Are cryptocurrencies a new asset class? This author believes so, although others argue that cryptocurrencies are simply VC-like risk assets best used to forecast movements in traditional stock markets.

However, none can argue that current monetary policies and control of money printing by central authorities have lead to weak money, inflation, manipulation, and loss of purchasing value for fiat currencies.

Study Objectives

1. Review cryptocurrency history, starting with the Cypherpunk movement
2. Define digital currency, Bitcoin, and altcoins
3. Explore portfolio construction with cryptocurrencies

The Cypherpunk Movement

Cryptocurrencies are a direct result of frustration with government policies towards privacy, a movement that began with the rise of the Cypherpunks. 

“Before the 1970s, cryptography was primarily practiced in secret by military or spy agencies. But, that changed when two publications brought it into the open: the US government publication of the Data Encryption Standard and the first publicly available work on public-key cryptography, New Directions in Cryptography by Dr Whitfield Diffie and Dr Martin Hellman.” – Coindesk

Cypherpunk Manifesto

Selected quotes from the Cypherpunk Manifesto:

“Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.”

“We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.“

Notable Cypherpunks

• Jacob Appelbaum – Tor developer
• Julian Assange – founder of WikiLeaks
• Dr. Adam Back – inventor of Hashcash, co-founder of Blockstream
• David Chaum – creator of DigiCash, founder of Elixxir
• Bram Cohen – creator of BitTorrent
• Hal Finney – main author of PGP 2.0, creator of Reusable Proof of Work
• Tim Hudson – co-author of SSLeay, the precursor to OpenSSL
• Eric Hughes
• Paul Kocher – co-author of SSL 3.0
• Moxie Marlinspike – founder of Open Whisper Systems (Signal developer)
• Timothy May – wrote the Cyphernomicron
• Sandy Sandfort
• Steven Schear – creator of the concept of the “warrant canary”
• Bruce Schneier – well-known security author
• Edward Snowden
• Zooko Wilcox-O’Hearn – DigiCash developer, Founder of Zcash
• Philip Zimmermann – creator of PGP 1.0

The Cyphernomicon

The Cyphernomicon, written by Timothy May as an in-depth FAQ, is a collection of Cypherpunk thoughts that reads like the ramblings of a mad man. Not all Cypherpunks agreed with May’s strong views, but in true Cypherpunk fashion, his response to them is:

“I’ve made no attempt to be fair. My libertarian, even anarchist, views surely come through. Either deal with it, or don’t read the document. I have to be honest about this … We are at a fork in the road, a Great Divide – Surveillance vs. Freedom, with nothing in the middle.”

According to May, the Cypherminicron is meant to “fill in some gaps about what we’re about, what motivates us, and where we’re going. And maybe some useful knowledge on crypto, remailers, anonymity, digital cash, and other interesting things.”

Defining Cryptocurrencies

Bitcoin wasn’t the first digital cash birthed from the efforts of the Cypherpunks, but it is certainly the most important – the one that worked.

In the words of Satoshi Nakamoto, the creator of Bitcoin…

The Problem

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

The Solution

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

Source/More: Cryptocurrencies – Brian D. Colwell