1
IN BRIEF
BETTING ON THE CURRENCY OF THE FUTURE:
A DIGITAL ASSET INVESTMENT STRATEGY
How do you evaluate investments in an emerging technology? What’s the rational split for a bet on
the two current leading blockchain-based currencies, Bitcoin and Ether, maturing in 2022?

Key driver analyses to establish relative probabilities for future scenarios

Regression analysis on historical data, plus coin supply forecasts and two models for market
growth to establish a range of price forecasts

Monte Carlo simulation to generate a probabilistic assessment of the potential returns for
multiple investment strategies
BEST BET
Bitcoin:
$0.7 million
WHAT IS …?
Ether:
$0.3 million
BLOCKCHAIN
An open, distributed ledger used as the
base for many digital currencies plus
more
Estimated Median Value, 2022:
$1.91 million
Estimated Maximum Value, 2022:
$8.85 million
BITCOIN
The dominant digital currency built on a
blockchain, since 2009
ETHEREUM
A blockchain platform that uses the
digital currency Ether and supports
smart contracts and other distributed
applications, since 2015
2
Investor Overview
“The world's largest global Bitcoin exchange in euro volume and liquidity” ... “We
believe in the potential for digital assets to bring about the long-overdue, dramatic
and positive change to global finance and financial inclusion”
– Jesse Powell
One of the world’s leading Bitcoin exchanges,1
Kraken is taking an active role in the
Kraken’s
intuitiveness,
development of the digital currency market,
professionalism and focus. Jesse Powell, CEO
pushing the envelope with “firsts” in the
and Co-Founder of Kraken, aims to make Bitcoin
industry.3 Ethers have caught Kraken and the
and other digital currencies accessible to the
industry’s attention in the past year.4 The
world.2
burning question is: Which will be the currency
values
include
of the future – Bitcoin, Ether or both? 5
3
1
http://blog.kraken.com/post/137588082707/krakenlaunches-ether-trading
2
http://blog.kraken.com/about
The first digital asset exchange to have trading price and
volume displayed on the Bloomberg Terminal, one of the
first exchanges to offer leveraged bitcoin margin trading,
the first to pass a cryptographically verifiable proof-ofreserves audit, and a partner in the world's first
cryptocurrency bank.
4
https://www.kraken.com/en-us/about
5
http://www.economist.com/whichmba/mba-casestudies/investment-case-study-competition-2016
3
Market & Competitor Overview
“Blockchain is gaining traction because it holds the promise to transform industry
operating models” …”An enabling technology of the platform revolution trend”
– Gartner
Businesses always want faster, cheaper, more
Since 2008 the market for digital currencies has
efficient ways to transfer funds. The global
grown immensely. Several hundred digital
financial crisis spread distrust in financial
currencies now exist, adding on average 80 new
markets and their governance. In 2008 the idea
entrants per year.6 Not all digital currencies are
for an open, distributed ledger called a
equal though. Of the current US$12 million total
‘blockchain’ emerged, which promised to
market value, Bitcoin boasts an 80% share,
address these concerns. It also enabled the
followed by Ether with 8%. To date only two
digital currency that came with it, Bitcoin, to
other currencies, Litecoin and Ripple, have
avoid the problem of double-spending.
managed to make significant inroads into
Bitcoin’s dominance.
Bitcoin’s market share has slowly declined … just.
6
https://coinmarketcap.com/currencies/views/marketcap-by-total-supply/
4
Market & Competitor Overview
Success in this fast moving, sensitive market is
heavily influenced by the level of consumer trust
in the technology and its governance.
Government regulations and support, the
development of complementary services and
ecosystems, and responses to security
challenges within the currency network are
critical determinants of growth.7
7
https://ripple.com/insights/2016-will-be-the-year-yourealized-you-dont-need-the-blockchain/
5
Future Scenarios
“The future is not a scenario written, which we only have to act out; it is a work which
we have to create”
– Roger Garaudy
Four scenarios of the apocalypse
The outcome of this bet depends on the future
price of Bitcoin and Ether, which in turn
depends on their adoption and success.8 Four
scenarios that characterised distinctly different
futures were created and described,9 and five
key drivers were identified that together would
be most likely to determine which future reality
emerges.10
Based on the estimated strength of each driver and the likelihood that it would occur in the coming 5
years, a relative probability of occurrence was derived for each scenario.
The future’s not obvious … which is good, as that would be boring.
DRIVERS
SCENARIOS
RELATIVE RANK
Government
Competition
Ecosystem
Crises
Technology
Strength Likelihood
Strength Likelihood
Strength Likelihood
Strength Likelihood
Strength Likelihood
Weight
Probability
Platform wins
0
0
1
1
2
1
0
0
1
1
4
20%
The great leap
1
2
0
0
1
2
2
1
0
0
6
30%
Brand wins
0
0
1
2
1
2
0
0
1
1
5
25%
Locked out
1
1
2
1
0
0
0
0
2
1
5
25%
100%
8
Currency exchange value depends on a dual supplydemand equilibrium. However, we consider that for the
next 5 years the adoption (demand) for the digital
currency will dominate. The impact of differential supply
on the USD price forecasts has not been calculated.
9
Appendix 1
10
Appendix 2
Rating
Likelihood
Strength
0
na
na
1
possible
weak
2
likely
strong
6
Modelling Uncertainty
“When nothing is sure, everything is possible”
– Margaret Drabble
The future is always uncertain, but never more
uncertain than for a newborn. Prodigious
Expected
talents and serious deficiencies can come to
light in the first few years of a baby’s life, and
the same applies to digital currencies.
In order to model the full range of potential
outcomes for the Bitcoin and Ether price over
the next 5 years, an expected value and a bestcase value were calculated for their market
capitalisation. The worst-case value is, of
Best-case
course, zero.
For the expected Bitcoin value, a simple linear
regression of historical market capitalisation
formed the base. For the best-case value, a
linear regression of the logarithm of the annual
growth rate was used, to produce an ‘S’ curve
projection commonly seen in technology
adoption.
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Modelling Uncertainty
Expected
The expected Ether value was then modelled on
Bitcoin’s expected value, assuming that
Bitcoin’s market share was maintained constant
as it grew. Ether’s market share was assumed to
grow only enough to take Ripple and Litecoin’s
share (the current 8% share for other currencies
was maintained). The best-case Ether value was
Best-case
based on the ‘S’ curve growth of Bitcoin but
with Bitcoin’s market share declining according
to the linear trend seen in the historical data.
Summing up
The probability of each currency under or over
performing against its expected value was
calculated based on the outcome of the
scenario analysis.
8
Price Forecasts
“Tonight’s forecast … a 99% chance of wine”
– Anonymous
Expected and best-case price forecasts were a
Bitcoin
simple calculation of the forecast market values
for each currency in each case, divided by the
forecast supply of each currency. Bitcoin has a
reasonably predictable supply curve, built into
the design of its blockchain.11 Ether’s supply will
be affected by the imminent move to a proofof-stake consensus model from the existing
proof-of-work model. While the details remain
unknown it is expected to be more efficient and
Ether
so the forecast supply is modelled to increase,
based on a reduction of the block time to
Ethereum’s 12 second target.12
11
https://en.bitcoin.it/wiki/Controlled_supply
https://blog.ethereum.org/2014/07/11/toward-a-12second-block-time/
12
9
Investment Strategies & Estimated Returns
“I invest, you bet, he gambles”
– Anonymous
The available investment strategies range from
The distributions were assumed to be triangular
100% Bitcoin to 100% Ether. Using Monte Carlo
around the expected price forecast, limited at
simulation, the estimated returns for 11
either end by the best-case and worst-case price
strategies along that spectrum were modelled,
forecasts.
based on the calculated probabilities for each
Price distribution (Bitcoin at top, Ether below)
currency to under or over perform against
expectations and an assumed distribution of
prices in each case.
Millions
Choose your own investment mix …
$12
$8
Maximum
75th Percentile
50th Percentile
25th Percentile
Minimum
$4
$0
0%
20%
40%
60%
80%
100%
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Investment Strategies & Estimated Returns
The Monte Carlo simulation produced a probabilistic estimate for returns from each of the 11 strategies.
Model behaviour
Bitcoin Investment
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Minimum
$
$
$
$
$
$
$
$
$
$
$
57,775
178,605
269,592
319,402
348,778
353,229
321,846
290,463
259,080
153,859
41,743
Maximum
$
$
$
$
$
$
$
$
$
$
$
6,474,488
6,208,151
6,387,788
6,770,678
7,289,875
7,809,071
8,328,267
8,847,464
9,728,695
10,767,424
11,806,153
25th Percentile 50th Percentile 75th Percentile
$
$
$
$
$
$
$
$
$
$
$
897,493
1,062,520
1,108,575
1,119,831
1,129,546
1,141,992
1,111,875
1,095,170
1,049,590
969,408
884,737
$
$
$
$
$
$
$
$
$
$
$
1,268,215
1,566,921
1,858,953
2,035,949
2,126,010
2,110,895
2,075,522
1,909,470
1,760,194
1,656,476
1,639,838
$
$
$
$
$
$
$
$
$
$
$
2,807,577
2,798,223
2,837,083
3,043,240
3,202,275
3,338,715
3,551,816
3,844,938
4,068,780
4,357,258
4,575,772
As a vocal market participant and active
The estimated returns show risks of greater
promoter of digital currencies, it was assumed
losses for the two extreme strategies. The
that the profile of Kraken’s risk appetite would
mixed strategies weighted toward Bitcoin show
be moderately aggressive. For marketing
the best profile for median and potential
purposes, a subjective preference to support
maximum returns. Of these, while the median
both currencies was also assumed, if supported
return is slightly lower than strategies that are
by the financial modelling.
more evenly balanced, a moderately aggressive
approach would be to invest 70% in Bitcoin and
30% in Ether.
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Appendices
Appendix 1
Scenario
Platform wins
The great leap
Brand wins
Locked out
Description
Ethereum's smart contracts and other complementary goods drive up
adoption (especially in the financial and government sectors) and value of
Ethers, which come to dominate the market, leading to Bitcoin's decline.
Encouraged by widespread government acceptance in the face of ongoing
global crises, the large size of the potential market leaves room for both
currencies to develop supporting ecosystems in particular niches, and both
currencies flourish.
Bitcoin's brand and position leads to large network benefits, which stifles
Ethereum's growth, leading to Ethereum's decline.
Concerns over security as well as criminal use of the currencies leads to
widespread government opposition (and regulation) for digital currencies in
general.
Appendix 2
Driver
Government
Competition
Ecosystem
Crises
Technology
Description
Government support or opposition to digital currencies will be extremely
influential, both in terms of public sector adoption of blockchain technology
and in terms of regulation.
Competition between digital currencies as well as with traditional and
electronic payment methods will be fierce.
The development of supporting networks of complementary goods and
services is frequently one of the determining factors in the battle between
emerging technologies (e.g. VHS vs Betamax, Apple vs Android)
International crises, especially financial and economic crises but also
geopolitical crises and health or environmental crises - if they occur - are
likely to drive up adoption of digital currencies in a search for safety
Problems with security and stability of the technology have repeatedly
derailed fledgling digital currencies
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STEEPLED (PESTEL) ANALYSIS
POLITICAL
ECONOMICAL
- Financial
crises are
- Governments
cyclical and can
depends heavily
contribute to
on the financial
the progress of
sector
digital
currencies
- Almost all
financial crisis,
which affect
primarily bank
users and banks,
also affect
Governments,
who have to bail
out at least part
of the banks.
- Government
can support or
oppose the
implementation
and regulation of
digital
currencies.
- Bitcoins and
Ethers can be
used as a store
of value with
different
characteristics
to fiat currency
- Transactions
with digital
currencies can
be faster,
cheaper and
more efficient
than traditional
currencies
SOCIAL/CULTURAL TECHNOLOGICAL ENVIRONMENTAL
- People are
increasingly
comfortable with
virtual
transactions
- People are
increasingly used
to having personal
information
placed online
LEGAL
ETHICS
DEMOGRAPHIC
- New
technologies
are driving new
business
strategies
- Banking
system
regulations
could be
adapted to help
or hinder digital
currencies
- All the
information in
the blockchain
is traceable
and cannot be
deleted
- In 5 years the
global population
will grow 5%
- The surge of
new
technologies
may threaten
the blockchain
- Banks are
significant
institutions in
the legal,
financial and
political
framework of
modern
economies
- The blockchain
offers the
anonymity of
cash, with
greater
efficiency,
which has
made it
attractive to
criminal users
- More people in
developing
economies may
be able to enter
the Financial
market for the
first time if digital
currencies
become
mainstream
- Governments
are potentially
- People
big blockchain
increasingly prefer users, given the
payments using
number of
electronic systems public ledgers
to cash
they maintain
(e.g. land
ownership etc)
- Digital
currencies
require
significant
energy inputs,
but these are
likely to be
lower than
current inputs
required due to
the reduction in
the parties
involved
- Regulations of
the finance
sector are
regularly aimed
at protecting
consumers
from bad
behaviour.
Digital
currencies may
present a more
effective nonregulatory
alternative
- Demographically
led changes can
influence
financial markets
and,
consequently,
digital currencies
13