Investor’s Take on Cryptoassets by John Pfeffer

An (Institutional) Investor’s Take on Cryptoassets December 24, 2017 • version 61 John Pfeffer Medium • @jlppfeffer • LinkedIn John Pfeffer is an entrepreneur and investor. In the 2000s, he was a London-based partner at private equity firm Kohlberg Kravis Roberts, and in the 1990s, he was Chairman of the Executive Board of leading French IT company Groupe Allium S.A. Before that, he advised on turnarounds while with McKinsey in Europe and Latin America. IMPORTANT NOTICE: This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance (which are not considered in this document) before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein. Amidst the indiscriminate speculation, sensationalist and mostly misguided media coverage and roller-coaster price volatility, this paper sets out to consider cryptoassets from the perspective of a rational, long-term investor. As investors, we look for things that generate sustainable, ideally growing economic rent—an economic surplus that will accrete to us. This paper evaluates the extent to which cryptoassets offer the foregoing. It aims to assess the potential future value of cryptoassets at mature equilibrium,2 on the assumption that they develop successfully and achieve widescale adoption. By design, it does not dwell on the significant risks that a given cryptoasset could fail, for technical, regulatory, political, or other reasons. These risks are very real, and are well documented elsewhere. Temporarily setting them aside allows for an objective analysis of the potential value of different kinds of cryptoassets and their use cases. I write not from the perspective of a trader, but from that of an investor who believes the long term is easier to predict than the short term. The paper thus focuses entirely on long-term equilibrium outcomes and investment strategy rather than short-term price movements. It also assumes the reader has some familiarity with the topic. Blockchain technology has the potential to disrupt a number of industries and to create significant economic surplus. The open-source nature of public blockchain protocols, 1 Earlier versions of this paper were drafted beginning in June 2017. 2 The notion of mature equilibrium as I use it here is admittedly imprecise. Conceptually I mean once the speculative phase has passed and (i) in the case of monetary store of value, once there is a mainstream, institutional view that crypto is a core monetary store of value like gold is today and (ii) in the context of infrastructure and applications, once markets are valuing cryptoassets based on significant realised user penetration. The obvious analogy is the internet. Internet penetration and internet-enabled businesses are still growing today but growth is slowing. Today, large internet-enabled businesses are valued based on financial ratios such as PEG and EBITDA multiples rather than clicks or eyeballs as was the case in the late 1990s. That’s the end point I’m thinking about. For shorthand, let’s assume 10 years from now. 1