What's Really Driving
the Cryptocurrency Phenomenon?

Chris Dannen, Leo Zhang, Martín Beauchamp
Iterative Capital Management
November 2018


In this paper, we introduce investors to a decades-old subculture of eccentric software-makers who resist the oppressive and ethically-fraught traditions of corporate employment. We encounter how they set out in the 1980s to make commercial software irrelevant, and how their mission expanded into a war against all forms of institutional oversight. We examine their approach to organizing volunteer software production in service of this war, and how their methods produced successful software. We present Bitcoin as the next logical innovation in volunteer-based software development: an ad hoc human coordination machine, which uses unpaid, unplanned contributions in lieu of a salaried workforce. We will examine how a volunteer-based system can resolve moral hazards endemic to software infrastructure development in a commercial setting, if the participants in the system adhere to a strict set of rules. We look at how a distributed network of machines is used to enforce and maintain rules setup for human participants, even if those participants hold key roles in developing the system software. Finally, we consider the cost savings achieved in a system built with volunteer labor, and how the economics of these “permissionless blockchains” might undermine the value proposition of full-time software employment. We relate this outcome to the original goal of the software makers to make institutional software uncompetitive, and examine who will be caught in the crossfire. As a coda, we ask: what is the larger socio-economic impact of systems like Bitcoin, and who benefits?

Table of Contents

Preface: Timeline to Bitcoin

How did we get here?

Section I: What's wrong with the cryptocurrency boom?

On the challenges of evaluating cryptocurrency for investors and portfolio managers.

Section II: Historical background on the phenomenon

Using context to understand why hackers set out to build digital currency systems.

Section III: Understanding how the key participants organize

How hackers approached the building of their own private economy

Section IV: Human consensus in the cryptocurrency networks

How Bitcoin coordinates work amongst disparate groups of human volunteers.

Section V: Machine consensus via Proof-of-Work

How does Bitcoin use a peer-to-peer network of computers to enforce the rules agreed upon by human participants?

Section VI: How value accrues in Proof-of-Work networks

Considering the outcomes of Bitcoin’s incentive structure, and the levers that control them.

Section VII: The investment outlook

Hypothesizing about cultural and economic impacts at scale.

Appendix: Popular conceptions about price trends

Is there more at work than self-fulfilling prophecy?


Iterative Capital is a cryptocurrency mining investment manager and its subsidiaries include a wholesale dealer which sells cryptocurrencies. This document may contain information and opinions on cryptocurrencies in which Iterative Capital Management, L.P. and i2 Trading LLC invests, trades, or otherwise holds an economic interest. As a result, readers should be aware that Iterative may have an incentive to describe such cryptocurrencies and companies in a positive light in order to generate demand and increase the price. This document is intended for informational, educational and research purposes only and does not constitute investment advice or recommendations, and should not be relied upon as such.