Crypto Confidential by Nathaniel Eliason

How strongly I recommend this book: 7 / 10

Date read: December 07, 2024

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Favorite Quotes and Chapter Notes

I went through my notes and captured key quotes from all chapters below.

P.S. – Highly recommend Readwise if you want to get the most out of your reading.

Highlights and Notes

Chapter 1: Is Everyone Getting Rich without Me?

Bitcoin was launched in 2009 to create a “peer-to-peer electronic cash system,” per the subtitle of the white paper attributed to Satoshi Nakamoto. The goal, according to the white paper, was to make it possible for anyone in the world to send money to anyone else without needing to go through a bank, money-transfer service, or even using a particular country’s currency.
The store-of-value aspect of Bitcoin was initially more of a side benefit. The total number of bitcoins that can ever exist is capped at twenty-one million, so, as more people started using it as a way to move money and store some of their wealth, individual bitcoins went up in value due to scarcity. If your government routinely devalues your savings by printing money, a store of wealth with a fixed supply suddenly becomes very attractive, especially if you can store that currency digitally and easily access it anywhere in the world. So, Bitcoin provides two compelling use cases besides speculation: It offers a digitally native currency you can send anywhere in the world without going through a financial institution, and it offers a way to store your wealth digitally in a form that, like gold, can’t have its value destroyed by currency manipulation.
However, what truly set Bitcoin apart was the innovative “blockchain” technology it introduced—a technology that makes it possible to build global, autonomous software powering much more than digital gold.

Chapter 6: Rugged

My approach to learning these kinds of skills was always to get to a very basic threshold of competence, then start doing it in the wild to find out where the gaps in my knowledge were. If you spend all your time taking courses or reading books, then you’re just collecting random pieces of information that don’t fit together into a cohesive web of knowledge. You need experience and practice to tie the information together. The sooner you start getting that experience, the sooner you fill those gaps and build your web.

Chapter 7: There’s Always Some Way to Make Money

This problem is called the blockchain trilemma. You can’t have a fully decentralized, fully secure, inexpensive blockchain. One has to be sacrificed for the other two. You can have a cheap, decentralized one with minimal security; you can have a cheap, secure one that’s controlled by one or a few parties; or you can have a secure, decentralized one that’s expensive. One way to get out of the blockchain trilemma is to build additional layers on top of Ethereum. Instead of submitting every transaction one by one and having to pay a huge gas fee, you could use additional blockchains to roll up transactions into batches and submit them all at once, making transactions cheaper, on average, without sacrificing the decentralization and security Ethereum provided. Polygon, where I stashed away some of my funds, was one of the first attempts at a layer 2 network. Since then, many more have launched, such as:
Optimism
Arbitrum
Coinbase’s Base chain.

Chapter 8: Rich or Rekt

If I’d learned anything from the last couple months of DeFi adventures, it’s that, once something starts getting pushed heavily on Twitter and YouTube, it’s time to get out.
You never buy or sell the exact right amount at the exact right time. No matter how well you do, you can always imagine doing better.
Even if other parts of the crypto ecosystem, like NFTs, don’t catch on, stablecoins seem here to stay given the utility they offer over the existing technology we have for digital money transfers.

Chapter 9: Million-Dollar Profile Pictures

But non- fungible tokens are a way to create digital proof that you own a specific asset not owned by anyone else. Artwork is just one example of such an asset, but the tech could be used as the standard for digital ownership of any kind of asset. One example that has yet to fully catch on but seems inevitable is tickets. Instead of buying concert tickets through a site like Ticketmaster, which takes a huge cut of the sale and charges exorbitant fees, you could buy concert tickets directly from the artist as NFTs in an NFT marketplace. The best part of this model, aside from avoiding the marketplace fees, is that if you change your mind and decide to resell the ticket, the artist could get a cut of that resale price.

Chapter 12: Just F*%$#%@ Ship It

This is another area where crypto offers something like the best of both worlds. Since tokens are a way to speculate on the future value of a company, getting paid in the tokens of the company they’re working for lets employees share in its potentially massive returns. Meanwhile, since most tokens can be traded for cash at any time, they don’t share startup equity’s risk of never obtaining a cash value. So, paying employees in tokens can be a win for everyone in a fledgling crypto company. The company saves money by not having to pay a cash salary, and the employees get to decide whether they want to sell their tokens immediately or hold on to them to see how high they go. But there’s one big tradeoff: all crypto transactions are public, so the community supporting a project will be able to see what tokens the employees are selling. If a prominent employee at a crypto company starts selling their tokens, investors might interpret that as a lack of faith and follow suit.

Chapter 13: Print Money

This was why teams often raised millions of dollars before launching their tokens. By seeding their liquidity pools with more money, they could reduce the volatility of the token at launch and create a better experience for anyone who wanted to buy in.
Your big loss is the gauntlet that toughens you up for future success. Sometimes trying to“make it all back” is what bankrupts you. But sometimes it’s what changes your life.
Bitcoin was created with a simple supply curve determining the rate at which all the bitcoins would be released over about 140 years. There will only ever be twenty- one million bitcoins, and they’re released at a rate that gets cut in half every four years or so. Roughly nineteen million already exist, so there are only two million more to be released over the next 120 years. With 90 percent of the supply already in circulation, and only 10.5 percent more bitcoins scheduled to be in circulation one hundred years from now, there shouldn’t be any serious inflationary pressure bringing down the value of the coin. The annual inflation of Bitcoin was 1.77 percent in 2023, and after the next halving around April 2024, the annual inflation rate will be 0.885 percent. Ethereum doesn’t have a supply cap like Bitcoin. New ETH is regularly being released, and an infinite amount of ETH can exist on a long enough timeline. But when ETH is used to pay for transactions on the Ethereum network, some of that ETH is burned, destroyed forever. If enough people are using the network, more ETH is burned than created, making Ethereum net deflationary. That was the situation in May 2023, when Ethereum had an estimated–0.6 percent inflation rate. But that estimate changes daily based on network activity, so you need to check the most up- to- date number on a site like Ultra Sound Money.
BTC can be used as a store of value, a medium of trade, and, yes, a speculative asset. It is a form of money. ETH can be used to pay for computing power on the Ethereum blockchain, whether that’s to send someone some USDC or to mint a new NFT. And, of course, it can be a speculative asset. What about the tokens for the applications on Ethereum, like Uniswap? Currently, the UNI token doesn’t provide any utility, it’s just a way to speculate on the future value of Uniswap. At some point, they’ll turn on fee- sharing from the exchange to UNI holders, and then the token will have a yield attached to it. So, a reason to buy and hold it would be to earn a share of the fees generated on Uniswap. A share of the fees generated by the platform is the most common kind of yield you can get for holding a crypto token. Even Ethereum has a native yield, which pays holders a share of the fees generated by the network for staking their ETH. But if the yield is paid in the same token, you have to make sure that the yield offsets the inflation rate. If you’re getting a 5- percent yield but the token is inflating by 10 percent, you’re losing money.

Chapter 14: The $20,000 Brunch

One bit of wisdom that I tried to keep in mind was that it’s impossible to make the perfect investing decision. You can always find something you could have done better, whether that’s buying earlier, selling later, or buying or selling more; it’s impossible to make the exact right decision at the exact right time. You just have to do the best you can and set some rules for yourself, most importantly: don’t go broke. The second rule I tried to keep in mind was that if you own something but you wouldn’t buy it for what it’s worth today, then you should sell it.

Chapter 15: Sell the News

In the early retirement and financial- independence communities, there are two guidelines for how much money you would need to never work again, called the 4 percent rule and the 2 percent rule. The idea is that if you have all of your money in index funds, they will probably grow by about 7 percent per year. If inflation is 3 percent, then you can spend 4 percent of your index- fund money each year, and you should be able to sustain that lifestyle indefinitely, because the growth will replace what you spent and what you lost to inflation each year. If you only spend 2 percent, then your investments will keep growing instead of staying flat. Plus, you’ll be a little more protected from unexpected expensive events and spikes in inflation. I opened a spreadsheet and started plugging in some numbers. I knew Cosette and I could live very comfortably, even with modest childcare costs, on $ 150,000 per year. So, how much money did I need to make to live on $ 150,000 per year passively? Well, if I divided that number by 2 percent, I got $ 7.5 million. That suddenly didn’t seem like an unobtainable amount of money.

Chapter 17: What Does This Guy Know?

There’s a concept in investing called the greater fool theory. It says that, in a bubble or an overheated market, you can justify buying something for almost any price because there will always be a greater fool you can sell it to. The vast majority of cryptocurrencies don’t have any fundamental underlying value. You aren’t buying stock in a company, and you usually aren’t buying a cash- flowing asset. You are buying a speculative token in the hopes you can sell it for more later. A great way to make sure you can sell that asset for more later is to spread the gospel of diamond hands. It has a certain camaraderie embedded in it: if we all hold this together and don’t sell, then the price has to go up! But everyone knows, on some level, that they only get rich by eventually selling it.

Chapter 18: Free at Last

This is the big tradeoff that comes with using cryptocurrency. You get an always- running, decentralized, global, computing- and- finance system operating independent of any government or currency, but anything you do in it is completely public, and as soon as someone figures out your wallet address, they know exactly how much money you have and where you have it. For this reason, people who work on projects often end up not selling any of that project’s tokens, because they are afraid of the backlash. In many cases, project founders got huge numbers of tokens but never sold any of them or made much money. The people who made money were the investors who bought in early and sold as it went up, who didn’t care about everyone watching their activities.

Chapter 20: Retired

The two easiest ways to miss out on making lots of money in a crypto speculative mania are by not participating and by holding your bets for too long. I don’t suspect you’ll commit the first error, since you’re already deep into this book, but you very well might commit the second error.

Chapter 23: Exit Liquidity

And as the liquidity dropped, it was harder for anyone with a large amount of tokens to exit their position, and any token selling pushed the price down faster. This is the big downside of giving people free tokens in return for providing liquidity. Once the rewards are no longer attractive, they can take away that liquidity and make your token worthless.
The worst part is that removing liquidity doesn’t necessarily change the price of a token. If a DEX has $ 10 million of ETH and $ 10 million of CRAFT, the price of one CRAFT token would be $ 1. If someone removes $ 9 million of each, the price of the token would still be $ 1, but now there is 90 percent less ETH backing up the value of the token, so it is worth 90 percent less, even though you can’t see that in the price. This is a particularly acute problem for some NFT projects. If you have one hundred NFTs for a project with a floor price of 1 ETH, you might think you have 100 ETH. But odds are, if you listed all one hundred of your NFTs for sale, that would start pushing the floor down dramatically, and you might only end up with a fraction of what you thought they were worth.

Chapter 25: Winter

The critics love to focus on the bad aspects of the industry, but, in doing so, they completely miss what’s being quietly built behind it. Crypto has this speculative, casino- like underbelly to it, but the technology making that possible has some fantastic uses. Bitcoin is slowly but successfully establishing itself as a store of value akin to digital gold. Ethereum is powering an increasing number of decentralized applications. Stablecoins are clearly the first major one, but many more are coming. Blockchain technology will keep getting faster, safer, cheaper, and less intimidating to newcomers.