Crypto assets fall under the “alternative investment” bucket along with hedge funds, private equity, real estate, as well as funds of funds, and compared to those other alternative options they present a massive market opportunity. The average person is still figuring out what blockchain means exactly, and they will realize where trust is muted that reputation is amplified through verification. People are beginning to understand that enterprise blockchains may have some difficulty and pose concerns because if they are not decentralized sufficiently they could be purported as securities and without any cryptographic native asset, coin, or token tied to its blockchain then its essentially just another database managed by a central body that requires trust and may be manipulated just like the current legacy financial system. Bitcoin, the King of Cryptoland, is known for being “digital gold” and has a few major hurdles before it can stand the test of becoming the next global reserve currency. Ethereum has some new competition in the decentralized finance game, but it enjoys having a good jumpstart on them as well as a strong community established around itself. The crypto market is still down considerably from its all-time highs, but there’s a crypto renaissance coming and it revolves around money and value. Central banks, institutions, and investors alike who are exploring the space will realize sooner or later that all blockchains lead to Bitcoin. When they do, it’s going to spark a buying bonanza that sends prices, “to the Moon!”
The main ingredient to crypto is not trust, it’s transparency by means of verification. The ability for two untrusting parties transacting with one another is incredibly powerful and makes an economy evermore efficient. The real beauty of these crypto assets and protocols are the cost-savings, remedies for fraud and its prevention, and the lack of manual reconciliation using blockchain technology compared to the aging infrastructure riddled with back-office inefficiencies and third-party intermediaries. Bitcoin alone with its technological forthcomingness may do more to help alleviate the damaging effects to society and human welfare that many of the institutions and their management cause from their negligence or lack of integrity. Prominent figures like Warren Buffett who has said Bitcoin is “delusional” and “attracts charlatans,” ironically defends the legacy financial system that people are losing their trust in as one of his largest investments is Wells Fargo who’s been fined over 90 times since 2000 for fraud as well as other abuses to the tune of some $15 billion (practically as much as Bitcoin and Ethereum’s current market capitalizations combined). Perhaps, what he meant to say was that it attracts mistaken culprits. It is odd that crypto assets have been popularized and associated with bad actors and criminals, yet unlike their fiat cash counterparts they are more resilient against manipulation, semi-anonymous, and easily traceable. The funny part of Bitcoin’s history is its involvement in the infamous Silk Road scandal linking it with that “shady” connotation; however, the truth is thanks to its blockchain that not only was the criminal mastermind who was the target of the investigation caught but it also exposed there were other perpetrators that ultimately were unveiled as a corrupt DEA agent and Secret Service agent both involved in the case. It says a lot about the reputation of Bitcoin representing transparency that you can trust, through verification!
Bitcoin, specifically, is trending up over the past month despite falling back from $4200 in late February to $3800 at the time of this writing as it looks to test breaking through the $4,000 level soon hopefully reviving a widely held bullish outlook. According to Peter Brandt, author of Diary of a Professional Commodity Trader, the value of one bitcoin would be worth $67,193 if the composite value of the network (fully mined at 21 million coins) equaled the value of the 33 thousand tonnes of gold held by the world’s central banks. The price trend growth of bitcoin using a logarithmic model has been an accurate value predictor, and bitcoin would appear to still be on track should the price of finish this year around $67,000. To reach those heights, the current prices would require a parabolic move that historically has been followed by a major correction that sets a “higher low” for yet another move up in the future. Bitcoin reaching that high is far more likely to me than it would be for it to fall to $0 because that would require even the most diehard supporters to lose confidence. Jamie Dimon, the head of JP Morgan who in September 2017 called Bitcoin a “fraud” and said it “won’t end well,” to his delight sent prices tumbling to $3,800 ten days after his statements only to see it later reach nearly $20,000 in December of that year. Taking this information with a grain of salt while bitcoin still in somewhat of a short-term correction and down 80% from its high, the long-term horizon is looking bright as its focus is on scaling prior to taking on major hurdles of firstly seeing its value reach parity with central bank gold reserves and secondly becoming as valuable as the United States monetary base in terms of the entire global monetary supply. In order to accomplish both of these leaps, it will likely need to be systematically adopted as the next global reserve currency.
“Web3” is the next generation of the internet that encompasses the original ideas of decentralization, openness, and permission-less collaboration. Ethereum, the “digital oil” of Web3, powers the decentralized applications (“dApps”) that are ambitiously taking it upon themselves to try and revolutionize money and finance like Compound, Dharma, Maker, GUSD, and USDC. These dApps use ether as the fuel that gets burned to power the Ethereum Virtual Machine (“EVM”) allowing executable code to operate smart contracts programmed to perform specific functions under certain conditions (hence “programmable money”). Ethereum serves as the base layer or “Layer 1” part of the stack that makes up a dApp, which PlaceholderVC has outlined in order from back-end to front-end as: (1) Layer 1, (2) Interoperability, (3) Middleware Protocols, (4) User Interface. Ethereum has a good jumpstart as the substrate of Web3 applications despite having some competition such as Cardano, Dfinity, and Polkadot that all have yet to launch but offer faster transaction speeds. Cosmos, another project challenging Ethereum’s shortcomings and marketshare dubbed as the “Internet of Blockchains,” launched this week and is seeking to create a network of distributed ledgers (blockchains). The launch of its main network (“mainnet”) intends to serve as the go-to for interoperability to make sharing information, assets, and money easier than ever before across blockchains and crypto networks. It also serves as major step in the crypto asset ecosystem though some concerns remain around its potential centralization.
The crypto market is in a dip, but there is a new dawn coming as advances in bitcoin and other blockchain technologies are enabling a transparent provider of trust people can verify around the globe in a peer-to-peer economy. Public and private blockchain implementations differ deeply in the way that it determines whether they are decentralized or centralized as well as if they are permission-less or permissioned, respectively. This technology is allowing many different solutions to applied and tested to the current banking system that is being disrupted by crypto assets. While they try multiple implementations of blockchain technology, it’s only common-sense that banks will realize adopting crypto assets and integrating them into the fractional reserve system will be optimal in contrast to being replaced by them. In the coming years, blockchain technology and crypto assets will historically change the way parties participate in capital and financial markets as well as the way securities are registered and managed because they revolutionized property ownership securely and with scarcity, digitally. Bitcoin and Ethereum are all about fostering confidence and reputation for their network security and reliability, many ICO’s and utility tokens needed to use dApps are fascinating quasi-securities that are legally challenging without any clear regulations yet that are mostly speculative of the network’s long-term value, and security tokens are looking to be the next big hype fest in the next crypto market boom cycle. Through democratization and decentralization, the value capture of Web3 is looking to be the most prolific at the base protocol layer (e.g. BTC/ETH) as opposed to the application layer at the top of the stack (e.g. Coinbase/Radar) that is powered by utility tokens or middleware protocols (e.g. 0x or ZRX token) and interoperability projects as well as niche use-cases which deliver solutions to issues arising from Layer 1. As far as that thinking goes following the fat protocol thesis: the lower it is in the Web3 stack, the better it is generally to invest in.
The future looks brighter than ever and the best investors will take a portfolio approach to bet on crypto assets. Although they will predominantly be weighted in bitcoin with some ether too, they will also take some moonshot bets to possibly profit handsomely off of as well as to further disperse risk out from their main investment holdings. I believe there are strong candidates for those smaller bets and will be lesser known projects like Numerai, which has an ERC-20 utility token (NMR) that powers a decentralized marketplace for predictions known as Erasure. It originally began as a hedge fund for data scientists who wanted to compete to model the stock market, and it would send them encrypted market data that they would use for their model submissions that would potentially be applied to a “meta-model.” The meta-model by Numerai combines the best models to trade on and pays the data scientists who’s models successfully perform well. Fred Ehrsam, the co-founder of Coinbase and Paradigm and previously a trader at Goldman Sachs, in his latest Medium post shares his interest in decentralized data marketplaces as well as combining meta-modeling and machine learning with blockchain incentives to create strong machine intelligences to generalize solutions to problems and power a wide array and variety of applications. Today, artificial intelligence and blockchain technologies are more complimentary than they are competitive in their nature because they can be used together cleverly in solutions where personal data security is of great importance. Fred has historically been a good gauge as to “where the puck is heading” in crypto and is backing Erasure’s new protocol accompanied by Union Square Ventures and Olaf Carlson-Wee (Polychain Capital, Founder). Full disclosure: I am not currently holding any NMR at this time, nor do I have a relationship with Erasure or Numerai.
Total market opportunity is huge for Bitcoin, Ethereum, and a select group of the Web3 stack. According to the World Economic Forum, “By 2027, 10% of global GDP is likely to be stored on blockchain platforms.” Blockchain has been flipping traditional models because retail investors in the crypto assets, protocols, and networks have been active and vocal about these products since day one, whereas traditionally money would have been raised privately and the product/service launched or would be announced to the public afterwards. The attractiveness right now of decoupling money from government control and influence is high because it affords people greater freedom, liberty, and privacy in an increasingly digital world. Money itself has become a monopoly that has been balkanized and separated by jurisdiction as well as digital since the financial systems around it fled from standards such as gold and silver that once backed it. Many bright minds think it is reasonable for there to be a separation of state and money so there is freedom of choice over money and value. This is spurring governments and central banks to learn how these technologies, networks, and assets work because soon they will be wrapping holdings on their balance sheets using some blockchain platform or else they might will lose out themselves. Andreas Antonopoulos said it best, “Bitcoin is not something that you build companies on top of. Bitcoin is something you build economies on top of.” Until it is realized they have already lost the race and that investing in blockchain without buying bitcoin is futile, we can all enjoy the show waiting for these large governing bodies and banks around the world to fully embrace that fact. Get your popcorn ready and prepare for takeoff, we’re going back to the Moon to Mars and beyond!
“We set sail on this new sea because there is new knowledge to be gained, and new rights to be won, and they must be won and used for the progress of all people. For space science, like nuclear science and all technology, has no conscience of its own. Whether it will become a force for good or ill depends on man, and only if the United States occupies a position of pre-eminence can we help decide whether this new ocean will be a sea of peace or a new terrifying theater of war. I do not say that we should or will go unprotected against the hostile misuse of space any more than we go unprotected against the hostile use of land or sea, but I do say that space can be explored and mastered without feeding the fires of war, without repeating the mistakes that man has made in extending his writ around this globe of ours. . . . We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too. . . . Well, space is there, and we’re going to climb it, and the moon and the planets are there, and new hopes for knowledge and peace are there. And, therefore, as we set sail we ask God’s blessing on the most hazardous and dangerous and greatest adventure on which man has ever embarked. Thank you.” — John F. Kennedy
Happy Pi Day!
Notable Bits of News:
Crypto Assets Venture into the Unknown – (Cambridge Associates) This report highlights their assumptions and expectations intended for their own investors regarding crypto asset exposure, proposing that there is booming investment activity and institutional investors have little to no capital invested it and if they are it is about “20-30 basis points.” Notably the Boston-based pension and endowment consulting firm said in a written investment note to clients that it believes “it is worthwhile for investors to begin exploring the cryptoasset area today, with an eye toward the long term.”
Coinbase Custody + Agency OTC: Instant Liquidity on Offline Funds – (Coinbase Blog) This blog post announces Coinbase Custody’s latest developments allow for seamless trading for offline funds or “cold storage” using an Agency-only OTC desk to provide anonymous access to trusted and vetted counterparties. These state-of-the-art services give clients a simple solution that affords them both security and liquidity.
IBM Quietly Enters Crypto Custody Market with Tech-Designed for Banks – (Coindesk) Looking to serve banks, brokers, custodians, exchanges, funds, family offices, and high net worth investors wanting to do self-custody, IBM is launching a beta version of a custody solution for digital assets with Shuttle Holdings (a New York Investment firm). The companies will not be storing crypto assets or tokens themselves, but offering tools to do so for others to use built on IBM’s private cloud and encryption technologies.
Chicago Chases Pot o’ Crypto – (Crain’s Chicago Business) ErisX, a crypto exchange based in Chicago, is competing in a market valued to be over $3 trillion against another local firm Seed CX as well as Bakkt that is Altanta-based, has physically-backed products, and supported by the International Continental Exchange infrastructure. With Chicago’s reputable futures and options exchanges and federally regulated market infrastructure, it’s historically been open to fintech and churned out top trading expertise and talent while it has slowly become a hub for crypto too.
Gold-Backed Cryptocurrency Is Almost Here – (Fortune) Paxos, a New York-based firm offering a dollar-backed product called Paxos Standard as well as Bitcoin trading services, launched its stablecoin “PAX” six months ago by tying cash reserves to a blockchain. They are sharing news of plans sometime this year to introduce investors to digital tokens backed by gold and stocks in the form of cryptocurrency, enabling trading in same way they might with Bitcoin.
Can Cryptocurrencies Enhance Portfolio Performance? – (Lund University Libraries) This interesting thesis paper revolves around an examination of the 17 largest crypto assets selected based on their market capitalization. The results of the study showed that not only bitcoin alone but a larger diversified portfolio of crypto assets presented a significantly improved Sharpe-ratio when compared to a portfolio holding strictly traditional assets.
SEC Affirms Stance that Ethereum (ETH) Is Not a Security, Could XRP Be Next? – (NewsBTC) Jay Clayton as the Chairman of the Securities and Exchange Commission (SEC) reaffirmed the agency’s stance that ether and crypto assets similar to it are not a security, and being exempt from that classification gives it a far more favorable regulatory treatment. This raises questions over what they consider truly to be crypto asset and what they deem to be a security as many investors wonder about XRP (the cryptocurrency created and issued by the Fintech company Ripple).
College Kids Are Using Campus Electricity to Mine Crypto – (PC Mag) Cisco security researchers have shown that the second largest sector, approximately 22% of the total mining of crypto assets, comes from college campuses. The findings suggest that students are likely using the benefit of free electricity from their dorms to operate mining rigs.