A New Frontier for Crypto

Blockchain technology has presented a new frontier for investing whether its crypto assets, decentralized applications, or protocols running on top of this revolutionary technology, it embodies the Silicon Valley boom of the late 20th century in terms of infrastructure and potential as well as the Wild West with characters famous for being gunslingers and outlaws. It is an investment emerging as the 21st century alternative to the traditional assets and markets of our outdated legacy financial system that is practically ancient in terms of technology. These subjects and topics are particularly cumbersome and easily discounted for their complexity, not to mention, the past year’s price consolidation. People serious about their wealth and who are the very best at managing their finances and at investing see crypto assets and blockchain technology together as an outstanding opportunity to place an asymmetrical bet in order to make outstanding returns on their principal if done so wisely. It is essentially wealth insurance should a macro level event like a currency or debt crisis ever happen too. The stage is being set for these new avenues to connect to the older financial infrastructure and legacy systems to onboard more customers and bring the masses a better form of money with security and scarcity in mind and become a part of a trustless and decentralized global network designed for a more digital world.

More people and money will certainly come once the prices begin going up again, which in the current market dynamics in consideration favors buyers and the long-term holders of these assets still. There’s a great maxim in technology investing that goes, “You don’t want to be the first one in on a trend, and you don’t want to be the last one on it either.” The interested parties are beginning to realize that sooner or later that they will likely make an investment or contribute large amounts of capital into these blockchain technologies through dApps and exchanges or invest directly into specific crypto assets, protocols, projects, or funds. Accordingly, smart money, large asset managers, and professional capital allocators are beginning to dip a toe in the pool to get acquainted with the environment. The main catalyst event they want to beat that many in the crypto community regard as a key driver to price growth and acceleration is the Bitcoin block mining reward halving (where the reward drops from 12.5 to 6.25 coins) on May 24th, 2020. Add an ETF approval into the mix and odds are high that a sustained price rally reminiscent of years past takes place.

The current problem that has been plaguing crypto is the pricing. The focus on the prices day-to-day and hour-to-hour are a waste of time and energy, and instead could be spent more productively on getting more active users on the decentralized applications. This could allow more people to interact with the infrastructure and to familiarize themselves with the actual assets, applications, protocols, and networks. It also could allow them to give developers valuable feedback on how to improve the technology or the user experiences and interfaces. While a large portion of institutional money is still on the sidelines, innovations and advancements in custody, on-and-off ramps for fiat, launch of Bakkt, Kraken derivatives and futures trading, and other progress is allowing more tools and options to be available to these investors so when their time comes they can jump in the pool informed and however suits them best.

The next phase in these markets is clear, institutional capital is coming in for the idiosyncratic opportunity to add exposure to uncorrelated assets that offer superior security, scarcity, and risk-return profiles relative to the existing holdings in their portfolios. A California-based asset manager made headlines this month for cleverly figuring out a way to work bitcoin into an exchange-traded fund prospectus, which the CEO said was the best way to get a crypto fund approved by the Securities and Exchange Commission. It is not a “full blown crypto ETF” because it limited exposure to 15%, but it offered solid evidence that demand exists for products that gives investors access to these crypto assets, protocols, and networks despite their limited histories or volatility. Unfortunately, the SEC has already asked for the withdrawal of the application by Reality Shares ETF Trust, though Bitwise still has an application under review. The Commodity Futures Trading Commission Chairman, J. Christopher Giancarlo, announced this month too that a bitcoin ETF will be approved eventually and that the CFTC’s priorities include practices around the crypto industry as it aims to improve their relationship with the markets it regulates to promote “a culture of compliance.”

Last year, I thought security token offerings (“STOs”) would be a trend that persisted into this year and into the future. It appears they are one of the hot topics in crypto despite a lack of real demand since the fall in prices and rise in scrutiny over initial coin offerings (“ICOs”). For individuals who are interested and certifiably accredited investors, STOs fundamentally differ from their ICOs predecessors in that the tokens are tethered to assets like real estate, debt, and company interests or shares. This also makes them less subject to price volatility naturally, but they would also be subject to securities laws that would limit their issuance since not all investors are accredited. Bloomberg published an article detailing them this month as they have also come under question as to whether or not the Securities Exchange Act could require their issuers to register as public reporting companies.

Hester M. Pierce, one of the five commissioners of the US Securities and Exchange Commission, talking about crypto-token sales was quoted saying:

“We rightfully fault investors for jumping blindly at anything labeled crypto, but at times we seem to be equally impulsive in running away from anything labeled crypto. We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.”

Given at a speech, Pierce was warning the SEC again about the risk of misapplying securities laws to digital assets, coins, or tokens and the potential harm to innovation that it may cause as a result. She also said that Congress could resolve the issue by creating legislation that simply would install a new framework for some crypto assets. It still may take further maturation of these assets, blockchains, and networks, but at least there are credible people that are providing oversight and who want to take charge leading them in the right direction with sensible and positive regulation. The lack of regulatory clarity has been one reason that more established and conventional investors have yet to invest, or at the very least integrate these products and solutions into their own businesses.

Institutional investment pace for digital assets is accelerating, according to Greyscale’s 2018 Q4 report, and it’s still only the beginning! Historically, prices have propelled upwards usually as a result of people’s fear of missing out or “FOMO” that typically follows highly positive and very publicized news. One main ingredient that is still missing for crypto is the “killer” product or application that sees an influx of adopters who send prices soaring again from network effects and potential for monetization value. The promise of the Lightning Network’s developments on Bitcoin could easily make it the killer app of crypto and Web3. There’s more opportunities available now to investors than ever, especially for the more sophisticated individuals and institutions, and the crypto landscape is looking ripe for investment as conditions in the greater capital markets are changing rapidly with consideration to global stress and political factors. Interest will build, pun intended, as developers continue to make Bitcoin and other similar crypto networks faster, more efficient, and transactionally more powerful. This technology is very similar to the early Internet in the dotcom boom and is still so new that applications and browsers are being developed today.

Overall, there has been a good amount of news that shows how positive the crypto market outlook is for the years to come. The themes I will reiterate and think of as being prevalent this year and in the future will be faster and more efficient payments, interoperability between blockchains, new trading venues, security token offerings, and stablecoins. It will be an important year as I believe it will be the setup before the two main catalysts that will come next year, those being the block reward halving and an eventual ETF approval from the Securities and Exchange Commission. I’ve shared my view that an ETF approval is not that important this year, but it should be clarified that it just ranks lower on my priorities of importance under
institutional products by Nasdaq, Fidelity, and TD Ameritrade, further institutionalization, expansion of futures and derivatives markets, improvements to liquidity infrastructure, privacy implementations, positive crypto regulation, Lightning Network growth, and price appreciation.

This is not to say that fear, uncertainty, and doubt (“FUD”) isn’t prevalent still in crypto, but to that point the best investments and opportunities are made when that element exists. Terry Duffy, CEO of CME Group which is a leading derivative market, expressed his views in an interview with Bloomberg that until governments start to accept crypto assets the challenge of getting comercial banks involved remains. He commented that the success of any currency is that it’s associated with the government and needs its involvement, and amazingly the next day two sovereign nations settled a transaction in Bitcoin. From looking at how successful just bitcoin has performed since its inception, it benefits and thrives still today by not being associated with any one government. Governments like banks, courts, and stock markets have been known to shutdown (sometimes from inefficiencies), but Bitcoin never shuts down and it never will. Buying into the FUD and going long bitcoin and crypto now seems reminiscent of Warren Buffet’s old saying, “Be fearful when others are greedy and greedy when others are fearful.”

Notable bits of news this month:

Some Wells Fargo Customers Are Still Having Issues Nearly a Week After a Nationwide Outage(Bankrate) Unlike blockchain networks and crypto assets where you can be your own bank practically, banking networks are prone to shutdown and keep people from their own money.

Jack Dorsey: Lightning Coming to Square Cash App Is ‘When’, Not “If”(Bitcoinist) Lightning Network is the powerful decentralized system that allows for sends transactions over a network of micropayment channels whereby the transfer of assets occur off-blockchain.

First US Public Pension Funds Take The Plunge on Crypto Investing(Bloomberg) It’s happening! The beginning of institutional capital and large funds entering the crypto space and starting to gain exposure to these assets, applications, protocols, and networks.

Most Cryptocurrencies Will Die a Painful Death(Bloomberg) Barry Ritholtz, founder of Ritholtz Wealth Management and previous chief executive and director of equity research at FusionIQ, hosted Matt Hougan who is the Bitwise global head of research. He warned, “95 percent of these will die a painful and deserved death.” Though, the survivors potentially could pose interesting investments.

Luxembourg Passes Bill to Give Blockchain Securities Legal Status(CoinDesk) This bill adds the registration and distribution of securities using blockchain and amends a previous bill that passed in 2013, originally making it possible to legally issue “dematerialized securities,” which essentially made the technology legally identical to traditional payments.

Winklevoss Exchange Gemini Shuts Down Accounts Over Stablecoin Redemptions(CoinDesk) Interesting headline especially last month’s commentary on stablecoins, in partciular, censorship concerns. It raises questions around the decentralization and actual use-case for them with companies like Facebook rumored to be exploring this option.

New Cryptocurrency Custodial Services Could Attract Institutional Investors(Investing) Overview of the custody advancements that could attract institutional investors by improving the environment for security and safe-handling of cryptographic bearer instruments.

JP Morgan Creates Digital Coin for Payments (JP Morgan) That’s right… The bank who’s chief executive officer was critical of Bitcoin, going so far as calling it a “fraud”, announced that it will offer an internal stablecoin called JPM Coin for select customers based on blockchain payment systems.