Introducing BlockSmith Capital

Bringing clarity to the crypto-asset class

Since the birth of transistors, we’ve seen an explosive growth in software products. Whatever the use case, code is a means of automation that ultimately increases our productivity. The blockchain is simply an extension of this pervasive computing trend, aimed at the automation of trust.

It started with Bitcoin. The real breakthrough lay in the utilisation of cryptography to create digital scarcity. Through a carefully defined mathematical model, Satoshi Nakamoto achieved a fully predictable issuance model for a currency. This eliminates the need for a central authority that could interrupt with the transactions or value.

In many developed economies, we have become accustomed to relatively stable monetary policy and this has indoctrinated trust in the macroeconomic institutions governing the monetary system. However, in many economies worldwide, monetary policy can become highly erratic. Avoiding political and economic influences, a rules-based issuance model for money strikes a positive difference.

The concept of a digital currency isn’t a novel idea, in fact, it has repeatedly failed in the past. Satoshi attributes these failures to a fundamental lack of decentralisation:

“I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them”. — Satoshi Nakamoto

While all the former attempts at creating a digital currency have failed, it should be noted that the average life expectancy of a fiat currency is just 27 years. We think that the suppression of a central authority and the introduction of a predictable model can only be beneficial.

Bitcoin was shortly followed by Ethereum, expanding on the idea of a decentralised network to automate trust in the transfer of value beyond financial transactions. Ethereum introduced Smart Contracts, which allow for small programs to be executed on the blockchain.

Ethereum was only created three years ago and some clear use cases have already emerged: recording provenance of physical goods, the authentication of data (especially from IOT devices), the tokenisation of goods and services, and digital collectables. While the aforementioned offer clear benefits, the technology is still in its infancy without adequate infrastructure to scale, yet.

BlockSmith is primarily a crypto-asset research company. We firmly believe that crypto-asset adoption can be accelerated through the provision of meaningful information about the industry and individual projects.

The Fund is currently a private auxiliary product, leveraging our research to take a pragmatic and long-term outlook to asset selection. A core part of our thesis is based on identifying the emerging networks that intend to build the necessary infrastructure to deploy this technology at scale. The utility value of these networks is a function of the number of users. Consequently, this will leave only a few, but significant, winners — creating an economic surplus to their users and investors.

It is our belief that a crypto-asset allocation of up to 5% of an overall investment portfolio provides an extra layer of diversification and acts as a hedge against mainstream financial infrastructure. Bought in a timely fashion and allocated to the most promising assets, an exposure to crypto-assets can provide attractive long-term returns.

We know that there is growth potential in the crypto-asset market. Even the most basic analysis of past price movement demonstrates this. In the long term, we see all of this growth, and more, as ultimately realisable, yet achievable through smoother growth curves.

We accept that many crypto-asset technologies will not survive long term, though this will only act to exaggerate the growth potential of the surviving technologies. The aim of our research is to find and test methods for identifying those technologies best positioned for long term survival.

At BlockSmith, we identify key metrics in the crypto-asset marketplace, and apply methodologies from traditional investment analysis, tweaking the method and the variables as required to suit this emerging asset class.

We aim to build new methodologies to provide meaningful quantitative, technical and fundamental analysis in the crypto-asset ecosystem. Our analyses are continuously tested and backtested to ascertain their validity in terms of real market movement.

We have become well accustomed to the lack of consistency in metrics across crypto-asset researchers. We aim to take in raw price data, and generate our selected metrics in-house, to ensure consistency of analysis. We then compare these metrics with one another, and ultimately to price movement, to determine predictive accuracy.

We look for long-term trend establishment, primarily using daily data, over and above intraday data. Our goal is to identify the crypto-assets with the greatest adoption potential for the future, through rigorous analysis of the relevant metrics and fundamentals.

Alongside the quantitative side of our analysis, we input a comprehensive qualitative project assessment, taking in data and opinion from blockchain professionals to provide an experiential edge to our analysis. This too is tested, backtested and graded for predictive accuracy.

The chart above gives an insight into one small window of our analysis. This is an example of the style of analytics we produce at BlockSmith, showing an overlay of ETH/BTC price and the pair’s Pearson Correlation Coefficient.

We use correlation analysis as just one element of a data driven approach that aims to predict forthcoming trends in the crypto-asset space. It is worth noting that the Pearson Correlation Coefficient uses a rolling 30-day data set, whereas the price uses daily data points.

We hope that you’ve found this article interesting and informative. Please follow us for future blockchain research updates.

Enquiries: charles@blocksmithfund.com