Andreas Park PRO
Professor of Finance at UofT
Discussion of:
A Model of the Optimal Selection of Crypto Assets
Paper by: SILVIA BARTOLUCCI AND ANDREI KIRILENKO
Discussion by: Andreas Park
November 14, 2019
2019 Philadelphia Fed FinTech Conference
crypto assets = traditional securities
crypto trading = traditional trading
crypto entities = traditional firms
Three fallacies for Crypto-assets
What is a crypto asset?
Technology
Legal/Regulation
Economic functions
Accounting
What is an asset?
-
Security
-
Throughput
-
Functionality
-
Compatibility
-
Control rights
-
Governance
-
Property/Ownership rights
-
Recourse/accountability
-
Cash flows
-
Contingencies
- state-dependent utility
- incentives
- externalities
Dimensions of importance for classification
Governance
(Stability)
Security
reliable
flaky
Mount Gox
Fort Knox
FED
Coins
Stable
coins
Utility
Tokens
Crypto
currencies
FED
Coins
Stable
coins
Utility
Tokens
Crypto
currencies
FED
Coins
Stable
coins
Utility
Tokens
Crypto
currencies
Dimensions of importance: decentralization?
Governance
Security
centralized
Mount Gox
Fort Knox
FED
Coins
Stable
coins
Utility
Tokens
Crypto
currencies
decentralized
Utility
Tokens
Utility
Tokens
Utility
Tokens
Stable
coins
Utility
Tokens
Utility
Tokens
Utility
Tokens
FED
Coins
Dimensions of importance: censorship resistance (for Cypherpunks)
Governance
Censorship Resistance
centralized
censoring impossible
censoring desirable
FED
Coins
Crypto
currencies
decentralized
Stable
coins
Utility
Tokens
To assess crypto-assets as investments we must understand their economics
Economic function
- some examples -
- Which incentives do they provide to issuers and users?
- What externalities do they create among users?
- Which state-dependent utility do they yield?
-
native to a blockchain for payment
-
examples: Bitcoin, Bitcoin Cash, Ether, Lumens, Cardano
- build on top of or linked to an existing blockchain
- various uses, not just payments
- could use blockchain natively or as payment and settlement tech
Cryptocurrency
on-chain Link
off-chain Link
- blockchain is a value transfer infrastructure
- claims to revenues, cash flows, assets (e.g. real estate)
- may use CBDC or Stablecoin in payments/transfers
How can we classify crypto assets?
A taxonomy by on- vs. Off-chain
Utility/payment
CBDC
Stablecoin
equity/debt
derivatives
old world,
new infrastructure
many open economic design questions
possibly transformative for business & finance
Infrastructure
reward
and internal currency
usage fee,
payment, or
incentive
usage fee
or
Payment
Service
Application
Tech Stack Layer
Role of Token
cryptocurrency
Token
Token
How can we classify crypto assets?
A taxonomy by location in the BLockchain Tech stack
Next feature of the model: the Selection "app"
Traditional Portfolio Theory
- collect information about assets' features such as expected returns and risks
- combine assets in a portfolio so as to maximize expected utility
- investors are price takers
- usually: \(1=E[mR]\) or \(p=E[mx]\)
Investment Approach in Paper
- sequence of pairwise comparisons of assets (similar to first application of Facebook as per "The Social Network")
- investors iteratively pick preferred asset
- aggregate choices determine returns
- changes to investment get assessed based on expected returns alone
Next feature of the model: the Selection app
Questions
- In paper, utility is represented as weights in the acceptance probability
- Won't investors end up with single-asset portfolio? Or will there be diversification?
- Is this meant to be a model or a proposal for a commercial product?
- How does this formulation relate to standard economic models?
- Is it a representation with known properties of utility functions (transitivity etc)?
- Is the model a reduced form representation of a more standard economic model?
final thoughts
There are by now a lot of papers that study crypto-assets like normal assets. BUT: Do we really understand their economic functionality?
This paper: step in the direction of understanding crypto-assets as investments.
My preference: anchor assumptions in primitives:
What features of crypto-assets give rise to "stability" and how does it affect payoffs?
How do features of "security" affect payoffs?
What type of preferences support the binary-choice equilibrium?
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
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Discussion of Bartolucci and Kirilenko: "A Model of the Optimal Selection of Crypto Assets"
By Andreas Park
Discussion of Bartolucci and Kirilenko: "A Model of the Optimal Selection of Crypto Assets"
This is the slide deck that I used for my discussion of the above paper at the 2019 Philly Fed FinTech conference.
