How to Purchase Ethereum with Coinbase

In order to purchase ether, you need to sign up to an exchange, which is a website what allows anyone to buy and sell Ethereum with dollars, euros, pounds sterling (etc.)
Coinbase is recognised as one of the trusted ether exchanges. They make it very easy to buy and sell ether once your account is setup and verified.
Signup using the green button and you will get $10 worth of bitcoin (approx €9) when you deposit $100 or more (around €90). When you receive this bitcoin signup bonus in your new Coinbase account, you can decide to keep it, or sell it into your local currency – allowing you to purchase ether, or just cash it out.
​You have to do the following before you can buy ether with your Coinbase account:
  1. Verify your identity by scanning passport or drivers licence (anti money laundering laws). Full instructions are available on Coinbase.
  2. Connect your bank account (free SEPA transfers in Europe, no fee purchases), debit or credit card.
  3. ​Transfer euros via SEPA (free, takes usually 2 business days) or with your credit/debit card (instant, not free)
passport verify coinbase identityThe above steps takes a few days normally. It’s a good idea to verify your identity and deposit some local currency into your account and wait to take advantage of Ether price drops.

 

Set Ethereum Price Alerts to take Advantage of Price Drops

coinbase price alertsDownload the Coinbase app for your smartphone – iOS, Android.
Login, then you can set price alerts on the bell symbol on the top right corner of the screen:
At the next screen, click “create price alert”:
Next, use the slider to pick the price target for your ether price alert. You could, for example, set an alert for when ether drops or increases $50/€50/50GBP from the current price. In the example below, I set an alert for when ether goes above €350 in price:
Tap “create alert”, and you’ll be brought to the next screen, confirming that your price alert is active:
It’s good to wait for a little while for a price drop, then buy in with what your comfortable with. This strategy will be discussed in a future blog post.

Coming soon, in this series on Ethereum investment:

  • Should I Invest in Ethereum?
  • Tools to use – Buy, Track and Secure your Ether Investment
  • When to Buy Ether – what is a good moment to purchase Ether?

Should I Invest in Ethereum?

Welcome to the world of Ethereum investing! This guide aims to give you an overview of what you should consider if you’re intrigued about investing in Ethereum but don’t know where to start. Perhaps you’ve heard about Ethereum on the news or from a friend, and would like to read more – in which case, this guide is for you.

For traditional investments, there are standardised, well-understood methods for evaluating whether or not an asset is fairly priced, such as the price/earnings ratio of a stock, or the yield or credit rating of a bond. This doesn’t exist for cryptocurrencies – so how is it possible to determine if they are a good deal? How do we evaluate if they will rise in value in the future?

Your Risk Appetite

It goes without saying that cryptocurrencies are a high risk investment, compared to more traditional investments.  This naturally means that it excludes certain investors from investing, such as those close to retirement. However, for others, the highly liquid nature of cryptocurencies, the global, 24/7 nature of the trading, and the possibility for extremely high capital gains makes them a very attractive investment.

See the image below for Bitcoin’s price over the past number of years. If you bought Bitcoin at the “wrong time” (something which is impossible to predict in advance) you would’ve been at a loss for quite some time afterwards.

Courtesy of 99bitcoins

Benefits of Investing in Ethereum

– The potential for truly enormous capital gains. This is a very attractive reason to consider investment, given the current low-interest rate environment.
Control your funds directly. You can store them offline (known as a cold storage wallet) or on a trusted exchange.
– Once you purchase Ether, there are no middlemen taking a cut of your investment. You are free to buy more, sell as much as you like, send Ether to whoever you like (as long as they have an Ethereum wallet, with almost no restrictions.
– Some countries, such as Germany, have zero capital gains tax on currency, including cryptocurrencies (with certain restrictions). Obviously this situation could change completely in the future. However, there are almost no assets with similar upside to Ether that are lightly taxed or not taxed (check with a local tax adviser to be completely certain).

Read on for a detail description of the indicators you should consider when deciding whether or not to invest in Ethereum.

Indicators to Use

These are long term indicators which I have successfully used in the past when deciding on whether or not to invest. Most of these indicators will not affect the price immediately – the investor behaviour aspect of Ether (and other cryptocurrencies) is quite different to the stock market. For example, recently there were several conferences and Ethereum-related events, well known in advance, however the price still rose around the time of these events – not as soon as they were announced, as it normally does with the stock market.

Below are a list of indicators that I like to use.

  • Leadership
  • POW Mining difficulty
  • Daily transactions
  • Overall market cap
  • Adoption
  • Developer mindshare
  • New exchanges adding Ether support

Let’s explore each indicator in more detail.

Ethereum Leadership

Buying and holding Ether is basically a bet that the Ethereum project leadership is competent, able to execute the Etherem project roadmap as planned (most notably the scaling challenge and the Casper/Proof of stake transition), and is honest. I strongly believe that the Ethereum project team can be relied on for all three.

Individuals such as Ethereum founder, Vitalik Buterin and Vinay Gupta are amazing people to tackle the challenge of moving the world towards adopting blockchains and smart contracts in many aspects of life.

Proof of Work Mining Difficulty

Proof of work is the current method by which Ethereum, Bitcoin and many other Altcoins are secured and can be relied upon to hold your funds securely in a wallet, and send them securely to someone else, without a middleman. It is a very reliable method of achieving this, and it is well understood having been around since the inception of Bitcoin. However, proof of work has one very serious drawback – it requires enormous amounts of electricity to operate a blockchain at the scale of Ethereum or Bitcoin.

In order to “mine” Ethereum, individuals purchase expensive computers and graphics cards, load them up with specialised software, and secure the Ethereum network. They get rewarded in Ether for supplying their computing power (aka “hashing power”). Since miners often spend thousands or tens of thousands or even millions of dollars, euros, yen, etc on computer equipment and electricity, they expect the price of Ether to stay reasonably constant or rise in the future, to ensure the see a return on their investment.

As more and more Ethereum miners are added to the network, the hash rate increases. You can see this effect in the image below.

ethereum network hashrate growth chart
Courtesy of EtherScan

The fact that so many miners are investing heavily in computer hardware is a strong positive signal for the future of Ethereum.

Very important: at some point in the future, Ethereum will switch from Proof of Work (POW), to Proof of Stake (POS). This means that the above chart will no longer apply. I will discuss the potential impact of Proof of Stake/Casper from an investment perspective in a future post.

Daily transactions

Daily Ethereum transactions are a straightforward indicator and easy to understand. However, I would put stronger emphasis on other indicators before this – as some transactions are simply one person moving ether between multiple wallets that they own, or other relatively meaningless scenarios. However, this number risen quickly recently, which overall is a positive signal.

ethereum daily transactions chart

Courtesy of EtherScan

Overall Ether Market Capitalisation

Market capitalisation (or market cap) is the overall value of Ether, calculated by the total number of outstanding Ether multiplied by the current price. This is a weak indicator. However, it’s a headline-grabbing figure for mainstream news outlets, therefore when Ether hits a new high, it gets reported on, which brings more newcomers into the world of Ether investing.

An important date in the future to watch out for is the date when (or if) Ethereums market cap overtakes Bitcoins market cap. This event will likely bring a lot of media attention, and drive the price higher in the short term. You can track the market cap of Ether and many other crpytocurrencies here.

Adoption

Most of the current value of Ether is actually based on speculation, not on real-world usage of the Ether currency or Ethereum based smart contracts. Therefore, in order to live up to expectations and justify a multi-billion dollar market cap, Ether will have to be adopted by mainstream users of the technology.

Some recent examples of Ethereum adoption are listed below.

Enterprise Ethereum Alliance (EEA)

The Enterprise Ethereum Alliance is a very important group in the Ethereum world. It brings together many individuals and companies of all sizes including Fortune 500 companies, startups and Ethereum experts to collaborate on Ethereum projects. The EEA will likely use the Ethereum projects open source code to develop their own applications specifically tailored for large enterprises. Its likely you will hear about many proof of concept projects and gradually mission critical applications, based on Ethereum, being developed and used by the alliance members in the near future.

One important thing to note – enterprises are likely not going to use the public Ethereum blockchain, which is what you use when you buy and hold Ether. It’s likely they will adopt the core Ethereum code, and use it to create private blockchains, for example members-only blockchains between big banks that wish to trade assets with each other more efficiently. This means these etherprises are not buying large amounts of ether. However, the fact that large enterprises are using Ethereums code is a hugely positive signal. I may write more about what private blockchains means for Ether investment in a future post.

You can keep up to date on Ethereum news on /r/ethereum (covers general Ethereum topics) and /r/ethtrader (focused on daily price movements and news that may affect the price).

Asian Exchanges adding Ether Purchase Option in Local Currency

Originally, most of the interest in Ethereum came from the US and Europe. However, more recently some Korean and large Chinese exchanges added support for investors in those countries who wished to purchase Ether in their local currency. Obviously, this is a long term, positive signal, as more investors points to a long term price rise.

The effect of this adoption can be viewed here. At the time of writing, the two top Korean exchanges alone made up over 14% of the daily transaction volume.

Developer mindshare

Ethereum has been very successful at getting developers excited about the idea of building decentralised applications based on the Ethereum blockchain. You can find many examples of decentralised apps here. Whether Ethereum ultimately takes over the world, or gradually fades away will depend on the real-world applications that developers build, therefore keeping an eye on the projects being launched is a very important indicator of future growth.

Initial Coin Offerings – ICOs

Initial Coin Offerings are a method by which blockchain startups can raise funds without going down the typical venture capital route. The startup offers digital tokens to the public – tokens which are often built on top of Ethereum – and has an initial sale. Some time afterwards, the tokens can be bought and sold on secondary markets (cryptocurrency exchanges such as Poloniex), similar to how Ethereum and Bitcoin can be bought and sold. The fact that Ethereum makes it easy for startups to create their own ICOs demonstrates how Ethereum is shaking up the world of startup investment.

Coming soon, in this series on Ethereum investment:

How to Create a Free, Highly Secure, Offline Paper Wallet for Ether

My Ether Wallet (MEW) is a completely free, open source piece of software that allows anyone to create a new Ether wallet. It can also be used to store any Ethereum standard tokens (ERC20 tokens, e.g. MKR, ZRX and many more). As such, you could think of it as an alternative to the popular hardware wallets such as the Nano and Trezor devices.

When you click any link to the MEW website (including the link on this page), be extremely paranoid and treble check the URL so you don’t get scammed with a fake duplicate website.

If you follow the steps below, your wallet is as hack-proof as a hardware wallet, e.g. Nano/Trezor. Make sure that you store the paper wallet securely, because it’s the same as cash when the wallet is loaded with Ether. Imagine having hundreds of thousands, or even millions of dollars worth of cash in your house! This is

  1. Create an offline MEW wallet, on a secure PC which is not connected to the internet (e.g. boot Linux ISO from a read-only DVD). You can alternatively download the latest release from Github, switch off your wifi/disconnect your ethernet cable, unzip the file, double click the index.html page and run the website offline. This is not as secure, but it is more convenient.
  2. Print out the wallet details (this will have the private key, a QR code for the wallet address, and another QR code for the private key). The private key must be kept secret, no matter what. This is what allows you to control the funds. Having the private key = ownership of the funds in a wallet.
  3. Send a small amount of Ether  to the new address. This is to test that you have the correct details (if you bought on Coinbase, use their iOS or Android app to scan the QR code of the paper wallet). The Ether should show up in the wallet within a few seconds (use etherscan.io to search your new address). Sadly, a common problem is users having a typo in the address, in which case the funds are lost forever.
  4. If the test went ok, send the remaining Ether from Coinbase -> MEW.
  5. (Optional) Backup a digital copy of the MEW wallet on a clean USB, that you exclusively use for that purpose. Store the wallet details in a password manager on the USB, e.g. KeePass, Keeweb, (any open source password manager that is kdbx compliant). This is convenient for when you wish to do transfers. Being able to copy addresses from a password manager drastically reduces the chances of having a typo and losing funds. Make sure you don’t accidentally copy these details to another PC or upload them online somehow.

That’s it! if you follow these steps, you can now securely store Ether or Ethereum standard tokens in your highly secure, offline wallet. Storing offline makes it virtually impossible for hackers to access your funds. It also shields you from situations where online exchanges have their funds hacked.

Three Bitcoin Passive Income Stream Ideas – Complete Guide

passive income stream ideas bitcoin

TL;DR:

I am going to teach you three Bitcoin passive income streams, all in one comprehensive guide. The three methods are related to each other. A minimal ongoing time investment per week and a small initial investment are two of the great advantages of these passive income methods.


Be aware; this is a detailed guide. The good news is that it contains all the information you need as well. This post will teach you EVERYTHING you need to know about creating three passive income streams with Bitcoin. You can choose whether to cash out immediately, or to reinvest your profits and experience compound interest growth on your investment. If anyone else is giving away this information, all in one place – I’m not aware of it!

You might be wondering why you should try to create passive income for yourself; Warren Buffett has something to say on the matter:

If you don’t find a way to make money while you sleep, you will work until you die.Warren Buffett, CEO of Berkshire Hathaway

If you want to quickly browse through this post, here’s what we’re going to cover:

  • Part 1 – Background on Peer-to-Peer Bitcoin Lending
  • Part 2 – Passive Income Stream #1 – My own experience with actively lending on a Peer-to-Peer, Bitcoin Marketplace
  • Part 3 – xCoins Review
  • Part 4 – Passive Income Stream #2 – Affiliate Income
  • Part 5 – Passive Income Stream #3 – Lending out Bitcoin Profits on Poloniex

Part 1 – Background on Peer-to-Peer Bitcoin Lending

how peer to peer bitcoin lending works

When a person wishes to purchase Bitcoin in exchange for their local currency, for example, purchasing Bitcoin with US Dollars, Euro, Pound Sterling, etc., the typical way this happens is for the user to sign up to a Bitcoin exchange, verify their identity, verify their credit card, and then purchase Bitcoin. One drawback to this process is that the verification can be slow (in extreme cases, delays of weeks with some exchanges during busy times in the world of Bitcoin, when the customer support teams of the major exchanges become overwhelmed with customer support requests).

Enter the concept of ‘secured lending’ with Bitcoin. The name is slightly misleading – it’s more accurate to call this a marketplace for individual buyers and sellers of Bitcoin – a bit like how eBay brings together buyers and sellers.

This guide will focus on being a seller of Bitcoin on a popular Bitcoin peer-to-peer marketplace. As a seller, there are many advantages to using a peer-to-peer market place to sell Bitcoin. This is how you will achieve your first passive income stream with Bitcoin – with minimal time and upfront investment costs. You will see your first sales within 24-48 hours of getting setup.

Advantages for Bitcoin buyer – Speed and simplicity. The buyer gets their Bitcoin more quickly and with less steps than with a traditional exchange.

Advantages for the Bitcoin seller – sell Bitcoin at a markup to the current market price. The selling process is largely automated, according to the rules you put in place – the total amount of Bitcoin that you wish to lend, the minimum and maximum amounts to lend in any one transaction, the amount of times the buyer has used the service before, and more. This is an extremely simple, yet powerful way to make money in your sleep, with no technical knowledge, and a minimal financial investment- you can start lending with as little as $20.

Part 2 – Passive Income Stream #1 – My own experience with actively lending on a Peer-to-Peer, Bitcoin Marketplace

 

Who is this passive income stream suitable for?

  1. Current Bitcoin holders who wish to sell some or all of their holdings (hodlings!) at a rate 15% above the current market price
  2. Those who have experimented with complicated, risky Bitcoin trading methods (which often require advanced software skills, or lots of time to watch the Bitcoin market all day) and wish to have an easier way to generate an income with Bitcoin
  3. Anyone who wishes to start generating a passive income stream with minimal time and upfront capital investment.

I have been a very satisfied user of a certain P2P Bitcoin Marketplace for over a year now. In this section, I will describe, step by step, the exact process by which I make hundreds of dollars every month, for just a few minutes of my time every week.

Once you complete the initial setup steps (getting your accounts setup), this is the process you follow to continuously make profits from selling Bitcoin:

  1. Purchase Bitcoin on a Bitcoin exchange (takes 1 minute or less).
  2. Deposit your newly-purchased Bitcoin into a Bitcoin wallet in the peer-to-peer marketplace (1 minute or less).
  3. Wait for your Bitcoin to be fully lent out (this is 100% passive, and is handled by the marketplace).
  4. Re-invest your initial investment, plus the fees you’ve earned, into buying more Bitcoin, so your investment grows steadily.…

Note: you can start with a small amount, e.g. $20-$200, and use this to become familiar with the service. As you grow more familiar with the service, you can increase the loan amounts as you see fit. You can also cash out at any time (stopping at step 3 in the list above), which is another big advantage.

Bitcoin is Highly Volatile – How Does this Qualify as an ‘Investment’?

Good question! The beauty of buying, then immediately selling Bitcoin at a markup is that you are exposed to very little price volatility because you only own Bitcoins for a short period of time – the time between the purchase and the time it takes someone to buy them from you on the marketplace. The price paid by the buyer is the current market value of the Bitcoin, e.g. $100 worth of Bitcoin, plus some fees on top (15% over the market price), which is what makes it very attractive for you as an investor.

Usually, large Bitcoin price movements take several days or weeks to play out, so you are exposed only to smaller price movements. If you buy $100 worth of Bitcoin on Monday, usually you’d expect to have most/all of it lent sold by Wednesday – with the cash on in your PayPal account, ready to be reinvested back into buying more Bitcoin with the intention of selling it again.

How Much Could I Make with this Passive Income Stream?

I will use an actual $50 sale to use as an estimate of how much you can make in fees, then run that number though a hypothetical example to demonstrate how you can make.

Here is an actual, real-life example from my account:

passive-income-bitcoin-50-usd-transaction-plus-fees

Explanation (“loan interest” is the key number):

  • Loan collateral = the amount of Bitcoin, in US dollars, requested by the buyer
  • Loan interest = the amount you, the seller, makes from this transaction – 15%
  • Loan origination fee = the amount paid to the operator of the marketplace
  • Payment processing fee = this fee goes to PayPal, so it doesn’t cost you, the seller, any money to receive the US dollar transaction via PayPal

Using these numbers, I plug some hypothetical loans into a spreadsheet to see what I could make from a $1000 initial investment, which I then loan and reinvest out ten times. In this example, I assume that you reinvest 100% of the initial amount plus the fees, so that the investment compounds quickly. I ignore the PayPal transaction fee that’s paid by the buyer, as well as the loan origination fee, which goes to the marketplace.

Note: expect most loans to be in the $20-$200 range, you are not going to lend out the entire $1000 at once!

bitcoin-passive-income-1000usd-compounded-ten-times-at-15-percent

If you start with $1000 in initial capital, invest it 100%, plus all earned fees, after ten loans you will end up with $4045! Not bad! Especially when you consider how little of your time such an investment takes.

The amount of time lending $1000 or more is difficult to say, as it depends how many buyers there are at any given moment. When Bitcoin is in the news, or the price is rising, demand is usually higher and you can expect to make money more quickly.

What are the Risks with Bitcoin Lending?

There are some risks involved with making these Bitcoin loans, as you might image. The two main risk are the Bitcoin price, which I’ve already touched on, and fraud.

Bitcoin price risk – in theory, the price could dramatically shift at very short notice, meaning you buy Bitcoin at a price much higher than you lend out. How to mitigate against this risk – don’t put more than $200 in your marketplace account at any one time, and don’t lend if you feel the Bitcoin price is too volatile at that moment – wait for the market to calm somewhat. Even if there are not many buyers in the marketplace, $200 or so should be lent out within a few days. Normally very large price shifts take several days or weeks to emerge, but if you are looking at a particularly choppy market, wait until things calm down before purchasing and sell more.

Scams – the other obvious risk is the fact that you are using PayPal- which in recent years has become riddled with scammers due to their crazy policies that favour buyers over sellers. In the event of a credit card chargeback, PayPal will be forced to favour the buyer over the seller (even where blatant fraud has taken place). PayPal will refund the buyer, and also charge you a fee.

You can see some of the results of buyer disputes in this example:

passive income bitcoin lending refunds

The good news is that:

  • Disputes are relatively rare
  • If the buyer sends a refund request to PayPal, but not a credit card chargeback, PayPal will side with you. You simply need to follow the instructions that the marketplace provides you with – which involves messaging PayPal support and send them proof of the transaction
  • It’s easy to change the settings in your account to prevent new buyers from being offered your Bitcoin – virtually all of the problems come from first timer buyers

You have to carefully consider these risks before getting involved with Bitcoin lending. Personally, I think the risk is worth it, even if I have to occasionally deal with some annoying borrower who tries to defraud me.

Ok – How do I get setup with Bitcoin lending?

Initial Setup

Step 1. Signup to a Bitcoin exchange. An exchange is where you buy Bitcoins, which you will then lend to someone else. I highly recommend Coinbase* as they’re really easy to use and come highly recommended. You’ll pay a transaction fee for using a credit card to buy Bitcoin, however if you live in a SEPA (Single European Payment Area) country, you can actually deposit your initial investment in Euro to Coinbase’s bank account without fees. Note that you need a passport, driver’s licence or other form of photo ID to open an account with all reputable Bitcoin exchanges.

$10 Coinbase Signup Bonus
*Note: Sign up to Coinbase with >>this link<< and you will get $10 in free Bitcoin when you buy your first $100+ of Bitcoin, as a nice welcome bonus.

Step 2. Sign up for PayPal, if you don’t already have an account.

Step 3. Sign up to the Bitcoin lending website, this is the marketplace that matches lenders and borrowers of Bitcoin. The service I use is xCoins. You can view their FAQ, if you have further questions.

 

Step 4. Change your risk settings according to your risk profile. Go to “Lend Bitcoin > Lending Offers”. This part of the interface is not explained very well. The “Rating” column refers to the amount of times a buyer has used the site – 1 means a first time buyer (highest risk), 2 means second timer, and so on.

It’s probably easiest to explain via a screenshot. You can use this as a jump off point:

bitcoins-to-paypal-lending-buyer-settings-to-manage-risk

Ongoing Activities

As mentioned above, the ongoing activities are really simple and only involve a few minutes of your time each week:

  1. Buy Bitcoin from an exchange – 1 minute
  2. Deposit it in the Bitcoin lending service – 1 minute
  3. Wait for your funds to be lent out – 100% automated. It can take several hours to several days, depending on the amount you are lending, and the demand at the time. Personally I like to log in once every few days to check my balance and to check for messages (in case of problems), but how often is completely up to you. You will also receive email notifications regarding your transactions, so you don’t even have to login to keep an eye on your lending activity.
  4. Take your initial investment amount, plus fees – which is deposited automatically in your PayPal account, and use that to buy more Bitcoin…. return to step 1!
Pros The marketplace has good customer support, clear dispute resolution with detailed instructions to send to PayPal, lending is completely automated, you choose what type of borrowers you wish to lend to, which controls your risk of being
Cons Scams, potential Bitcoin price risk
Initial investment $20 and upwards
Risks Risk of fraud, price risk
Time to start earning Within 1-2 days, often less

Part 3 – Xcoins Review

 

how bitcoin secured lending for passive income works

Xcoins is the service I’ve used to create a passive income with Bitcoin secured lending.

The problem they solve is buying Bitcoin with a credit card or though PayPal, quickly and easily for buyers. Lenders “loan” (in reality: sell) Bitcoin to buyers, at the current market price, plus a fee on top. Xcoins provide a very easy to use marketplace that brings together the buyers and sellers. They provide tools to automate the sale of Bitcoin, so it makes life very easy for buyers and sellers.

Pros:

  • Easy to sign up and get started, as a buyer or seller.
  • Flexible loan amounts, starting from $10-$100s+ (it’s also possible to split a large purchase into multiple, smaller purchases).
  • Automated handling of sales, once the seller is registers and makes the Bitcoin deposit, meaning minimal weekly time commitment.
  • In case of a PayPal dispute, detailed instructions are provided on what exactly to send to PayPal support staff, and evidence is provided in the form of a PDF to send to PayPal also.

Cons

  • Withdrawal fees for Bitcoin are very high currently due to congestion on the Bitcoin blockchain – although this is not something that Xcoins has much control over.
  • Support can be quite slow to respond to support tickets.
  • More work could be done to filter out fraudulent buyers.
  • No way to easily view overall sales activity. A CSV download would be a welcome addition for sellers.

 

Summary

Is Xcoins a scam? No, absolutely not. However you do have to be aware of the risks of using the service – namely that some new buyers are not honest, and may try to deceive sellers by purchasing Bitcoin and initiating a credit card chargeback.

Would I recommend using Xcoins to generate a side income? Yes, absolutely. I’ve been using them for a while now, and while the service is not perfect, the low time investment, and high ROI make using the service a great way to generate a side income from the service.

Make sure you read Xcoins FAQ if you have further questions.

 


Part 4 – Passive Income Stream #2 – Affiliate Income

In order to generate this second passive income stream, it’s necessary to have completed part 2 above – sign up with Xcoins, become comfortable with how it works and make some profit from your initial loans. You can then boost your passive income by referring others to join the service.

With affiliate marketing, it’s very important to be honest and upfront about the potential negatives about the service you are recommending. If you use Xcoins as a seller, you will definitely experience attempted fraud at some point – you need to make that clear if you decide to recommend the service to others. Additionally, the world of Bitcoin and cryptocurrencies in general is very volatile, so this is not something to put your retirement nest egg into! Depending on your age, risk appetite, etc. investing around 10% maximum of your investment portfolio in cryptocurrency-related investments is a decent rule of thumb. Don’t invest an amount money that would cause you to lose any sleep.

Lastly, take into account the context in which you share the information and your referral link. Don’t bombard your friends Facebook profiles or work colleagues LinkedIn profiles with get rich quick bullshit. If someone is not looking to make investments, or is not in a good place financially, this is not a good option for them.

Taking into account the above considerations, here are some ways you can boost your Xcoins passive income via referring others:

  • Offline – tell interested friends or colleagues, and offer to share the link with them
  • Share your experiences on social media – don’t spam!
  • Email interested people in your network
  • If you have a blog, write about your experience and share the link to your blog post on relevant cryptocurrency forums or websites

Steps

  1. Sign into your xCoins account
  2. Go to the “Referrals > Referral codes” page
  3. Create an affiliate code, give it a relevant name, such as “Facebook link”. This allows you to accurately track where signups and transactions are coming from.
  4. Share the link(s) in non-spammy ways, as mentioned above.

That’s it! If you share the link with people who are interested, you will slowly start to see transactions in your account. You can then use the extra, passively-earned Bitcoin earned to:

  1. Loan out on Xcoins
  2. Grow more slowly with Poloniex lending – see passive income stream #3 below!

Part 5 – Passive Income Stream #3 – Lending out Bitcoin Profits on Poloniex

Now that you’ve got some Bitcoin earnings from passive income streams #1 and #2 above, it’s time to consider how else to put your funds to work. Lending Bitcoin speculators on Poloniex is probably the least time consuming form of passive income that I’ve ever come across.

Poloniex is a very popular cryptocurrency exchange. One of the features of this exchange is that speculators can borrow Bitcoin on margin, in order to increase the size of their bets on whether Bitcoin’s price will rise or fall in the short term. The source of these funds is investors who loan them Bitcoin – a need that you can fulfill. You get paid a daily interest rate in exchange for supplying Bitcoin to short-term speculators. Loan offers range in duration from two to sixty days, with most loans ending before their maximum duration.

The good news is that Poloniex manages most of the complicated parts of matching borrowers and lenders, so you don’t need to concern yourself with the nitty gritty details of how the loans work. additionally, I will discuss how you can setup a software bot that handles the issuing of loans for you – automatically!

bitcoin passive affiliate income to poloniex lending

If supplying short-term liquidity to speculators sounds very risky, don’t worry – Poloniex has very strict rules in place to keep your funds safe. Those taking loans cannot move the funds off the Poloniex platform, and Poloniex will force speculator’s loans into liquidation when their position becomes too risky. You can read the full details of margin trading and issuing loans to speculators on Poloniex’s support article on this topic.

How Poloniex Lending Works

  1. Share your Xcoins referral links as described in part 4 above, and people will sign up with your links.
  2. You will receive affiliate income on Xcoins when the people you referred make transactions. At this point, you can decide to cash out immediately – in other words, sell the Bitcoin on Xcoins (just like the funds you deposited yourself) or to try to compound the funds further. If you want to compound your Bitcoin holdings, you can move to the next step.
  3. Transfer your Bitcoin affiliate income from your Xcoins wallet to your Poloniex lending wallet.
  4. Choose the loan terms according to your preference – loan interest rate and duration. The optimal way to do this is by using software that continually scans the market for the best opportunities. You can customise the loan settings according to your preferences by setting parameters in the software.
  5. Cash out your Bitcoin funds to your local, fiat currency. When you do this is completely up to you – if could be after a week, month or year. You can partially or fully cash out your holdings. You can wait until the Bitcoin price is at an all time high. You have total control here.

 

How much can I expect to make issuing loans on Poloniex?

poloniex passive lending daily interest rates

You can view the current and historical Poloniex interest rates on CryptoLend. Typically, your daily interest rate compounds to 19-20% annually, which is an amazing return compared to most other forms of investment.

 

Ok– How do I start issuing Bitcoin loans on Poloniex?

  1. Sign up to Poloniex. You will have to verify a photo ID, this may take some time. It’s best to sign up and verify your account long before you think you’ll need it.
  2. Transfer funds from Xcoins to your Poloniex lending wallet. Login to Poloniex, and go to the deposits and withdrawals page, and select “BTC” to see the Bitcoin address that you need to send the Bitcoin to.
  3. Issue and manage loans – you can do this manually, but it’s best to use software. This is discussed below.
  4. Cash out your funds, when and how you want.

This is what the Poloniex lending interface looks like. Loan offers refers to the current rate at which loans are being accepted by traders. My open loan offers refers to loans you’ve offered to traders, but haven’t been accepted yet. My active loans are loans that have been accepted and are currently accumulating interest for you. You can ignore loan demands.

passive bitcoin loans with poloniex

 

Three Options to Manage your Poloniex Lending Activity

  1. Manually. This is not recommended, as it’s obviously not passive! It involves logging into Poloniex, scanning the loan offers, and deciding if they’re attractive enough or not. You need to do this 24/7 in order to capture the absolute best loan offers.
  2. Polobot. A Poloniex lending bot website, it handles all the technical setup for you, allowing you to choose your settings, and let the software do it’s thing. The downside is that the free version of this software only runs once every four hours – meaning that you could potentially miss some good, high interest loans, which reduces your return on investment. There is also a premium option which updates very frequently.
  3. Poloniex lending bot- Github code (most recommended). This allows you total control over your lending activity. It’s also the most technically challenging to setup, but it’s a one-time activity that frees up your time.

 

How to Setup the Poloniex Lending Bot

You need to host your lending on a 24/7, always-on computer in order to capture the best loan rates. To minimise your costs, I suggest using either a cheap VPS, such as Scaleway (which I use), or a cheap computer like the Raspberry Pi (annual electricity costs are about the same as an expensive coffee) which is very efficient with electricity consumption. Using your main computer is not recommended as it’s unlikely you will leave it running 24/7 – and it would be very expensive to do so.

Install Ubuntu server and follow the instructions in the documentation. You need to make sure you enable the option to run the software at startup, otherwise you will need to manually restart the bot every single time that you turn on and off the hardware, or after a power failure or other unforeseen event.

You can follow this video for instructions on how to configure your bot settings:

 

Further reading

Lending strategies

Poloniex lending bot full documentation, including full set up instructions.

Get support from the Poloniex lending bot subreddit.

 

Pros Once setup, very low time investment

Zero risk of fraud from borrowers

Advanced software is available to handle the loan management

Cons Poloniex takes a 15% fee from the daily interest you earn

Some technical activities are required in order to maximise long-term profits and reduce your time investment.

Initial investment 0.01BTC minimum
Risks Potential risk of Poloniex getting hacked or going out of business, meaning you could lose your funds, in theory. This risk is low, but it’s worth considering.You are exposed to the long-term price risk of Bitcoin (or other cryptocurrencies) that you hold.
Time to start earning Immediately

I hope you enjoyed this guide! You now have enough information to set up your very own passive income streams with Bitcoin

Ether Investor In Focus: Olaf Carlson-Wee, Polychain Capital

ether investor olaf carlsson wee polchain coins and notes

ether investor olaf carlsson wee polchain coins and notes

One way to research your investments is to look at what knowledgeable investors are doing. Many investors in the traditional finance community look at what Warren Buffet, the so-called “Oracle of Omaha” is investing in, and listen very closely to advice his gives on how to conduct analysis on his investments before pulling the trigger. Buffet’s investment vehicle, Berkshire Hathaway, has generated 20.8% annual compounded returns from 1965-today, a staggering return, handily beating the S&P500 over the same time period.

With this in mind, it’s useful to look at the investment research process conducted by experienced players in the world of cryptocurrencies.

Below is a video from Youtuber ‘MrYukonC’, who is someone well respected in the Ethereum community, discussing how and who to follow when it comes to crypto investing advice. Around the 6:40 minute mark in the video, he starts talking about how to invest in Ether. It’s well worth a watch, and look at the notes I’ve made under the video.

Later on, I will dive into specific points raised by some investors mentioned by MrYukonC.

MrYukonC on following successful Ether investors

Video notes

6:40 – Buy Ether and Hodl!

Bitcoin over past 8 years has taught us – time is on your side, just hold onto your tokens. Don’t bother trading in and out of your position. Dollar cost average into the position and hold (hodl!). Averaging into a position insulates you somewhat from volatility and is especially useful for younger people.

7:45 – ICOs and Ethereum

Ethereum is here to stay.

ICOs are extremely hot at the moment, so extreme caution is advised. Do lots of research – read the whitepaper, look at the team’s background, ask around. There’s lots of misinformation is out there – people spreading false information.

9:50 – Follow respected people in the cryptocurrency space

Two examples of respected investors are cited:

  • Olaf Carlsson-Wee, founder of Polychain Capital – more details below
  • Fred Wilson, of Union Square Ventures

12:15 – Only purchase ICOs where value flows back into the governance token

– Ethereum, Maker, Augur/REP, handful of others

Looks at Polychain’s account to see what they’re invested in.

Talks about following the strategy of successful people, to follow what they’re doing and contrast it to what he’s doing.

Only buy cryptoassets where some value flows back into the governance token, where the holder of the asset is rewarded with fees/dividends. DGD, Maker, Augur REP are examples of this.

Next, let’s explore some in-depth statements that Olaf-Carlson-Wee has given about how he thinks about his investments, why he believes that funded open protocols are the future of the internet, what he looks for when making investment decisions and how he conducts research.


Podcast: Interview with Olaf Carlson-Wee and Chris Dixon of a16z

Interview link

What is covered in this podcast? In-depth conversation with Carlson-Wee, founder of Polychain Capital, and an early employee of Coinbase, alongside Chris Dixon, who is a well-respected venture capital investor with a16z and financial backer of Polychain.

Carlson-Wee discusses investing investing at the protocol layer, not at the application layer. He and Chris Dixon contrast it to investing in the internet in the mid-90s.

Application layer of the internet = Amazon, Yahoo, Google, eBay – specific user facing applications that regular people use.

Protocol layer of the internet = HTTP, TCP/IP – a layer below the application layer. Not possible to invest in the protocol layer of the internet. Protocol layer is what’s necessary to have a functioning application layer.

Compares buying Bitcoin vs Coinbase. Simply buying Bitcoin would’ve produced similar returns to investing in Coinbase, and isn’t just restricted to venture capitalists (anyone can invest in Bitcoin).

Ether has grown approx x100 in value since launch.

Crowdsale app token launches based on Ethereum’s protocol have raised over $300m to date.

Golem example given of a new marketplace for buying and selling CPU cycles, using Golem network tokens as currency. This is effectively owning equity in a p2p protocol – and betting that it’s popularity will rise.

Often [with new open protocols] there isn’t a company you can invest in – only way to invest is to purchase the token. Contrasted with Linux foundation – which most of the web and smartphones in the world reply upon, yet was/is impossible to invest in, as Linux wasn’t a company. A problem for foundations like Linux is that they must continually raise donations, despite the enormous importance of the work they do. Heartbleed bug – SSL foundation must beg for money despite importance. Open protocols for the web are therefore neglected.

Now there is an opportunity for open protocols to be funded. Creators of new open protocols make lots of money by contrast – effectively Series A (initial venture capital round) for open protocols. Flip side – users of P2P networks are equity holders. Centralised web services Amazon, eBay etc – value doesn’t go to users, only a central entity.

With new token funding model, value flows back to the users, creating extremely strong network effects. Users of centralised services like Facebook and Uber (even power users) are not fanatical about the service, unlike e.g. Bitcoin users.

Current open web protocols: Email – STMP, Internet – HTTP, TCP/IP, HTML.

Very few open protocols developed in the past 20 years, most were developed >20 years ago. This was a Golden era of open protocol development, funded by governments and academia. No capitalist model.

More recently, huge shift to centralisation of power to private companies, dramatic drop off in open protocol development.

RSS was a recent open, social protocol that showed promise in the 2000s. Could’ve rivaled closed social platforms like Twitter and Facebook. Lost to closed platforms. Battle of open v closed in social, closed won. One possible reason is that closed won is they had all the funding and developer talent and better business model.

Open is now developing its own business model, may shift energy and funding in this direction. New funding mechanism – app coins, new infrastructure – blockchain and mining. Open software has existed for some time, open services is new. Blockchain mining is like an open AWS. Public infrastructure, usable for all sorts of things. No central control, can’t be cut off. A developer can develop an app on top of Ethereum secure in the knowledge that no one can pull the rug out from under them.

Growing Linux userbase didn’t increase funding. Need to raise funding indirectly (donations, corporate sponsorship).

Trust. ‘Trust no one’ is baked into blockchains. Assuming that scams and thievery is ongoing and attacking the network constantly. No central authority to shut down transactions. Anyone can participate.

How do you know which projects matter and should get investment? This is Polychain Capitals main task every day. Bitcoin scripting language is very limited. Ethereum has Turing complete language – you can build any application with it. Bitcoin blockchain is only for storage and transactions but Ethereum’s blockchain can do almost anything. Advanced features are possible. Solidity is the language, similar to Javascript.

App specific tokens and new blockchains.

Mentions Tezos – new blockchain. Proof of stake consensus model. Holders of coin act as miners (they validate transactions). Most interesting thing is that the governance pushed to holders of the coin, at protocol level. Decisions about upgrades doesn’t come from closed group of miners or the protocol developers, where it’s opaque, it comes from protocol level, people vote with their coins. Protocol changes based on their decisions – similar to stock holders in a company. Much more democratic. Has a turing complete scripting language.

Example of an application specific token (appcoins) that’s interesting – Maker (symbol: MKR).  Governance and insurance system for a new type of coin that is pegged to the value of the US dollar (called a stablecoin). Because of speculation and trading, most cryptocurrencies are extremely volatile, for many scenarios this makes them unsuitable (escrow, crowdfunding are two examples). This leaves room for a stablecoin that doesn’t change in value. Naive way to achieve this is to have $10m in a bank account and peg the stablecoin to that – however this negates the value that blockchains offer (not decentralised, can be shut down easily, etc). Maker is very ambitious, high chance of failure, but what they are attempting is a system of smart contracts on the ethereum blockchain which create a stablecoin. This coin is pegged to USD. You can then do transactions on the blockchain that you know will hold their value. Anyone in the world can buy Maker, you can get venture capital-type returns if you pick the right coin. Early Amazon investment for example was only available to a small group of venture capitalists, however MKR is open to anyone. MKR is mostly traded on a decentralised exchange (comparable to a decentralised Nasdaq).

Overall theme is bringing capitalism to open source. Why have a hedge fund like Polychain though? Reason: this is an obscure field right now. This is a high risk investment, lots of these assets have declined in value. Those who don’t invest professionally are not recommended to do this.

As an asset class, you can invest in units of protocols – equity ownership in open source projects. When Polychain wished to purchase MKR tokens, there was no legal entity, pure open source project and no bank account. Polychain had to send Ether, in order to receive MKR, no bank account involved. Brand new asset class, totally uncorrelated with equities, bonds, emerging markets, oil, etc.

Polychain’s staff read whitepapers religiously. Bitcoin and Ethereum have famous whitepapers. These define how the new protocol should work. Then they talk to the developer team.

More broadly, they (Polychain) are interested in a stack of technologies that recreate how the current centralised services work, but in a decentralised way. Centralised platforms are built on a massive stack of tech, e.g. DNS, server/client architecture, etc. Needs to be built out in order to have Twitter the protocol, Uber the protocol, and so on in order to compete with centralised companies. So the low level of the internet stack (building blocks) is what they invest in. IPFS project aims to create a decentralised server architecture. Swarm aims to build decentralised apps, similar to Ethereum. Ethereum Name System (ENS), works similarly to DNS, maps “.eth” domain names to smart contract cryptographic addresses. All these underlying technologies need to be in place before application-specific tokens (apptokens) used by normal users can flourish. Polychain also invests in “middleware”, e.g. Golem. Not used by regular users, but by developers. Golem runs on top of Ethereum. Using Golem and Filecoin, developers can build complicated, emergent applications. Too early for viral, end user app tokens. What technologies will enable that?

What are the challenges to be overcome for this vision to become reality? Brand new tech, not just facing market challenges, they’re facing hard technology challenges, sometimes the challenge may be literally impossible to solve. Something like Ethereum was not simply a matter of time, no one knew it was possible. Creating things that didn’t exist, may be totally impossible in some cases. Thousands of developers are needed to build the decentralised web stack, and because of Polychain and those like them, more funding is becoming available. Matter of time before some of these projects become the next era of the internet.

What about the problems of coordination, are there challenges unique to these open source projects? In open source projects, the arguments are in the open, in private companies it happens behind closed doors. Conflict resolution is build into blockchain protocols – miners can vote on Bitcoin’s blockchain via their hashing power. Tezos is an alternative governance mechanism allows one coin=one vote democracy.

Lots of competition as this is a growing asset class.

Long term vision is where the web is owned by users of the web. Privacy, data mining, and pseudo-monopolies are huge problems today. Wave of technologies are emerging where the pendulum could swing in the opposite direction. You own your data, you decide what to share with services, which will be p2p services owned by the users. All the wealth generated by VCs and entrepreneurs of centralised companies, will get pushed back to everyday investors and most of the value will go to early adopters and users of these platforms and protocols instead of owners of web platforms.

Emergent behaviour. Easy to compared the early days of cryptoassets to centralised web platforms – it’s what we know. Internet wasn’t a digital library, it was much more that was impossible to predict in advance. Therefore cryptoassets will allow things currently unimaginable, just like the internet did. Biggest things that will emerge are ont currently imaginable.


Podcast 2: Interview with Olaf Carlson-Wee on Forbes Unchained Podcast

Interview link

1:30 Polychain is a hedge fund that invests exclusively in digital assets. Invests in protocols not companies. Invests in things made scarce through the blockchain.

Polychain is a hedge fund that invests exclusively in digital assets. Invests in protocols not companies. Invests in things made scarce through the blockchain.

Investing in protocols – Satashosi Nakamoto solved Byzantine Generals problem, thereby creating digital scarcity. With Bitcoin, funds are definitely transferred – solving the double spend problem. Not possible to copy and paste Bitcoin. Created a whole new area of innovation. New platforms are emerging to allow almost anyone to launch tokens/scarce digital assets. That’s what Ethereum offers.

3:50 Security of a blockchain is 1:1 with it’s market capitalisation. When launching a new blockchain, it’s vulnerable in early stages. Therefore launching on top of another blockchain that has solved these problems is very valuable.

4:30 Terminology used- Cryptoassets, Blockchain-based assets. Trying to shift the perception that Bitcoin/blockchain technology is limited to money or currency- this is not the full picture. Ethereum offers much more than value creation and transfer. Offers the ability to create arbitrarily complex pieces of software on the blockchain.

5:45 Examples of things that Ethereum enables. Ethereum has a Turing complete scripting language. Bitcoin’s language is deliberately limited, only possible to store and transfer value. Ethereum’s scripting language means you can build much more complicated financial contracts. Known as smart contracts. Gives example of playing blackjack against a smart contract. Taking actions in the game (in blackjack lingo – standing, hitting, shuffle) means interacting with the state of that smart contract. Possible to win (and lose) Ether playing against this smart contract.

8:30 Polychain Capital Details. Currently around $15m assets under management. Investors – Andressen Horowitz, Union Square Ventures, and a few others. Launched the fund to invest in blockchain based assets. Offers exposure to broad based digital assets, without the usual way of simply buying the asset directly.

9:30 Carlson-Wee’s background in the blockchain world. How he first heard about Bitcoin – June 2011, friend told him about Silk Road, the darknet marketplace. Article casually mentioned Bitcoin. Did lots of research on Bitcoin. Started buying Bitcoin. Wrote undergraduate thesis on cryptocurrency. Very little academic studies at the time on Bitcoin. At the time, the BTC price drop from $17 to around $2. Articles at the time predicted the fall of Bitcoin, a computer science experiment that failed. Held onto his faith in Bitcoin, and adoption rose, and so did the price. Knew immediately that Bitcoin was the most important technology that he’d ever heard about. Whitepaper for Bitcoin was released just two years prior. Felt like he was reading whitepaper for the internet. Felt lucky to get in on the technology so early. Programmatic finance – possible to run the financial system through software, rather than centralised clearing houses, banks, etc. Just like the internet has disintermediated many industries, crytocurrencies will be automated through software.

I knew immediately that Bitcoin was the most important technology that I’d ever heard about. Whitepaper for Bitcoin was released just two years prior. It felt like I was reading the whitepaper for the internet.

14:50 How he went from thesis to being hired at Coinbase. Bitcoin industry was non-existent at the time. Coinbase launched, he was the 30th user. He was using many of the services that were being launched at the time to test them. Coinbase had a killer feature – being able to buy Bitcoin on the internet! Easy to imagine that it should be easy, but a big problem is that if you pay with Paypal or credit card for Bitcoin, you can do a chargeback, and the seller doesn’t get the bitcoin back. Traditional payments are reversible, Bitcoin isn’t. Fraud therefore, is a massive problem for sellers of Bitcoin. Coinbase offered Bitcoin purchases via bank transfer. Very hard problem to solve. Prior to that, Carlson-Wee made Bitcoin purchases in cash. Describes the awkwardness of buying Bitcoin with bank transfers. Saw Coinbase growing and growing, was purchasing Bitcoin constantly, saw the potential in Coinbase. Cold emailed jobs@coinbase, was willing to work in any position in Coinbase. Cofounder replied quickly.

20:30 Jobs at Coinbase. Worked customer support. Did this alone until they had 250,000 users (when he started it was 50,000 users). Automated a lot of the support requests, matching keywords. This solved a lot of routine tickets. Next step, he hired a distributed team. Difficult to hire, needed to fix bugs quickly as a lot of money was on the line. Customer support tickets were first indicator of things going wrong. Funds flows between BTC addresses and bank accounts. Much higher requirements than typical customer support job.

24:45 Created the “Bitcoin SAT” – quiz with complicated Bitcoin questions. Used to screen potential hires to test ability. Posted it on the main BTC forums. If you get perfect score, you will get an interview. Got a huge response. 250 took the test, lots actually did well. Started doing 4-5 interviews per day. Very high calibre of interviewees. Paid all the customer support, all over the world, paid in Bitcoin. Team was working in 12 different countries, so it was easier to pay them in Bitcoin rather than dealing with multiple currencies.

28:35 – Next step after customer support. Head of risk. Dealing with fraud and user account issues. People buying bitcoin with stolen identities. Coinbase is on the hook for the loss. Talks about anti-fraud systems put in place. Was given leeway to work on whatever he wanted, started looking into Ethereum.

30:30 First experimental token launches around this time (late 2015-early 2016). Series A style funding for open source, P2P protocols, a completely unprecedented phenomenon. Needed to leave Coinbase to become more actively involved in Ethereum and token launches.

31:45 What’s so different about these token launches, versus earlier tweaks to the open source Bitcoin code, launched as a new digital currency? 1. Now it’s much easier, Ethereum makes it much easier. 2. People raising money to fund the protocol – effects normally seen in venture rounds are now open. Anyone can participate. Funding an open source P2P project that funders want to see exist. Main effect is – monetised p2p networks. P2P networks historically never had a monetary layer attached, e.g. Torrents, Tor protocol. These never added payments, they were run altruistically. No-one is doing it for money. Now with digital assets, you get asymmetrical P2P networks. One side is extracting, the other contributing. You can have P2P marketplace. Golem is an example, a P2P market for computation. Rent out CPU and GPU cycles to someone who is training a machine learning algorithm. P2P alternatives to centralised hubs, e.g. Microsoft Azure or Amazon web services.

35:00 Why create new token instead of using Ether for payments? Mostly, not for hard tech reasons, but for game theoretic reasons. In the Golem example, allows GNT (Golem Network Token) holders to be exposed to growth of the Golem network. Also tied to governance – used for voting on the network. As an investor, you are exposed to the growth of the Golem network, not broadly Ethereum. Founders of the protocol have equity incentives – where if the network becomes very popular, it’s possible to see a very large rise in the value (e.g. x100-x1000) of the tokens. So issuing own tokens aligns incentives better, and provides a better governance mechanism.

37:25 – By issuing own tokens, you can create funding out of thin air, sidestepping Venture Capitalists, instead doing a crowdsale and raising several million dollars. Because of how appealing this sounds – a lot of less legitimate tokens/scams may appear. How does Polychain evaluate which tokens are worth investing in? Totally permissionless innovation. Anyone can create a token. Also means a lot of noise, his job is to find the signal in the noise. They read lots of whitepapers religiously, they look at the Github code repository to check the codebase, as well as the Github forks and stars (indicators of interest from other coders with the open source codebase, i.e. the developer ecosystem), as well as speak to the founding team, particularly the technical architects on the team to make sure everything makes sense. Carlson-Wee doesn’t have a computer science background, so he gets others on the team to do that part of the research. Forks = copy the code and make some tweaks.

40:50 Importance of developer interest in a project. What they’re (Polychain) investing in currently are protocols (or “middleware”), Golem being a good example. Golem won’t be used by “regular people”, like a user-facing app. It’s a developer tool, so that they can build user facing apps. The users in Golem’s example, are developers. Ethereum is also a tool for developers. Therefore, measuring the developer ecosystem is measuring the success of the project. If a lot of developers are showing interest, and trying to build projects on top = very positive signal.

Measuring the developer ecosystem is measuring the success of the project.

41:55 What are the main reasons to pass on an investment opportunity? Many! A lot of people wish to create a token to raise money, but the token doesn’t make sense for the project they’re building. In general – if you are building a project with network effects, then a token can make sense. If you’re not building a project with network effects, then a token probably doesn’t make sense. This has remained true for many projects. As a buyer of a token without network effects, the project could succeed, but the value of the token might not increase at all. When buying tokens, Polychain must create returns for it’s investors, therefore they need to invest in things where the growth of the network will be 1:1 with the token price increase. That’s the number one red flag to not invest.

If you are building a project with network effects, then a token can make sense. If you’re not building a project with network effects, then a token probably doesn’t make sense.

43:45 Apart from Golem, what other digital assets are they excited about currently? Ethereum and Golem are application-specific tokens. Golem isn’t general purpose money, only for the computational marketplace. Another token, not Ethereum-based but on another blockchain is Tezos. It is like Ethereum, Turing complete language, capable of allowing developers to build smart contracts, but has different qualities. The language is capable of being formally verified, meaning that you can mathematically prove that the contract will do what it’s intended to do. This means it’s easier to write a bug free piece of software. When writing financial contracts, bug free code is very important, e.g. avoiding a situation like the DAO hack, where someone exploited a bug to steal millions of dollars in funds. Additionally, Tezos is proof of stake blockchain. 1 coin = 1 vote, on consensus. Therefore token holders take care of the consensus mechanism, instead of miners like with bitcoin. Lastly, it has protocol-level voting on decision making. Governance has been historically a difficult problem in the blockchain world. With Bitcoin, it has manifested as a multi year debate around how to scale the protocol, with large disagreements between the various factions, and no clear governance on how to decide on what to do. This has resulted in an analysis paralysis, meaning neither side wins. In Ethereum, a decision was made to fork the protocol after the DAO hack, and un-do what the hacker did via a fork in the blockchain, which was a controversial decision. A vocal minority opposed this, and there was no good mechanism to determine how to move forward. With Tezos, 1 coin = 1 vote, so you have votes on how to proceed, and the protocol will automatically upgrade/fork based on votes. So you have built in governance at the protocol level, not based on vague relationships between developers, miners, users, exchanges… but codified governance. Will be interesting to watch over the next year or so how it develops.

You have built in governance at the protocol level, not based on vague relationships between developers, miners, users, exchanges… but codified governance.

47:10 Does he worry about legal/regulatory issues affecting his investments? Yes, a little. Regulatory risk is there, unclear regulation. That said, open source, and P2P sectors have proven to be extremely resilient. For example, with torrents and file sharing, they’ve been extremely resilient to attempts from any particular geographic region to squash that activity. This is a global phenonema, so there is no clear legal jurisdiction over these projects. All happening on the internet, and the digital assets held by the fund are not domiciled in any particular geographic region. Really exist on the internet. Truly global, internet based phenomenon. Legal frameworks are based on geographies in the physical world, not on relationship over the internet. Therefore the legal situation is complicated. If any country makes laws affect this area, it’s unclear what that applies to. If a project is online, and no developers are US-based, likely outside US jurisdiction.

Legal frameworks are based on geographies in the physical world, not on relationship over the internet. Therefore the legal situation is complicated. If any country makes laws affect this area, it’s unclear what that applies to.

49:05 Polychain holdings – how do they keep the private keys secure? Industry standard, offline (cold storage) wallet. Get an offline computer, that has never touched the internet, and never will, and generate keys on that computer. Cryptographic keys that store the cryptocurrency. Then you can create backups of these keys- on flash drives, and on physical pieces of paper, which never touches the internet. You can secure these in safe locations, like banks, safe deposit boxes. When you’ve created a cold storage wallet, you can then send cryptocurrencies to this wallet, completely securely. You can, counter-intuitively, send cryptocurrency from an online exchange to a piece of paper. What is on the piece of paper is access to the wallet – which is stored on the ledger, on the internet. Very easy to move from an online environment, to an air-gapped (offline) environment. Means that an attack targeting the cryptocurrency needs to happen 100% offline. This is the most important step when securing your cryptocurrency – to move to offline storage.

51:05. Background to how Polychain got large, well-established Venture Capital firms to invest in the hedge fund. Very unusual for a VC fund to invest in a hedge fund. This is a very unique asset class. Bitcoin companies raised around $1.4bn in VC financing, Ethereum based companies have raised a negligible amount. By contrast, Ethereum digital assets, built on the platform, have raised around $300m – order of magnitude more than what’s been raised by private companies with VC financing. Lots of activity, and almost none of it VC funds. Gaining access to these digital assets and protocol based tokens means you have to buy directly into the tokens, or invest in something like Polychain. For a traditional venture firm, explaining to your investors that you will purchase cryptographic tokens, is very hard! Investing in another fund, while hard, makes more sense. Andressen Horowitz and Union Square Ventures had great faith in Polychain, and therefore decided to invest to gain exposure. They also know that monitoring the space, reading the whitepapers, talking to developers, and understanding the ecosystem, is a full time job. They put that on Polychain, to avoid having a whole team of people dedicated to monitoring this area. The skillset involved when conducting the research is quite specialised.

53:50 Background on how Carlson-Wee was making and spending all of his money in cryptocurrency. Creating Polychain has complicated the “living on Bitcoin” experiment that he was doing for several years. He put 100% of his crypto holdings into the fund, so he doesn’t have cryptocurrency sitting around in personal wallets.

 

Disclosure: I have invested in the Tezos ICO and hodl ETH.

Now read: Should I invest in Ethereum?