Some Thoughts on Investing in Grin
Note: This piece is not meant to be used as investment advice, it is simply meant to start the discussion on crypto based derivatives and other ways to gain exposure to promising crypto projects.
1/15/19 marked the launch of Grin, a highly anticipated implementation of the Mimblewimble protocol. The whitepaper for the Mimblewimble protocol was first anonymous paper dropped into the #bitcoin-wizards chatroom in 2016. Mimblewimble offers scalability by using a ledger with no addresses. This leads to a decrease in the amount of data storage required on its blockchain of 90% compared to Bitcoin. If you are looking for more reading on Grin start here.
What has really lead to Grin’s prelaunch popularity is that there has been no investors, ICO, premine or founders reward like its counterpart Beam. And though I would argue that no productive capital to fund future development is a flaw, the Grin protocol really captures the Bitcoin ethos that appeals to many within the crypto space. Furthermore, the Grin mining algorithm is currently ASIC-resistant allowing more retail investors the opportunity to mine Grin from their laptops. Because of these factors, I expect Grin to have high levels of demand on the supply side over the coming months.
There are some key concerns from an investors point of view that I think are important to discuss. Bytesize Capital in a twitter thread recently looked at the launch of other high profile privacy coins mapping their returns right after launch. Monero, Zcash, and Ravencoin all significantly underperformed Bitcoin in the quarter following their main net release. Knowing that the crypto space is still in a bear market does nothing to convince me that Grin’s price won’t slip in a similar way.
It is also important to look at Grin’s scheduled inflation rate. Currently, the mining reward for Grin is 60 Grin per block, with a new block being produced every minute. Though Grin’s inflation rate will trend towards 0, the inflation rate of the first three months after the project release will be 400%. This leads to 86,400 Grin being produced daily. The current trading price of Grin on Galleon, the first Grin exchange, on the day of release was 2 dollars meaning a fully diluted market cap of 500 million. This means the market would need to cover 172,800 dollars per day on the demand side to support it. I don’t see this as likely. For more information about Grin’s monetary policy, read this article by CryptoProfG here.
Because of this, I see an unsettling amount of risk in being diluted out of share size and I don’t think that a long position is the best way to gain exposure to this project in the short term. Instead, I believe that a derivative of Grin’s hashrate is a more promising and risk-averse way to invest in Grin. To clarify which type of derivative, I thought through this with a Future or Forward in mind.
First looking at the hashrate of Grin’s counterpart Beam. The current hashrate as of Jan. 15th is 1,634,196.6 Sol/s. There has been some discussion that Beam already has 1/3rd of the hash rate of Monero(XMR). Digging through a Zcash Forum, Zcash also uses Solutions per second, I was able to find a conversion between H/s to Sol/s of 2.11 or for every 100 hashes, 211 solutions are found. This would mean Beam after only a week of operating has a hashrate of 3,448,154.83 H/s.
Though not the 1/3rd of the Monero hashrate, This high of a hashrate after only being available for a week is a good sign. This comparison to Monero should be taken with a grain of salt because hashrate and solutions are not a clean comparison, Hashes are a static measure of calculations over time, while Solutions include the variance of those hashes performing an operation, furthermore, most mining algorithms differ in numerous ways that again make comparing two projects difficult. As I said above, I expect Grin’s hashrate to outperform Beam’s in the short term with Grin being the more popular of the Mimblewimble protocols.
A derivative of Grin’s hashrate would limit downside. Looking at Bitcoin, the hashrate has fallen 51.71% from it’s high to its local low mid-December. Bitcoin’s price is currently down 81% from it’s late December 2017 all-time high.
Finally, hashrate continues to be a lagging indicator. As seen in the graph below, Bitcoin’s hashrate did not peak until late September of 2018, almost 10 months after Bitcoin’s all-time high in late December.
Because of this, I would argue that a derivative of Grin’s hashrate to be a much more risk-averse way to gain exposure. One could look at a slump in price even to the point of a significant correction as a preemptive warning of a falling hashrate. Furthermore one could also look at block times as well as difficulty adjustments. With Grin having block production every minute the information feedback loop is almost real time.
I see really only two options on how a hashrate derivative could be created. The first being on a predictions market. Veil is a Cayman Islands based company building markets and interfaces on top of Augur that also launched on Jan. 15th. Veil is launching with cryptocurrency derivatives, Academy Awards results, and Grin related markets. Hashrate derivatives for all major proof of work chains seem like a logical next step for Veil and already have a market for Ethereum. Unfortunately, Veil markets are only available to people outside of the United States, Cuba, Syria, North Korea, and other OFAC embargoed countries. There is also not enough meaningful liquidity on Veil to be able to buy a Grin hashrate derivative at scale. There are currently only two Grin markets open on Veil as of 1/16/19 with 0.80 Eth in open interest.
Because of this, I believe the best way to buy a hashrate derivative at scale would be through a centralized market maker within the crypto space. How to go about doing this I will leave for those with actual experience working with market makers to decide.
An additional topic worth exploring is using a derivative of Grin’s hashrate as a hedge, and its impact on risk metrics on a portfolio.
Additional note: The first two blocks produced on the day of the launch took over two hours to be produced. This indicates that the Grin team overestimated the difficulty and hashrate for the project.
