unequal asset performance over time. HNW investors enjoy the luxuries of being able to afford custody fees for secure banks (such as those popular in Switzerland), discuss investment options with brokers that will not charge exorbitant fees (as a percentage of the total investment), and obtain liquidity without the use of complex derivative instruments. These abilities enable more direct exposure to gold’s actual performance over time.

Since November 2004, GLD was introduced as an efficient option for retail investors. While GLD enjoys benefits of being easy to access, hard to steal, live pricing, and the ability to garner leverage, many factors reveal inefficiencies in this ETF structure. Retail investors are not able to redeem GLD certificates for actual gold (this option is only available for investors with greater than ~$1,000,000 worth of shares), suffer from counterparty risk related to banks and sub-trustees of the physical supply, and experience performance drag as a result of management fees. Technically, even GLD’s live pricing is based on the trading of shares rather than that of actual gold.

Further, these inefficiencies are illustrated in actual performance data (daily returns). Observing trading performance since the introduction of the GLD ETF, the S&P 500 has been negative 45% of the time. Of these days, the LBMA gold index performed positive relative to the S&P on 73% of days while GLD was positive only 50% of the time. Moreover, average performance during those negative days were better for gold (almost 1% total) relative to GLD.

Looking at a more recent trade, we observe the latest performance of GLD and Gold during the most recent S&P 500 drawdown between 5/3/19 and 6/3/19. As a quick recap, many attribute this downturn to trade tensions between the US and China. Over that period, there were 7 days where gold and GLD were split between being positive and negative. The performance for GLD was ~25% greater than that of Gold during the same period. Although a positive for this specific period, the performance differential demonstrates that the true value of gold is not accurately reflected, especially in quick moving markets.

While certainly an improvement over legacy retail liquidity options for Gold, GLD will one day be a steppingstone to the more improved, tokenized version of the commodity. Tokenized gold enables investors to ‘own’ the index in a seamless manner.

Why Tokenization is Better

The use of blockchain to facilitate gold investments is significantly more efficient than our current system. Most of the questions pertaining to tokenized gold refer to the actual process of ‘tokenization’.

There are several competing systems that are just now coming to market. For example, DaVinci Token works with an LBMA accredited refinery in Switzerland. They have created a proprietary system where nano-lasers are utilized to engrave ID numbers in QR code format on each of the gold coins. New systems in the tokenization process are being created, but the overall idea is that the physical commodity requires a unique identifier to tie it to the digital version.

The benefits of the tokenization process are plentiful. Digital gold solves for the security element of physically owning the commodity and simultaneously the counterparty risk associated with publicly traded ETFs. Other benefits include the following:

  • Access to premier gold offerings at a fraction of today’s cost of ownership;
  • The ability to quickly leverage gold assets either to double down or generate portfolio liquidity;
  • Redemption of tokens for actual gold (most platforms allow you to redeem in 1g units of gold and receive the physical commodity in a few weeks);
  • Minimization of acquisition fees (in some cases it’s $0); and
  • Real time, auditable pricing.

Leverage 2.0

Gold has been the best store of value for as long as investors can remember; however, the trading strategies and liquidity options with tokenized gold will revolutionize the way we think about the commodity.

First, the following are structural improvements to liquidity with the use of blockchain technology:

  • Easier access to loans – Historically, secured lending against gold has required a robust diligence process. With tokenized gold lending, the market will allow (i) a smaller dollar value loans due to the reduced marginal cost of lending and (ii) unify a fragmented market.
  • Avoid High Currency Conversion Fees – Today’s fees for currency conversions typically exceed 5% for situations as simple as a vacation. Tokenized gold could be exchanged at real market prices for any currency in a frictionless manner. Currency stablecoins further reduce costs to the consumer.
  • Access More Traders – With the global nature of the tokenized asset, GLD is unable to compete given the difficulty in accessing foreign investors.
  • Conflict-Free Gold – As blockchain gets tied to the actual production process, it becomes easier to trace the history of each bar of gold and the ecological / humanitarian impact of each mining operation.

Second, with the improved liquidity, various investment strategies can be built in a customized fashion.  

  • Leveraged Lending Strategies – Investment funds can achieve better loan performance against an overcollateralized product without the red tape in setting up the appropriate infrastructure to lend against traditional gold. Gold is a liquid asset with no credit risk, adding blockchain-based liquidity creates an ideal secured lending platform for leveraged debt investors.
  • Investment portfolio adjustments – Get liquidity for more divisible interest in Gold. ETFs must be purchased at an exact share count and coins suffer from other inefficiencies that prevent portfolio optimization.
  • “Reverse the Hedge” – Gold’s cyclical movements resulting from supply/demand imbalances may also be a drag on portfolios in situations where there is downward pressure on prices. If investors feel an upcoming bear market (e.g., those resulting from an interest rate hike, newfound supply, etc.) for gold prices, leveraging their asset to invest in the market prevents a taxable event of selling one’s gold and arms investors with a valuable portfolio optimization tool.


The new generation of gold investors have a lot to be excited about, we can see a number of these platforms gaining significant interest over the next few months. For those excited about Bitcoin, tokenized gold presents institutions with a better form of something they already understand and a real use case. Finally, tokenized gold offers another path for retail investors to minimize gaps in their investment capabilities – i.e., blockchain can enable more and better access to the most widely used hedging commodity in the world.

Crypto Millionaires and the Estate Planning Quandary: Using Traditional Life Insurance Policies to Hedge Downside Risk

The rapid inflation in blockchain-based asset values has contributed to a new generation of “crypto-millionaires.” As of the date of this article, there were 7,046 active addresses with greater than $1.0 million in BTC assets. Back in August 2018, there were approximately 24,000 addresses with greater than $1.0 million in BTC assets. Estimates at the height of the market range from 10,000 to 200,000 addresses with greater than $1.0 million of BTC1. Assuming BTC values grow over the next 2 decades, I expect for this figure to exponentially grow.

A key question for these millionaires is how to create liquidity using BTC (in a world where common goods cannot be purchased without BTC) in a tax efficient manner. Today, utilizing BTC for the purchase of goods and services would require two levels of taxation: (i) income / capital gains tax on the appreciation of BTC and (ii) sales tax. Another unforeseen tax is the estate tax, which is a unique consideration given that many crypto-millionaires had a low cost basis when entering their positions.   

While many structures will likely exist in the future to facilitate tax expediency with blockchain-based assets, I propose a strategy using a traditional universal life insurance policy and loans acquired through a crypto service provider as a means for an investor to both protect against steep declines in blockchain-based assets and boost returns.

Life Insurance Structure

Before going through the math, I wanted to start with an overview of the structure. The graph below depicts the mechanism in 3 stages. The blue boxes represent a crypto service provider activities, the green boxes represent activities of the investor / grantor, and the pink boxes represent activities of a life insurance company.

The first step in the process is for the investor to post their crypto collateral to a crypto service provider. A crypto service provider then secures the assets in their cold storage wallet with multi-signature functionality and lends fiat currency against the crypto collateral. The fiat currency is then used to facilitate a single-premium universal life insurance policy and an 8-year annuity (this is the max allowable LTV based on the math below). The selected universal life insurance policy is structured to provide a return linked to the S&P 500 with a floor / cap of 0.0% / 8.0%.

The investment thesis is to provide a greater rate of return on $5.0 million of BTC while protecting against downside risk. Below, we detail the steps in the process and the sensitize the resulting economics to the investor.

Exhibit 1: The Structure

The Math

The first step in the process is to obtain a loan from a service provider. Currently, you can take out a fiat-based loan against 50.0% of the value of your BTC assets. For example, if you have $5.0 million in BTC, a crypto service provider would offer a loan up to $2.5 million. While the lowest rates offered are around 6-7%, we used 8% in our analysis. The loan proceeds are granted by an investor to an ILIT to avoid the proceeds being counted as part of the owner’s estate.

The amount of the loan required to facilitate the strategy would be $2,347,852. This amount is calculated as 14.5% LTV for the fiat loan (in order to finance the premium payment) plus the amount required to finance an annuity that covers interest payments on the total loan balance ($2.4 million) for the longest period possible (in this case, 8 years). We estimated that the insurance premium for a $5.0 million universal life insurance policy to be roughly $725,0002. Assuming a time to liquidity of 20 years (i.e., death), the annual loan payment would be roughly $240,000.

Exhibit 2: Loan Payment Calculation

Exhibit 3: Financing the Annuity3

Note that the total debt ($2.4 million) was established at a 47.0% LTV.

Phased Approach

In terms of the change in value of BTC, we assumed no growth. Later, I sensitized the results on both the upside and downside. In order to understand the strategy, I broke it down in the following phases:

  • Phase I: Annuity Payments cover interest payments through the initial 8 years. Increasing the number of years would take above the LTV target. These payments would be made at the beginning of the year / period. The annuity payments have another function in that they defer the risk for the underlying collateral base – if BTC has 8 more years to gain liquidity (and one is a believer in the growth story), the annuity offers a valuable strategy to defer the holding cost of holding BTC.
  • Phase II: Annuity payments have ended; therefore, future interest payments would be funded either through liquidation of BTC (given LTV is more favorable as a result of the PI structure of interest payments) or accessing the cash value (discussed below).
  • Phase III: Exit and distribute proceeds to trustees of the ILIT. For the purpose of the below analysis, we assumed that the ILIT would immediately distribute the proceeds on the date of death.

Cash Value

A key component of life insurance policies is the cash value. The cash value represents an internal account within a whole / universal life insurance policy that could be accessed by the owner on a tax-free basis. For a whole life policy, the cash value usually turns positive beginning year 4 or 5. For a universal life insurance policy with a single premium, approximately 25.0% would be kept by the insurance company for fees, and the remaining balance would be deposited as an immediate cash value balance. That amount could be accessed by the grantor for whatever reason, like paying interest due. Day 1, the cash value would cover about 2.3 years of interest ($725k * 75.0% = $534.8k / annual interest). Assuming a long-run growth rate of 5.0% for the S&P 500 over the next 8 years on an annualized basis, the cash value account would be worth $803.4k, covering 3.4 years of payments.

Exhibit 4: Cash Value Calculations

Remember, any loans taken from the balance would be drawn 1 for 1 against the ultimate life insurance payout. In addition, there is no need to take out any funds from this account for the strategy to work, it just provides additional value.


We assumed an exit at the end of 20 years to estimate the net distribution. At exit, the total distribution would be $5.0 million. The remaining payments after the annuity include the loan’s interest ($2.9 million) and tax liability (for the purpose of this analysis, we assume that the cost basis was $25,000 – resulting in a large tax liability of $995,000).

At exit, the trustees would receive the net distributions plus the BTC. Assuming the mechanics above and no growth in BTC, an additional $1.1 million would be added to the value of the estate.

Exhibit 5: Exit Waterfall4


I sensitized the performance of the investment strategy based on growth rates of BTC. Assuming a decline in the value of BTC, the portfolio outperforms given the uncorrelated hedge built into the life insurance policy. Furthermore, the tax liability would be reduced. The net benefit of the strategy works better as we sensitized lower performance. In a worst-case scenario where BTC goes to $0, the insurance policy is still fully paid for.

Assuming an increase in the value of BTC, I note that the portfolio return is greater due to the tax-free distribution from the life insurance policy covering a portion of the increased tax liability. The gains are diminishing if greater rates of return are achieved, without performance drag as a result of the policy.

Exhibit 6: Sensitivity Tables


The wave of crypto-investing we all experienced the last couple of years will need to be monetized in some fashion as investors consider their exit strategies or look to diversify their portfolio. The structure described above can be combined with other mechanisms to either increase the hedge or increase exposure to the underlying crypto. We note that improvements in crypto liquidity in futures markets may one day enable a low risk hedging option for investors that want less asset volatility but still wish to participate on the upside. Additional liquidity would also enable dynamic tactical hedging strategies informed by burgeoning asset management services in the crypto space.

Any strategy focused on providing liquidity to crypto holders should consider optionality for repayments. The approach above considers 4 sources of liquidity: (i) growth in the BTC asset, (ii) cash value principal + growth, (iii) annuity stream, and (iv) deferring a large tax liability5.


  1. Source:
  2. Source:
  3. The annuity was “back-solved” so that the resulting annuity distribution equals the interest on total debt.
  4. Interest after annuity represent the remaining interest payments on debt. We assume they would be paid lump-sum on exit but note they would be paid periodically over the life of the loan. No PIK options currently exist on crypto-based lending platforms.
  5. No transaction fees were considered in the analysis (except the large haircut required for the annuity stream).

Disclaimer: I am not a financial advisor, none of the information contained in this blog post should be considered investment advice.

The Bitfinex / Tether Controversy: Bitcoin Pricing in an Era of Crypto Fraud

It should come as no surprise that Tether’s structure has now garnered the limelight of the NY AG. Previously, Bloomberg reported that the US CFTC sent subpoenas to both parties, a Tether hack back in November 2011, Tether dissolved its relationship with its auditor, a UT study revealed Tether being used to manipulate BTC prices, and so forth. Despite the negative news for the industry, the underlying community remains strong and resilient to such occurrences.

We are now witnessing a “run-on-the-exchange”, a unique test case for Bitcoin Hodlers to prove that the sum of its parts can push through greed’s hold on using crypto for quick, scammy gains. As I type this out, a reported $185 million in BTC and ETH has been removed from Bitfinex’s cold storage wallets – about 20.0 percent of their total total balance. While additional losses (in terms of crypto pricing and faith in the industry) are expected over the short run, I remain confident that the industry players will find ways to effectively manage the risk of these illicit activities.

The history of our community demonstrates powerful forces pushing forward, working collectively on unique solutions that bring us closer to the goal of blockchain entrepreneurs – to create trust and accountability in the digital world. After Mt. Gox, crypto security providers become more popular, a renewed focus on security culminated in the popularity of cold storage solutions, multi-sig authority, and updated private key protocol. Large companies like IBM and Fidelity took the opportunity to release their own technology solutions for crypto custody.

We have also observed the shakeout of ICOs in favor of a more measured, standardized approach to fundraising on the back of blockchain-enhanced infrastructure. ICO deal flow has experienced significant losses over 2018 and the first half of 2019, favored by a variety of STO projects that use blockchain solutions to go to market more efficiently. Scam artists, like those responsible for Centra Tech, are being brought to justice – clearing the way for focus to turn to real projects.

However, progress has all proven to take time and work in volatile cycles. The direct impact on the crypto community has yet to be seen; however, prior fraudulent activity and hacks have lead to negative BTC performance over the subsequent 30 days after an event. The average max drawdown over this period, net of S&P 500 returns for the events listed below, has been about 25% – indicating that we may be in for a bumpy second quarter.

However, after all of these prior events: Bitcoin mining hash rates continue to climb year after year and adoption marches on via new, exciting platforms that demonstrate the potential of crypto technology.

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.”


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  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.
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Top 5 Historical Cryptocurrency Performers Over the Last Year

The top 5 monthly performers have changed quite bit over the last 3 years, we analyzed 30-day returns for the current top 200 cryptocurrencies (by market capitalization) and analyzed some of the top performers 

A notieable change since the 2017/2018 bubble is the decrease in the average traded volume. Looking over the past three years, we observed that both the top 200 cryptocurrencies (blue) and the top 5 (orange) have experienced roughly a 50% drop in average daily volume since last year. The chart also demonstrates that the popping of the bubble began the process of cleaning out crappy / fraudulent protocol (note, I said started, still a long way to go). The top 5 crypto’s percent of total trading volume crept back up since last year, indicating money was moving out of riskier assets due to increased investor attention to detail, regulatory pressure, and other industry factors.

While it is too soon to call a bottom to the issue of volume, the average figures seem to indicate some trading stability is returning . It is also the first time that the average trading volume increased relative to the last quarter. While this could also be associated with trading behavior exhibited towards the end of the year, exchanges are fighting tooth and nail to avoid looming interest rate hike implications and competing to be the best offering.

The table below shows the top 5 performers on a monthly basis for the same period:

Based on the chart above, the top 10 performers were as presented below. The top performer was defined as any monthly ranking in the top 5 chart above.

TickerTop 5Cryptocurrency NameMission
GRS9GroestlcoinInstant & private transactions
RDD8ReddcoinEasier to use for general public
PIVX7PIVXInstant & private transactions
XVG6VergeInstant & private transactions
UBQ5UbiqPayment + decentralized platform
BCN4BytecoinPrivate payments
DASH4DashInstant & private transactions
REP4AugurDecentralized prediction market

Notably, some of the top performers include coins focused on instant & private transactions. The top 10 performers include only 1 crypto was not focused on payments or broad platforms – Jack Peterson and Joey Krug‘s Augur. As utility token companies begin to deploy the insane amount of capital raised for their projects, we may see the successful projects begin to creep up on these charts. Given the recent boom-and-bust raised the eyebrows of institutional players, we can expect decent market trials and venture-esque projects to provide further insight on future winners and losers. 

The often volatile nature of the industry may be quelled by current attention on fomenting stability. The market’s competition on establishing a stablecoin provides additional evidence that capital is getting smarter and key players are finding ways to take advantage of other emerging technologies (e.g., AI/ML, edge computing, virtual/augmented reality, etc.). The above charts illustrate investors may be consistently reward certain industry segments and protocol. However, as always, it is important to keep tabs on all of your names and keep a diversified portfolio – even historically successful names like Bytecoin may potentially be worth $0 at any time.  

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.


4 Takeaways from SEC Registration Charge Settlements with Airfox and Paragon

First Takeaway: The SEC Means Business and is Polishing their Playbook

First, the recent settlement of SEC Registration charges against Paragon and Airfox on November 16, 2018 is likely the first of many civil penalties levied against cryptocurrency businesses. The ruling also represents an important legal precedent where the SEC applied guidance from the 2017 DAO Report of Investigation (Release №81027 / July 25, 2017). The guidance was used to charge both Airfox and Paragon for violating Section 5(a) and 5(c) of the Securities Act by “offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying exemption from registration with the Commission.” PRG and Airtokens were represented as “Utility Tokens” to present themselves fundamentally as glorified Kickstarter projects rather than securities.

The DAO Report set a framework to predict how the SEC would interpret securities law when applying them to ICOs despite labels as a security or utility token. Below are a few of the foundational principles of securities law from the DAO Report applied to capital raising via cryptocurrency offerings.

1) Determination of whether an investment contract exists. A key item distinguished was that the investment of “money” does not necessarily need to take the form of fiat currency. Using ETH to make investments was specifically cited (such as exchanges involving smart contracts). Tokens that fit the Howey test are determined to be securities.

2) Reasonable expectation of profits. Despite the focus on funding development projects, the tokens were presented and structured in a manner where a reasonable investor would have been motivated by the “prospect of profits on their investment.”

3) Benefit derived from the managerial efforts of others. The responsibility for shepherding the raised capital and generation of profit was assumed to be tied to the efforts of the management team. This increases in importance when considering management teams using cryptocurrencies to compensate employees and contractors.

4) Voting rights are a critical distinguishing factor. Based on the structure of these companies, there are a number of limiting items for the overall control of token holders. In addition, given that token holders are often widely dispersed and lack the ability to communicate with one another, there is an even greater burden placed on management to prove their efforts are not being relied upon for economic gain.

5) Information rights are important. Whether it is an unplanned hard fork or change in monetization strategy, it is important for token holders to have a reasonable amount of information to make an informed decision. This is likely to increase the burden on management teams to effectively communicate their results and general business plans in a more structured manner.

Second Takeaway: No Fraud Charges Levied

The SEC charged the two companies with a $250,000 fine and a cease-and-desist order until they can be properly registered. Notably, no criminal charges were applied in either case. This demonstrates that the SEC is focused on establishing registration requirements and enforcement mechanisms to create a more predictable ICO market. While these rulings may not establish a clear bright line on a number of other securities items pertaining to cryptocurrency markets, the blue prints for ICO compliance seem to be coming together.

Third Takeaway: Labeling it as a “Utility Token” Means Nothing

None of the defenses based on the label of a “utility token” were strong enough to avoid the categorization of each token as a security. A utility token is issued in order to fund development of a cryptocurrency and future marketplace where the token would be exchanged for a particular good or service. The legal defense of a utility token to avoid the label of a security is tantamount to comparing themselves to Kickstarter projects. However, the SEC determined that the promise and hope of asset inflation creates a fundamental point of distinction.

Fourth Takeaway: Investor Relations is Important

The SEC consistently discussed the promotional efforts on social media, email communications, blockchain communities / chat sites, and white papers in applying securities law. Similar to virtually every other asset class, the overall communication of the opportunity was evaluated in a legal vacuum to determine whether the tokens were securities and if they were exempt from registration.


While there are likely much more settlements in the SEC pipeline, we are starting to see the development of clear standards for ICO markets. This positive trend will culminate in more clear standards for asset monetization strategies using blockchain technology. Future guidance on the following topics are likely over the next few years:

· Equity compensation rules around distribution of cryptocurrency

· Trading rules surrounding secondary markets

· Liquidity requirements (for instance, escrow accounts held in ETH)

· Information rights

· Voting rights

· Governance structure

· Distributed ledger technology security

· Industry-specific applications (i.e., gambling, gaming, cannabis, etc.)