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Real assets tokenization : use case in the real estate

Real assets tokenization : use case in the real estate

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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Real assets tokenization 

Generally speaking, tokenization means the registration of an asset and its rights on a token in order to allow instantaneous and secured ‘peer-to-peer’ trades and administration in a blockchain. Then, a new era is opening for real estate assets : their digitization

The tokenized asset ‘the token’ has numerous advantages :

  1. It can be transferred ‘peer to peer’ on the Internet like a crypto-currency. It means that it can be sent to another person without any third party approval and without any need of monitoring by the issuer.
  2. It has the specific characteristics of the blockchain : it means that it is not falsifiable, that transactions can be monitored in an ‘unchanging’ ledger and that security of the transactions is guaranteed.
  3. It can be coded by the issuing entity, and so it can represent a voting right, a medium of payment, a property title, a dividend, etc
  4. It has liquidity : meaning that you can buy and sell it any time on platform exchanges at a real time price determined by supply and demand.

    Concretely, tokenization of a real estate asset is a digital copy issue of a property title integrating the rights and obligations attached. This digitized version of the property can be shared in several tokens. We can then imagine for instance the disposal of a residential property at a value of 1 million euros divided in 1 000 tokens with a nominal price of € 1 000 each.

    Tokens are also issued during regulated issuances operations through STO (« Security Token Offering »). Those tokens are sold to investors on the primary market. Then, the second step is a tokens registration on a secondary market exchange by the issuer. Therefore, he will be able to take profit from the digitalized asset appreciation and also from its underlying right. The capital appreciation will be possible thanks to the income yield paid but also thanks to the price change of the underlying property. .

    Tokenization provides numerous advantages, specifically for the transmission of assets between sellers and buyers and also for reducing friction during phases of creation and trades. In the context of the Ethereum ecosystem (or for any other blockchain technology 2.0 generating ‘smart-contracts’), it brings numerous possibilities as well, particularly because of the utility tokens features. Smart-contracts brings transparency and goods trades globalization all in benefiting from the security of the platforms on which they are deployed.

    Thanks to tokens representative of real estate assets, savers that wish to invest in those type of investments but who do not have enough money, could acquire a « share » of a property while benefiting from the income yield .

    Thanks to this digital material, this new ‘real estate market ‘ through dedicated tokens will give possibilities to people as investment diversification beyond current national borders. For instance and currently, it can be really difficult for investors based in Asia to invest in unlisted US properties. Tomorrow, those assets will be exchanged on platforms accessible to all. .Accessibility, 24/7, including during financial markets closing hours will allow transfers and trades without any limits .

    Examples

    Tokenized real estate transactions are already existing, as some examples show it in Switzerland, United States and more recently in France. The tokenization is realized for now through Ethereum tokens and corporates that own the underlying properties. The tokens owners do not directly hold the property but it is a dedicated company, created on the purpose, that is holding it. In the US, we use LLC structures (or Limited Liability Company) and In France, it is usual to invest through the specialized status of SCPI.

    Tokens used are called ERC 20 (on the Ethereum platform), a standard in the blockchain ecosystem. Each of them are representative of one share of the capital of the company, knowing that the company is only owning the property in its balance sheet.

    1/ Tokenized residential real estate

    For the first time, a residential real estate asset has been tokenized by a specialized company called Real IT in 2019 in the US. The price was estimated at $60 000 and the House “9943 Marlowe RealToken” located in Detroit (Michigan) has been shared between hundreds of different investors who own security tokens worth $ 63 each. Owners are daily gaining $30 of income that gives an annual yield of 13 %.

    We have several assets in Detroit that are available directly on the platform now. Each of them produce different levels of yield and the attached tokens have different prices depending on the underlying property. 

    2/ Tokenized professional real estate

    In Switzerland, the real estate company BrickMark has acquired a building worth $ 134 million (in January 2020) and has used the blockchain to tokenize each property share and for reselling each ‘brick’ of this building located BahnhoffStrasse in Zurich.

    Earlier in 2019, the Swiss company Blockimmo, based in Zoug,had also tokenized a building in order to sell it on the blockchain. The total value of the tokens sold has been priced at CHF 3 million.

     Conclusion :

    Thanks to the strengths of the blockchain (quick transfer, unchanging record , absolute security) and thanks to the possibilities offered by smart contracts, a new world with strong possibilities are opened to the real estate market, both professional and residential. It will help to democratize it. The flexibility that allows the tokenization of real estate assets will help to create a new category of property owners.

     

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Decentralized Finance in motion

    Decentralized Finance in motion

    Decentralized Finance in motion

    DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    DeFi and crypto loans

    In the article published February 2nd, we described  Dapps, DAO and Decentralized Finance. DeFi is an alternative to the traditional banking and financial system. This system that uses  blockchain and crypto assets recently breaches a key level as the value of cryptos involved in different DeFi services jumped above one billion dollars. 

    To reach this level, Decentralized Finance has particularly benefited from  crypto credit and loans services quick growth. 

    Indeed,  those services make  possible now to lend and to get loans without using the traditional banking and financial system. They have seen the use of them particularly rising recently. Inclusion of a simple mechanism (algorithm that let interest rates fluctuate in real time depending on market conditions) mainly explains why it succeed recently.

    Having said that, this mechanism  automates convergence between supply and demand, and makes the use of the order book obsolete, friction point not to be overlooked in a small liquidity market environment .

    But remains a concern today about this activity growth.  

    Yes because those services are money consuming. A borrower should give more as collateral  than the amount he is borrowing in order to avoid counterpart risk. The guarantee is usually greater than 1.5 times the total money borrowed.

     

    DeFi

     

    Solution : the ‘flash loans’ 

    Because the inventiveness of the blockchain ecosystem is huge !

    Some services offer the possibility now  to do what is called a ‘flash loan’ – or ‘instant loan’  in crypto currency without the need of a guarantee. These  operations are working without any counterpart risk !

    This prowess is possible thanks to the way the lend is structured. 

    How does it work ? The person who is borrowing should also contract, use and refund  money during a single transaction on the blockchain. With this structure, the counterpart risk  is zero because the money is lent only if the three operations (borrow, use and refunding) are executed  definitely and simultaneously .

    Flash loans are innovative because  each time someone get a lucrative but money consuming  investment idea, can ask to obtain it. These lends are possible only if the lucrative idea comes true and only if it can run without  going through several transactions. 

    Arbitrages opportunities 

    Specialized traders in the Decentralized Finance took the opportunity  of this new tool large potential (high scale arbitrage operations)between different services of the ecosystem. 

    It has been recently mentioned several  times two ‘arbitrage operations’ as some traders took the opportunity of this new  way of borrowing money to ‘steal’ funds to the loan services department of bZx.

     

    Decrypt one of these operations

    By using borrowed money, some traders succeed to manipulate the prices of some unliquid crypto currencies on different decentralized platforms and blur bZx about the value of the crypto currencies without triggering warnings. Following those operations, bZx administrators have frozen their businesses to identify and compensate weaknesses of the service. 

     

    What did happen exactly ?

    The first attacker started by contract a flash loan of 10 000 ETH (roughly 2,3 million euros) on DyDx, an exchange that is offering this kind of crypto lending service. Then, he sent half to Compound in order to borrow 112 WBTC (Wrapped BTC),and the other half to bZx, in order to short 112 WBTC (and consequently to bet on the price fall). Finally, he sent 112 WBTC from Compound to Uniswap for converting them at a low price. The described operations allowed to profit from the short position to refund the flash loan at a very low price. 

    It took only few seconds and cost only $ 8,71 of transactions costs to win $360 000 ! Let note that the beauty of the operation is coming from the fact that the smart guy has realized all the operations in one single transaction. Thanks to specificity of flash loans that do not need collateral and cannot be realized if the operation is not done into one single bundle transactions. The attacker –trader has been forced to prepare thoroughly all the operations plan. Pure malice or great operations ( this type of operations should be heavily punished on the regulated financial markets) ? 

    It seems possible that the trader succeed to shun verification processes that are bridges between DeFi blockchain protocols and underlying data under control, especially the involved asset prices. 

    In fact, the success of the operations is built on the base of the strong interoperability between services. This is showing the strength and the weakness of Decentralized Finance.

    DeFi

     

    What should be kept in mind ?

    1. Due to the strong ecosystem interoperability, new financial products can have a large and powerful impact. Paradoxically, the DeFi large exposure should allow it to gain resilience. Different services must be updated or abandoned.
    2. But DeFi services are in fact not really and fully decentralized as shown by the bZx administrators and actions they decided to launch. Then, before each any use of service, it is strongly recommended to audit to assess the power of the administrators and the related risk.

    Conclusion

    Decentralized Finance is still a stammering ecosystem for which flaws and errors can exist, meaning that investment funds involved in these protocols are potentially at risk. But because of its sharp ramp up, DeFi is now a new universe that banking, financing and tech players cannot leave besides. However, at the same time, historical and emerging players must be warned about the associated risks to these new markets.

     

     

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Ripple and XRP story

    Ripple and XRP story

    Ripple and XRP story

    The Ripple protocol is multifunction. Both payment  system and money transfers network, it allows free, real-time and  secured transactions. XRP is its native crypto.

    This article is for beginners in the field of Blockchain and cryptocurrencies. The information cited below is voluntarily simplified. If, however, you feel attacked for an article with a higher reading difficulty, do not hesitate to change the cursor in the box below. 🙂

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    Also named Ripple Transaction Protocol (RTXP),  Ripple is a system for  :

    1/ real time payment (RBTR)

    2/ an exchange place where one can realize currency transactions

    3/a money transfer network

    Launched in 2012, the  Ripple network aims to permit « global low cost, real time, secured financial transactions for any size without chargeback». Ripple is both  an Open Source distributed Internet Protocol , a  consensus ledger and also a native crypto currency called  XRP. Ripple relies on a public opened and shared (ledger) data  base that uses a consensus algorithm allowing payments, exchanges and money transfers. That works whatever the payment unit is  (fiat or crypto currencies, raw materials or any other unit of account).

      It is used by banking  groups as Santander, UBS, Unicredit and also Crédit Agricole for organizing offshore clients money transfers. But the first bank that has adopted  Ripple was the German on-line bank Fidor Bank

      Among all validators, we can find different corporates, Internet access providers and the  MIT

     

    Ripple Genesis

    The former Ripple Payment protocol  (Ripplepay) has been imagined in 2004 by a Canadian IT developer  (Ryan Fugger )with the target of producing secured payment options to the ‘on line’ community through a global network.

    This first step  wa s the beginning of a story  before the design of a new system led by the eDonkey network’s founder  Jed McCaleb and two other developers (Arthur Britto and David Schwartz).In May 2011, they all started to develop a new digital payment system  in which the transactions were verified by a consensus, instead of doing it by a mining process (as with Bitcoin). This new version aimed to consume less electricity than Bitcoin and generate transactions much quicker. End  2012, joined with several other specialists (Chris Larsen and some others) the team has co founded OpenCoin (reappointed Ripple Labs later in 2013) that started to develop a new Payment Protocol, named Ripple Transaction Protocol (RTXP)

    As it is designed  by Ryan Fugger at the beginning, the protocol can get around the traditional banking system  fees and transactions time lags. Furthermore, any type of assets (fiat currencies, Gold, airlines miles,….) can be traded through Ripple.

     In order to maintain the network security, Ripple is based on a common ledger managed by an automatic and independent  validation servers network that constantly compare transactions. Servers can be owned by all participants, banks and market makers included.

    In October 2013, Ripple Labs continued on the basis of a more advanced partnership ( ZipZap), the relationship having been perceived as a threat by the major money transfers companies, and firstly by Western Union.

     

    A  specialty : banking and financial transactions

    Since the beginning , Ripple was adopted by a growing number of financial institutions for proposing an alternative money transfers offer. The protocol  allows cross border money transfers for private clients, Corporates and banks. Following the first adoption by Fidor Bank in Munich, Ripple Labs started ( end 2014) to work with the global payment service   Earthport, combining the Ripple software with the payment services system led by Earthport (presence and running in 65 countries). Earthport clients are banking corporations as Bank of America and HSBC.

    End April 2015, Western Union announced  that they are going to experiment Ripple. One month later, Commonwealth Bank of Australia   announced the same experiment too.

    In 2015,on the basis of a banking secrecy  law breach and breach of the legal additional elements of the Financial Crimes Enforcement Network, Ripple Labs receives a $ 700 000 fine. The company quickly corrects the operational  procedure in order to be compliant with an agreement that permits XRP trading operations and that permits « Ripple Trade » business by recorded money services only (MSB).The improvement also contained anti money laundering transactions ‘on line’ monitoring and enhanced the transactions analysis.  

    June 13, 2016, Ripple obtained  a virtual money license from the New York Financial Services State Department, becoming the fourth company with a « BitLicense ».

    In August  2016, SBI Ripple Asia announced  the creation of a Japanese banking consortium within a new Ripple technology payment network. The consortium is officially  launched October 25, 2016 with 42 banks . In July 2017, 61 Japanese banks joined the group, forming more than 80 % of the total banking assets owned in Japan.

    September 23, 2016, Ripple announced the creation of the first cross banking global payments’ group, based on the distributed financial technology. In April  2017, the Global Payments Steering Group (as named or GPSG)network members are the following: Bank of America Merrill Lynch, Canadian Imperial Bank of Commerce, Mitsubishi UFJ Financial Group, Royal Bank of Canada, Santander, Standard Chartered, UniCredit and Westpac Banking Corporation.

    October10, 2017, Ripple announced  numerous partnerships with more than  hundred financial institutions. Those banks or payment services providers are now using the  Ripple technology for offering to their clients a real time global payment service.

     XRP

    The company has also created its own crypto currency  named XRP. By using it, you allow financial institutions to transfer money at a very low cost (negligible fees) and almost instantly.

    As said,  XRP is the Ripple network  native crypto currency. XRP units are currently divisible by 6 decimals,  the shortest unit being named a ‘drop’ with  1 million drops equivalent to  1 XRP.

    100 billion  XRP have been created   during its genesis and no more can and will be created ever.

    As with Bitcoin, the system  was designed to make XRP a scarce asset  with a decreasing number of available Units. As unlinked with any third party for exchanging money, XRP is the only Ripple network’s  currency without any counter part risk. Other Ripple network’s currencies are debt underlying (liabilities), and the Ripple network users are not obliged to pay with XRP, (if you consider XRP as a store of value or as medium of payment).However, each Ripple account needs a minimum size of  20 XRP.

    Over the 100 billion XRP that have been created, 20 billion of them have been stored and withdrawn by the founders ( the same people that founded Ripple Labs). They gave the remaining 80 % of the total existing XRP to  Ripple Labs, those XRP units being destinated as an incentive for market makers to improve liquidity.

     In March 2015, 67% of the original  80% that was owned by Ripple Labs, were still retained by the company..

    In May  2017, in order to soothe  concerns about the XRP supply, Ripple was engaged to sell  55 billion XRP (88% of the total assets) under secured collateral . It allows to use up to 1 billion XRP every  month and give back the unused coins quantity under an additional one month contract.

     At the current price of $ 0.2333 (as of 01/20/2020), the XRP market capitalization is about USD 10 billion .

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Bitcoin valuation and the Gold price (4)

    Bitcoin valuation and the Gold price (4)

    Bitcoin valuation and the Gold price (4)

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    Bitcoin is a medium of payment but its core price is based on the  store of value concept that makes it comparable to Gold

    Bitcoin  is not yet fully used as a medium of payment (number of Bitcoin users as a mean of payment is estimated at roughly and only 30 million people all over the world) because of somewhat high average transactions fees, especially for low criticality transfers and long validation periods (several minutes). In this article, we’ll be focused on a Bitcoin analysis as a store of value (see the article published 21 November 2019) and as a transaction value.

    Bitcoin and Gold are both stores of value – Pricing  Bitcoin compared it to Gold

    As a store of value and scarce asset (number of bitcoins issued limited to 21 million units by 2140), the crypto currency would then act as ‘Gold 2.0’ as we have mentioned in the previous article. By continuing to compare Bitcoin and Gold, let assume that the total value of all bitcoins in circulation   (equivalent to the market capitalization for securities) would equal the total value placed in Gold .

    Assuming this, the bitcoin’s value would then be the result of the following equation :

    = (Value of Gold x market share in %)/number of bitcoins in circulation

    Assuming that the total amount of Gold is close to USD 9400 billion  (on the base of a Gold price at $1550 as at January 3, 2020) and that the total number of bitcoins that have been created  is roughly 18 millions , we get the following figures (see the table below for different market shares) :

    In other words, assuming that the current market price  of $7450 and a market capitalization of USD136 billion , Bitcoin only represents a little bit less 1,5% of the total value of Gold (or 136/9400).

    As shown by the above table, and taking the assumption of a Bitcoin that would represent  5% of the total value of Gold (meaning that the Bitcoin and other crypto currencies investments would represent  an average 5% of all investments), the unit value of a bitcoin would be about 26 000$

     

    Bitcoin pricing if its use becomes transactional

    If Bitcoin becomes a transactional mean (largely used to carry out transactions) and combined the functions of storing value and the one of medium of payment, let’s have a look on how to price it by using the well known quantity theory of money equation :

                                                                     MV=PQ 

    with

    M : the quantity of money in circulation

    V : velocity of circulation of money  (the number of times money ‘changes hands’ over a certain period)

    P : the price of money

    Q : the quantity of money

    Through this equation, the Bitcoin value can be estimated by forecasting the demand generated by the underlying resource distributed by the network (product PQ could be equated to the network revenues), divided by the available monetary base (in bitcoins).

    Transactional value

    The former equation may be summarized by the equality Supply= Demand with supply consisting of available money multiplied by velocity of circulation of the money (MV) and the demand that is equivalent to the wealth produced by the network (PQ). So, the monetary mass should equalize the network value creation   (as for fiat currencies that should equalize the macro total Gross Domestic Product).

    About the Bitcoin velocity, it is difficult to estimate a good assumption given its very high volatility . It is therefore obvious that its velocity used to be higher than the velocity of traditional currencies (fiat) because of infatuation and strong speculation. Then, a velocity 7 to  8 times larger than one of Fiat monetary mass seems credible.

    Without elaborate too much about the needed calculation for this approach, but  :

    1/by combining a Bitcoin velocity level (assumption of 7.5x greater than the  dollar US velocity)

    2/ By estimating a share of the total GDP generated by the Bitcoin network,

    We do obtain a price of  $25 000 $ per Bitcoin unit, knowing that this value is very sensitive to the different parameters  

    Total value = Store of value  + Transactional value

    If Bitcoin becomes more widely used as a store of value and as a transactional tool, the approach is simply to add both valuations. By combining and give more details to the formula, one way to express is to calculate the average velocity for each of the two uses, weighted by the demand associated with each use respectively The Bitcoin’s velocity would then be expressed as follows :

     

    V= (storage value x demand ‘store of value’) + (transactional value x demand ‘ transactional value’)/ (demand ‘store of value’ + demand ‘ transactional value’) 

    The benchmark ‘store of value’ is expressed by a market share of 5% of the Gold value (hypothesis as mentioned before) equals to $ 470 billion.

    Assumptions for the transactional value are considering a network that represents 4% of the total GDP  ($3170 billion), given a Bitcoin network GDP (revenues) of $3550 billion with an average velocity of 3

    So,   V= (470+(3×3170))/3550=2.81 that gives Bitcoin market cap of 3550/2.81=$1263 billion  and, Considering the 18 million bitcoins in circulation , Bitcoin value must be equal to 1 263 000/18= $70 166   a superior price to the simple sum of the store of value (linked to Gold) added to the transactional value, as calculated before (26000$+25000$).

    Conclusion

    All the calculations tell that Bitcoin price  has a room to rise if we consider its potential to replace (or ‘co replace’) Gold, the traditional asset haven / store of value, and also the potential function of transactional value of the first crypto currency.  Obviously, one can bring criticism to the calculations given assumptions that are used, and can bring criticism because other competing protocols and crypto currencies are not taken into account.  

    Tough Bitcoin has a legitimacy and is now a benchmark in this new digital asset class, Bitcoin could be tackled with success by some other projects. It has been the case with Ethereum in some extent. Of course, this potential scenario could reduce the intrinsic and fundamental value of Bitcoin.

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Decentralized Finance in motion

    DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Bitcoin valuation and production cost (3)

    Bitcoin valuation and production cost (3)

    Bitcoin valuation and production cost (3)

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    After  having discussed about the Bitcoin pricing on the base of its Network value (article published  on 11/14/19)  and on the base of its ‘scarcity’ ( see article published on 11/21/19)-, let’s have a look now on an approach based on its production cost.

    Bitcoin is based on the Proof of Work (PoW)

    It’s necessary to remind that the proper functioning of the Bitcoin Blockchain requires the validation of transactions carried out on the network. These transactions are grouped into blocks where each added block is validated at regular intervals by ‘miners’ who should solve a kind of mathematical equation. The resolution of this mathematical problem is very computationally intensive. This consensus mechanism on which the Blockchain Bitcoin is based is called Proof-of-Work (PoW). The difficulty of the mathematical equation to solve for a block of transactions to be undermined is periodically readjusted. Nevertheless, this difficulty tends to increase constantly except during prolonged bear markets. It was the case in 2018, and at that precise moment, the difficulty decreased in front of the loss of financial interest of the miners for Bitcoin mining.

    (see the chart below showing the difficulty of mining a new block on the Bitcoin)

    The almost uninterrupted growth in the difficulty of mining Bitcoins inevitably leads to an arms race on the part of miners to obtain ever more computing power.

    Chart showing the constant increase of the Hash Rate   

    (Hashing : mathematic way to enable the security/ cryptographic process for mining Bitcoin)

    In this way, miners maximize their chance of receiving  the reward  which is paying the miner who is successful in solving the encryption problem and who is validating the block of transactions. The reward  is currently 12.5 bitcoins but it will decrease to 6.25 bitcoins in May 2020 (read our article published on 10/31/2019 about the  coming Bitcoin Halving ). This division of the reward will make the creation of new Bitcoins even rarer. This scarcity will inexorably increase the price of Bitcoin but also increase competition between miners who will continue to try to have ever more computing power available.

    The computational power of miners being obtained through the purchase of computer equipment specialized in Bitcoins mining. This type of famous equipment is called ASIC  (acronym for Application Specific Integrated Circuits).

    Bitcoin mining induces  High Power consumption

     Cambridge Bitcoin Electricity Consumption Index

    As mentioned, the process to validate a transaction’s block and create new bitcoins results in  very high power consumption. According to the Bitcoin electricity consumption index calculated and maintained by the Cambridge Centre for Alternative Finance (see the above chart), Bitcoin consumes 70 Terawatt-Hours per year to ensure the reliability and security of its network. This electricity consumption places the Bitcoin Blockchain just above Colombia, a country with a population of 48 million !.  

    Bitcoin Mining simplified microeconomic model

    A miner has an incentive to mine if, and only if, the total revenues generated  by the mining  activity on a given period exceeds  the total costs incurred by this activity.

    But it also must be taken into account the potential  increase capacity of mining and it gives the following equation :

    (1)      PBTC (Bitcoin price) >  A x Nm

    Nm is the number of miners in the network

    A is a constant number equivalent to the mining profitability equation (Revenues/Costs)

    The equation (1) shows us that the price of a bitcoin is affected by the number of miners in the network. The price of a Bitcoin depends on the demand for bitcoin in a context of limited supply.   An increase of the Bitcoin price gives the miner a greater incentive to mine, which leads to a rise in the number of miners in the network. However , this increase cannot exceed the network profitability threshold  (PBTC /A) that  implies mining costs larger than revenues.

    Therefore, it is clearly the price of Bitcoin the only factor that motivates  a player to mine and develop (or not) his activity. But the true economic reality is much more complex as the miners don’t all work  in the same conditions and do not have :

    1/ identical computing power

    2/ identical electricity cost

    As said,  miners can also maximize their production by buying  more sophisticated hardware, forming large mining pools (mining farms) that combine their computing power, and by setting up business in countries with the cheapest electricity costs.

    Mining cost in different countries

    As the electricity cost is the key parameter  of the mining cost , let’s now have a look on the different electricity tariffs depending on regions and countries. Elite fixures  gives information on electricity prices to provide Bitcoin mining facilities all over the world (see the map and chart)

    So, the miner ‘Holy grail’ is obviously based on cold weather countries (in order to refrigerate machines) and low electricity prices.

    At looking more in details the numbers , we can see that :

    South Korea  is the most expensive country to mine  Bitcoin (26170$), even if this country controls the majority of the capital invested in the Bitcoin industry at the same time

    Venezuela is the cheapest country to mine with a ludicrous cost of 531$, thanks to State subsidies.

    -In France, the cost level of 7930$ is in the average.

    And for countries with favorable (cold weather) conditions as:

    -the United States (at the world  ranking 41) the  average cost is 4758$

     –Russia and Iceland  have the respective costs of  4675$ and 4746$.

    For China, the country that is bringing together the largest stake of the mining capacity, has an average cost of 3100$.But low cost Chinese miners can pay even less , a cost estimated  by JP Morgan at roughly 2400$  per bitcoin, helped by deals with power producers. These miners take the opportunity of direct electricity purchase agreements, like with  aluminium shelters that are looking for selling electricity excess production.

    Conclusion

    Even if the cost to produce a good or a service is not an absolute determinant for a minimal price of this good (or service), economical  rationality says that an equilibrium is found at a level where the production cost gives at least a break even, as a ‘floor’ price. All things and costs being equal, (electricity  prices and amortization of the hardware ASIC machines), a global mining cost average is around 6000$/7000$ and seems to constitute a minimal price for Bitcoin.

    Below this price, supply would decrease (maybe except in China where the costs are much lower) , but based on this assumption, the reduced difficulty of mining would give a boost to new supply that would bring back an equilibrium later on.

    On this base, and at the current price, Bitcoin is justifying its production cost (but not much more) This current cost is probably offering a floor level to Bitcoin today.

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

    What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

    What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    What is a Fork  ?

    A fork is a divergence to the protocol from the previous version of the blockchain.  In a blockchain, forks are justified by the different stakeholders who should used common rules for validating blocks.

    What is this for ?

    -If you wish to launch your own crypto currency, a possible solution is to launch a « Hard Fork* » from an existing  blockchain.

    – Otherwise,  a « Hard Fork » is often the only way to conciliate opposite opinions  within a blockchain community.

    These forks may occur for several different   reasons that are :

    Intentional

     

    1/ Blockchain protocol rules changes .  The main  frequent reason is a deliberate change  of the source code to improve it or to make it evolve . In other words, if you want to change the rules of a protocol such as the maximum block size, update security rules, or create a new crypto asset from an old one, you must perform a fork to create a new branch.

    2/ Splitting a blockchain in 2. It can happen that  a new block is generated by a rogue miner, then  the system reaches consensus that this block is not valid, and this ‘orphan block’ is very soon abandoned by the other miners.

    Unintentional

    3/ a situation during when 2 blocks at least get the same bloc number

    Typology

    There are two main types of  forks. Additionally, we can mention the “Codebase  Forks”. Let see what it means :  

    Hard Fork

    Hard forks are deliberate, and occur when there is a major difference of opinion within the community which has built and sustained a particular blockchain, and one (or both) of the camps decides to go their own way. The group that disagrees with the original protocol ‘forks’ off its own version of the blockchain and the members who believe in this fork upgrade their systems to work on this new blockchain, leaving the previous one. Nodes (miners) running the previous blockchain are not accepted by the new blockchain. Users who prefer the old version can keep their systems and nodes working on it. This will then create (1) two competing blockchains, or (2) all the nodes will consensually agree the new blockchain and accept to work with the new protocol.

    Let’s look in more details and distinguish 3 different types of hard forks :

     

    (1)  HF Contentious

    Caused by disagreements in the community,   forming a new block chain. This usually involves major changes to the code.

     (2) -HF planned  : In this case , we have a scheduled upgrades to the network, giving users a chance to be  prepared. These forks typically involve abandoning the old chain.

    To  these two cases, (3)  we can add the specific case of “Spin off coin”  that  is shared changes to  the code that create new coins (Bitcoin’s example with  Litecoin and key changes included reducing mining time from 10 minutes to 2.5 minutes, and increasing the coin supply from 21 million to 84 million.In fact, Litecoin and Bitcoin are running with the same mining programs following the code changes).

    Therefore, one can imagine the  blockchain with forks as a tree, and the  successive hard forks that seem to create new branches.(see the map of Bitcoin forks at the end of the article).   

    Soft Fork

    Like hard forks, they involve two version of a blockchain. However, unlike hard forks, users can keep running the old version after a soft fork, and still be part of the same network as the users who have upgraded to the new version.

    Original blockchain in blue, and the forked version  in red. Both can exist simultaneously.

    Codebase Forks

    Codebase fork is a software development term. When a developer works on the source code of an application (it could be blockchain-based, or another software product) to develop (or create) a distinct and separate version of the software, the new version is called a codebase fork.

    It is ultimately the decision of the network’s users whether or not they want to upgrade. Developers cannot force changes. They can only suggest changes and users decide whether to adopt them or not. On the blockchain, too, the fate of codebase forks is in the hands of users. To summarize, the codebase forks allow developers to modify the code without changing all the blockchain protocol.

     

    The major Bitcoin Forks

    Bitcoin, the pioneer blockchain cryptocurrency, has had several forks. Recognizing  the original Bitcoin blockchain (called Bitcoin Core) introduced by Satoshi Nakamoto, developers have made changes to Bitcoin Core’s blockchain protocol.  Forks of Bitcoin Core that happened are the following (see the Bitcoin forks map):

    Bitcoin XT: August 2015

    Bitcoin Clashic: February 2016

    Bitcoin Unlimited: May 2017

    Bitcoin ABC : This is a codebase fork intentionally incompatible with original Bitcoin iterations. Then Bitcoin ABC gave birth and established Bitcoin Cash in 2017.  

    Bitcoin Cash: (August 2017) As an objective the increase in theory the number of transactions per second with a higher bloc size

    Bitcoin Gold and Bitcoin Diamond : (October- November  2017) Alternative mining algorithm to allow users to mine at a cheaper price.

    Bitcoin SV : Fork of Bitcoin Cash, with higher block size than Bitcoin Cash

    SegWit2x (BTC): Few developers proposed a hard fork protocol called SegWit2x aiming to convince all Bitcoin protocol users. The project has failed.

    Conclusion – What impacts do forks have on ?

    When a hard fork is  performed, holders and miners of a quantity of the original currency will receive both the token of the new protocol as well as the old one.

    For example, when you fork Bitcoin Cash if you had 1 Bitcoin at the time of the fork you will hold 1 Bitcoin and 1 Bitcoin cash after the fork.

    .

    If there is no consensus in the community, investors and miners are  split between the two existing projects and hold the two tokens.

    For Bitcoin or any project, all these hard forks could  have been seen as a long-term threat because part of its market capitalization is dispersed over the other altcoins projects. But in fact, despite apparent technological improvements, the effect of  forks have been diluted. Because forks only correspond to 5% of the entire Bitcoin tree for less than 3.5% of its total capitalization (see chart).

     

    Finally, Bitcoin has never been so strong. It is possible to see a Bitcoin hard fork to, one day, take over the core project and propose an improvement in technology. But for now, Bitcoin remains the winner, thanks to its age and track-record, its strong community, its visibility and its unequalled safety empowered by the number of miners. Forks are mutations that allow the development of this booming technology. They are a sign of the vitality of the blockchain technology.

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.