This document summarizes a presentation given at the International Scientific British Blockchain Association Conference about developing a theoretical model for crypto-asset investment. The presentation discusses how blockchain technology works, defines different types of digital currencies, and outlines an economic model analyzing factors that influence investors' decisions to invest in crypto-assets versus traditional assets. Specifically, the model considers how rents, social trust, and waste of resources impact utility for investors and governments. If utility is positive, investors will keep assets locally, but if negative, they will switch to crypto investments. The presentation concludes by discussing policy implications for decentralization, price stability challenges, and applying the blockchain theorem to stablecoins and CBDCs.

1. International Scientific British Blockchain Association Conference
Napier University, Edinburgh, Scotland
11th March 2020
Portfolio Theory: crypto-asset investment
Alfio Antonino Puglisi

2. Agenda
•Digital currencies and blockchain
•Theoretical model for crypto-assets investment
•Policy implications for regulators and central
bankers
•Conclusion

3. Central banks join in piloting digital currencies, a move to add long-term credibility by centralizing
crypto use cases
Introduction

4. Fidelity has bet on crypto by incubating a digital
asset service provider
• Custody of cryptocurrencies for enterprise clients. Its platform only
supports Bitcoin currently, but Fidelity has stated it plans to start
supporting Ethereum in 2020.
• Trading platform for best execution. Fidelity’s platform sources
information from different exchanges and market makers, then
returns the best bid or offer to the client.

5. What are digital currencies?
Digitally represent values currencies
Not denominated in ledger tender
Denominated in legal tender (Paypal,
e-money)
Convertible to real-world gods,
services , money
Non convertible (game coins such as
second life coins)
No central authority
Centralised, web authority
Uses tech from cryptography to
validate, hundreds of
cryptocurrencies (bitcoin, Ethereum,
Litecoin)
• Digital currencies
• Virtual
currencies
• Convertible
• Non Convertible
• Decentralised
• Centralised
• Cryptocurrencies

6. How Blockchain DLT market works or may work
Transaction
requested
•Network users request a transaction
The
transaction is
processed
•to a peer-to-peer network of computers
The network
validates the
transactions
•as well as the user’s status using algorithms. Transaction is approved when consensus has been achieved
among computers
The new block of
validated
transactions
•The new block of validated transactions is added to the existing digital ledger. Entire transaction, including
asset ownership, is cryptographically recorded in ledger.
•Permanent audit, immutable, records on the ledger.
The transaction is
completed
•The transaction is completed and shared simultaneously on the updated ledger

7. Theoretical Model
• In this model there are two agents: government and investor.
Government utility function
𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 = 𝑚(𝑝)
Investors utility functions
𝑈 𝑐𝑟𝑦𝑝𝑡𝑜 − 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑈!,#
$
+ 𝑈!,#
%
Assumptions
• There are two sub periods τ = 0, 1 in each period t.
• There are 𝐼 number of investors
• heterogenous investment preferences.
• Investors consider the devaluation of money due to inflation.
• Blockchain applications in financial services allow social activities on the
blockchain. These activities are exogenous to the model

8. Assumptions expanded
• Phase 1: Investors switch to crypto-asset investments.
• Phase 2: Investors move their capital abroad.
• Phase 3: Investors have faith in the government and their wealth may
be affected by inflationary pressures
investors decide to stay in their domestic economy according to three concepts
as follows: rents, social trust, and resource costs. I provide a statement of the
investors’ preferences and a proof of the concepts

9. Proof of concepts
• The rent extracted by a group of investors h from an investor 𝑖! ∉ 𝑖 in a state 𝑠 when
investors in 𝑖 have types of financial activities $𝜃" is defined as:
𝑟∗
ℎ, 𝑖!
, 𝑠, 𝜃" = *
"∈%
𝐸[𝑉"
$𝜃", 𝑠 𝑖!
𝜖 𝑃 − [𝑉"
$𝜃", 𝑠 𝑖!
∉ 𝑃
• The social trust of investor 𝑖!
in a group of investors ℎ is the value of mutually beneficial
relationships for ℎ generated by the presence of 𝑖!
:
𝑠∗
ℎ, 𝑖!
, 𝜃 = *
"∈%
𝐸[𝑉","!
'
|𝑖!
∈ 𝑃] − 𝐸[𝑉","!
'
|𝑖!
∉ 𝑃]
• The waste of resources of the corresponding investors to moving to a blockchain
economics of financial markets 𝑏 is just the sum of the resources that stay in the
domestic economy, 𝑘𝑣 represent resources of investors:
𝑐∗ 𝐶 = ∑(∈) 𝑘𝑣(𝑏)

10. Blockchain Theorem
• From the three conditions written above, we can write the following
theorem, where V represent the total value of the utility of the investor:
𝑉 < 𝑟∗
+ 𝑠∗
+ 𝑐∗
• Where 𝑟∗, 𝑠∗, 𝑐∗ represent rent, social trust and waste of resources of
investors and government respectively.
• The investment conditions are:
If 𝑉 < 0, investors would switch from local investment products and or any
other investment products to crypto assets.
If 𝑉 > 0, investors keep their investment position in the domestic market,
having a positive impact on the real economy.

11. Policy implications
• The decentralisation of the financial infrastructure allows investors to
move capital across-borders without passing through a central
trusted intermediary.
• Cryptocurrencies pose three challenges for price stability:
A. Crypto currencies modify the quantity of money.
B. Crypto currencies influence the velocity of money, the use of cash,
and/or influence the measurement of money.
C. Crypto currencies can be used online and in the real economy.
• AML concerns

12. Conclusion
• The model presented in this paper is based on the idea of a DLT-based
market of securities, where investors have the option of switching
between traditional financial securities to crypto-assets.
• If a DLT based market will be created, understanding the incentives
for investors as well as for market participants is important.
• The Blockchain theorem developed in this model also applies for
alternative investment classes such as stable coins and central bank
digital currencies.

13. Q&A
Thank you for your attention
Stay in touch
@Alfio64337855
alfio.puglisi@kcl.ac.uk