Bitcoin Springs Back into a Bull Market!

Spring has sprung! Accordingly, bitcoin and crypto assets jumped on the bandwagon as their prices surged across the board over the past month as investors took notice too and also observed the return of FOMO. It’s left many questioning whether or not the bottom is in for bitcoin. The price per coin in US dollars has soared over a thousand dollars since the last blog post when bitcoin was roughly $3,850 and is trading for around $5,200 at the time of this writing. It also sparked enthusiasm for another iteration of “alt-season,” when crypto asset prices increase broadly following Bitcoin’s price momentum and spikes in public interest. The financial news covering crypto prior to the run up in prices was raising doubts about inaccurate data reported on exchange trading volumes and now is expressing its concerns with “Flash Boys”-like trading bots deploying algorithmic and quantitative high-frequency trading strategies on crypto exchanges. April 2nd was the single largest intraday price swing from roughly $4,175 to $5,050 (about 20%) per coin since December 2017, which as we all know was when bitcoin reached its all-time high. The timing of it led many to speculate if it was an April Fool’s hoax, short squeezes and liquidations, or a lone buyer with $100M and orders spread across various exchanges.

Bitcoin and crypto asset prices have mostly traded down since about August 2018 when FUD was rampant still with talk of protocol wars as well as questions surrounding the regulatory environment concerning initial coin offerings (ICOs) from the Securities and Exchange Commission. Since that time, progress has been made but the only thing missing has been some encouraging regulatory news or a distinct catalyst like an ETF approval. The SEC has postponed their decision to mid-May as to if the Bitwise Bitcoin ETF (that tracks their Bitwise Bitcoin Total Return Index drawing prices from trusted exchanges) application fits their criteria and is ready for investors. Valerie Szczepanik, Senior Advisor for Digital Assets at the SEC, at the SXSW conference last month indicated that even some stablecoins may be viewed as security tokens in their eyes recommending that companies contact the commission regarding possible problems and to ask for permission. She also explained that no matter the name of the stablecoin or token at the end of the day what really matters is what’s “behind the label.” While this includes algorithmic and digital-asset backed products, it highlights the need for a deeper examination and some basis to decide which stablecoins and digital assets can be perceived as securities with legitimate issues under the current laws as well as a withstanding investment framework (perhaps multiple).

The institutional outlook has brightened as skeptics are becoming more accustomed to the price swings. Enthusiasm for bitcoin has not disappeared even despite the Chicago Board Options Exchange (CBOE) delisting their bitcoin futures product, which in comparison to the Chicago Mercantile Exchange (CME) had far less daily historical trading volume and was subject to more manipulation since it was only derived from one exchange providing its information. CME’s bitcoin futures product was superior and benefited from having more clients available to it being a bigger exchange as well as from using an index that is comprised of multiple exchanges providing its information. It is another sign of maturation too because there seems to be a real demand for products that are physically-backed to give the buyers the option to “hodl” the asset or sell at a later time of their choosing at a “real” price. To this point, Intercontinental Exchange’s (ICE) yet-to-be-launched futures trading platform with physically-backed products for institutions, Bakkt, raised $182.5M last year and following its recent Series A funding round saw a post-money valuation approximating $740M. Reaching unicorn status can be a sentiment indicator for these products, and Bakkt’s latest valuation could allow it to exceed $1B at its next capital raise without sacrificing any considerable equity.

The decentralized finance ecosystem just got a little more interesting last week with news of Harvard University’s endowment venturing into crypto and purchasing crypto assets, directly. This comes after other notable news of Yale’s endowment making a similar investment last year and pension plans investing into a venture-capital fund for the blockchain and digital asset industry earlier this year. According to Bloomberg, citing a recent SEC filing, Harvard Management Co. joined two other investors in backing Blockstack Inc. by purchasing 95.8M Blockstack Tokens, valued at $11.5M. Blockstack’s offering is said to support its decentralized computing network, which utilizes the token. The New York City-based company has built a “parallel internet” where those who access and build on the platform maintain autonomy over all of their own data on blockchain applications. It’s also expected to be the first industry firm to have a token sale approved by the SEC’s “regulation A+ framework.” While the investment was not Bitcoin or other crypto assets themselves, it is especially exciting to see that the endowment is happy holding their own tokens.

The crypto asset universe has us all waiting for the technology to materialize and scale to the point where it serves as the foundation of the next generation’s mainstream consumer applications such as e-commerce, gaming, social media, and more. While that will take an ample amount of time to happen, decentralized finance or “DeFi” is a sector where scalability is not such a priority and a place that blockchain, bitcoin, and crypto assets are already showing their promise. It encompasses all the ICO activity that has largely been built on top of Ethereum and the ERC-20 token as well. Coinbase’s CEO, Brian Armstrong, issued The State of Crypto with a statement that the company tweeted saying, “Crypto may have started with speculation, but that’s not where its headed. Decentralized lending, interest, derivatives, prediction markets – there’s so much happening to be excited about.” It is thrilling to think of applications and platforms where there isn’t any intermediaries, clearinghouses, or “trusted” third-parties, and DeFi won’t be the only sector where blockchain technology and crypto assets shine because people will soon realize the use-cases beyond just money and banking for applications to be built for the mainstream consumers using them. There is a growing consensus of people who are coming around to the idea of trusting algorithms over humans when it comes to making accurate, disciplined, and speedy monetary policy decisions.

Bitcoin and other crypto asset penetration around the world is likely to be over 10% now, but the amount of people really using it and spending it probably is much slimmer. The value and investment returns though have increased quite significantly over the years, yet commercial adoption remains low despite there being a successful global payment network that’s immutable and irreversible as well as was fast, frictionless, and free to accept without fees. This gives them their money in hours not days through strong security measures and without middlemen, delivering consumers as well as merchants true ownership and control over the multiple currencies and assets they opt to accept and/or hold. Hypothetically speaking, if accessibility and adoption spreads to the point for bitcoin as well as other crypto assets that the global penetration rate rises into the double-digits, where do you think prices would be compared to now? I can see a future where bitcoin and crypto assets are so ubiquitous they’re integral not only to online shopping and transactions, but they extend themselves so far to become common in stores as well as during dining experiences, entertainment, sporting events, and more globally. It’s hard to imagine where they may go from here and what that might look like exactly, but institutional and commercial adoption can certainly help them get there and reach new heights along the way!

Taking this all into consideration, there is a myriad of reasons why Bitcoin is poised to carry on its fresh bullishness. Above all, the economic landscape appears to be uncertain about its future facing slowing GDP numbers that are posing the growing threat of a recession around the corner while the Federal Reserve is also tightening monetary policy that will thoroughly cap growth. Bitcoin and crypto assets, as alternatives to other current investment opportunities, display uncorrelated and asymmetric return profiles and are emerging as the supreme hedge against market shortfalls and contractions as well as devaluation of global currencies. Looking at the hourly chart for the BTC/USD pair on Coinbase (see below), it looks positioned for Bitcoin to continue its strong uptrend through the end of the month into May. Best case scenario would be seeing it reach $6,000 before then, and worst case scenario would be prices skidding well below $5,000 to break the trend and fall around $4,600. As fears of a slow down and recession looms in the minds of investors, I’m confident in the bull case for Bitcoin and the greater crypto asset market to continue and prolong its current bull market.

Notable Bits of News:

Cryptocurrencies are ‘clearly shaking the system,’ IMF’s Lagarde says(CNBC) The Managing Director of the International Monetary Fund, Christine Lagarde, urged that the emerging crypto industry should be monitored and regulated in hopes of limiting the disruption caused to global stability. Speaking in her interview with CNBC (below), Lagarde regarding the disruptiveness of the technology expressed her view that it is already changing the way companies do business. Notably, she was quoted saying that she thinks “distributed ledger technology, whether you call it crypto, assets, currencies, or whatever…” is so powerful that too much innovation could apparently “shake the system so much that we would lose the stability.”

A Unique Look Under the Hood of One of the World’s Most Comprehensive Crypto Insurance Programs(Coinbase Blog) Coinbase, the major San Francisco-based exchange, has held an insurance policy placed by Lloyd’s registered broker Aon and sourced from a global group of US and UK insurance companies (including certain Lloyd’s of London syndicates) covering its hot wallet crypto holdings since mid-November 2013. In particular, the policy was to protect against what the exchange identifies as being the highest-risk consumer loss scenario in the crypto industry – theft by hacking. The details have been disclosed according to Coinbase’s Chief Information Security Officer (CISO) Phillip Martin who outlined the two chief insurance classes involved in crypto insurance (Crime and Specie marketplaces) noting, “Importantly, that means that a Specie policy would not be responsive to a loss of funds that occurred due to an on-blockchain failure (e.g. a vulnerable smart contract multi-sig implementation).” He provides insight and an analogy to explain the distinction between the two classes, proposing that while Crime policies insure “value in transit,” Specie policies cover “value at rest.”

Numerai Token Sale Raises $11 Million From VC Firms Paradigm, Placeholder(Coindesk) Mentioned in last month’s post with incredible timing, Numerai, made headlines with prominent crypto VC firms purchasing the NMR token directly to invest in the Erasure protocol rather than its parent startup. The opportunity was attractive to the VCs who liked Numerai for its existing track record, strong team, and community of 44,000 registered users with weekly data science competitions on its current platform. Erasure, the decentralized offspring of Numerai’s existing marketplace, is said to launch later this year according to the founder, Richard Craib. Erasure.xxx will offer users the ability to see how much was staked, paid, greifed, and more allowing them to track how much hedge funds spend buying predictions on its marketplace including Numerai’s own fund itself to draw more users to Erasure, Numerai, and the NMR token.

Chicago Mayor Says Crypto Adoption Could Be Inevitable(Forbes) Chicago’s mayor, Rahm Emanuel, at a meeting discussing the city’s FinTech movement explained his position on the community saying, “I think we have something really unique and special here in Chicago.” Emanuel mentioned he thinks an alternative currency dealing with the debt markets is going to happen at some point in the future too. The purpose of the meeting was to talk about how to base Chicago as a top hub, or in more straightforward language as “The Crypto Trading Capital of the World.” He certainly thinks the city has the makings and necessities for crypto innovation success. Emanuel also went on the record to add that he believes the trends show that the movement has an affirmative future, especially in Chicago with its rich trading history. The city also made crypto headlines recently on CryptoPotato with the announcement from the popular crypto asset exchange BitMEX partnering up with Chicago-based Trading Technologies (TT).

Square is Staffing Up For a New Cryptocurrency Unit(Fortune) Jack Dorsey, CEO of Square and Twitter, as one of bitcoin’s most distinguished advocates tweeted “I love this technology and community. I’ve found it to be deeply principled, purpose-driven, edgy, and…really weird. Just like the early Internet! I’m excited to get to learn more directly.” This came after another tweet announcing that the firm was hiring to create a team of 3-4 crypto engineers and 1 designer to work full-time on open-source contributions to the bitcoin and crypto asset ecosystem for Square Crypto. The motto of Square’s first open source initiative is “Vires in numeris.” (Latin meaning, “Strength in numbers.”) Appropriately, it will be independent of their business objectives and will focus on “what’s best for the crypto community and individual economic empowerment,” with all resulting work being open and free.

Kraken is Delisting BSV(Kraken Blog) An official announcement from another U.S.-based crypto asset exchange, Kraken, posted on its blog saying alongside upstanding members of the community and in consultation with their users their decision to delist Bitcoin SV and included the opinion poll results taken from Twitter. The news comes after months of community criticisms and scrutiny over the supporters and team behind Bitcoin SV, specifically taking offense to fraudulent claims and threats to various members of the crypto community with lawsuits for speaking out about their doubts regarding the true identity of Satoshi Nakamoto. Kraken joined other exchanges and wallet operators in ceasing support like ShapeShift, Binance, SatoWallet, and Blockchain. Jesse Powell, Kraken’s CEO, also hinted in another interview that the exchange will probably start listing two coins a month beginning next month in May.

Goldman’s Trading Floor Is Going Open-Source—Kind of(Wall Street Journal) The Wall Street firm plans to release some of the code that its traders and engineers use to price securities and analyze and manage risk. Just from what has been said in other news and reading by reputation, Goldman does not seem like the type that would shed its trademark secrecy and it could not care less about the loyalty of code-driven traders. This news comes as there has been an open-source push across the entire financial industry, thanks to bitcoin and blockchain, but personally it just seems to be geared for their own in-house technology resources to boost efficiency, enhance speed, and otherwise cut cost while charging clients more fees. Going open-source eliminates the need for as many analysts and back office employees, plus given the rise of automation and artificial intelligence it will help simplify the work for remaining employees as well as allow them to perform other functions outside of their traditional scopes.

“We choose to go to the Moon.”

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.

(NASA)

#Moon2Mars

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.

Crypto Facts & Fantasies (2019 Thesis)

It is a new year and there is much to accomplish in the crypto space! Optimism is running high too. Despite the drawdown in prices over the past 12 months, everyone seems to believe this is the year that the large amounts of institutional money flow into the blockchain and crypto space. While for some people the big money cannot come soon enough, it has been notoriously established that many of the large capital allocators like banks, endowments, family offices, financial advisers, pensions, and other institutions are taking their time regarding crypto assets waiting for more regulatory clarity and/or to prudently allocate funds to these new strategies, initiatives, and investments. These investors are overwhelmingly positive on the blockchain space want to gain access to crypto at these prices but are limited from their varying specialties, backgrounds, and levels of knowledge regarding crypto. For many it is only the beginning of their educational crypto voyage, although there is also a couple subset groups that either do not have mandates against crypto specifically and are evaluating crypto managers like other alternative fund managers or that are knowledgeable and considering an immediate allocation. They have many different options to choose from such as investing directly into blockchain assets and protocols, futures and derivatives, pooled investment vehicles and trusts, or through an exchange traded fund (ETF) granted one is approved after going through the right channels and proper authorities. I personally think that an ETF can acquiesce and help make Bitcoin more ubiquitous than it is currently, but it will take a laborious effort to make it more transparent to the SEC ensuring that specific criteria are met in order to help drive their decision. In my opinion, having an ETF will not be all that important or helpful for its growth or development besides just letting mostly retail traders and some institutional investors put some skin in the game without actually owning any real crypto. This year has two filings set for regulatory review (Solid X/Van Eck & Bitwise) that are already facing obstacles from delayed decisions and the current government shutdown furloughing many government staffers at the SEC. Bitcoin’s blockchain and network are politically neutral and borderless and have been running continuously for over a decade and earned its reputation for being the best investable instrument for secure, low-cost transactions that also offers incredibly more throughput for the amount of value it can handle relative to modern payment processors despite its limitations on the number of transactions it can process per second.

The crypto market has a lot of projects and products, but many of them lacked two way price discovery until last year. Much of the downward pressure was added by the ability to go short with the emergence of new exchanges, markets, and products. It changed the tune of the market like a piano player being allowed to play with both hands instead of just one. It is evident that the bottom is in for bitcoin around $3200 and its recent resistance upwards suggests it will retest that level. It is possible it goes lower, but there is ample information and data available about bitcoin aside from the current prices being where they were in September 2017 to show it has an immense amount of upside for its superior qualities to holding either fiat currency or gold as well as other alternative investments. Speaking of which the amount of money invested in bitcoin and crypto assets as a total is dwarfed currently in comparison to hedge funds, private equity, real estate, commodities, and fiat currencies. In the next decade though, Bitcoin and the crypto market will find itself being equally if not more valuable than all of them. It is a gateway for people to other decentralized markets, protocols, assets, and applications like it that people find as completely novel or as appealing, cost-efficient alternatives to analog or centralized counterparts that may also appreciate and gain mainstream prominence in their own right. Once people realize how much value is possible and the money that is coming in, they will spark the next leg up and revive the poised bull market in crypto assets. The only target I have and will make publicly is for bitcoin’s price since its is what the market and I follow most closely and because it also has the longest track record. My price call is for it to be valued, conservatively, between $60,000 – $100,000 by the end of 2020 for my investment time horizon. It is presenting around a 15X to over 25X multiple opportunity from these current prices and that is why I choose to be long bitcoin.

In an effort to publish more often and help demystify the space to present more meaningful content that helps transparency as well as decision-making, I am publishing the first edition of Crypto Facts & Fantasies.

FactsFantasies
1. From 12/31/2016 – 12/31/2018, Bitcoin’s market capitalization grew by 323% and its price saw an appreciation of 288% according to CoinMarketCap data1. Bitcoin is dead
2. The Total Market Capitalizations on CoinMarketCap according to their data shows the market as a whole is up about 770% from about 2 years ago, 1,970% from 3 years ago, and 3,260% from 4 years ago 2. The crypto asset market is in a “winter”
3. Money around the world is already digital from the fractional reserve banking system, flee from the Gold Standard, and rise of applications for fiat peer-to-peer payments (physical paper notes are only about 8% of the total money supply), and it is slowly shifting into the form of crypto assets with decentralized blockchains3. The money of the future won’t be digital
4. Stablecoins are either 1:1 or algorithmically collateralized to be pegged to the US dollar’s value, even though they realistically should be pegged to the Consumer Price Index (CPI) that measures the average change over time of the prices paid by urban consumers for a market basket of consumer goods and services. Many are also subject to centralization, censorship, or privacy concerns that defeat many precepts of crypto assets 4. Stablecoins offering active investment qualities or any potential investor returns
5. The best performing crypto asset investments and strategies will be diversified, though their largest position will likely still be in bitcoin which will remain as the dominant Store-of-Value (SoV) as well as Medium-of-Exchange (MoE) with the continuing maturation of the Lightning Network (a network of trustless micropayment channels working to solve scalability)5. Being 100% invested in any one coin or token doesn’t make you a fanatic without protection for ignorance
6. You don’t really own your crypto assets unless you hold your own private keys, otherwise they are practically just IOUs from a business that may not be secure or trustworthy, insured, or that complies with your jurisdictional laws 6. Exchanges are secure places to hold crypto assets as trusted intermediaries (i.e. financially responsible)
7. Crypto asset investment firms like Grayscale revealed that the majority of capital inflow (56% of all new investments) during the first half of 2018 was institutional capital, and the Intercontinental Exchange (ICE, the NYSE parent company) is offering contracts for trades which will result in physically delivered Bitcoin in the regulated Bakkt Warehouse (regulated by the CFTC) 7. Institutions and legacy financial corporations will not get involved in the next generation of money and lose out on potential revenue streams
8. While many of the markets that provide data to CoinMarketCap may show drops in trading volume, OTC volumes that are not frequently reported on like Gemini’s desk saw over 50% year-over-year growth and many more are cropping up around the world to serve major investor interest looking for high and low-touch trading services 8. Trading volumes have dropped and institutions are concerned about possibly “catching a falling knife”
9. Government censorship isn’t feasible with Bitcoin and many crypto assets as well as decentralized applications because they are not routed through the legacy banking system, traditional financial networks, or 3rd parties 9. Central banks do not explore the creation of a peer-to-peer currency or token that they are able to control the ledger to ultimately
10. The federal government in the US has been shutdown now for three weeks over funding a 5 billion dollar dispute, while in the meantime it spends that much virtually in a less than half a day 10. The Bitcoin network experiences a shutdown after the built-in proof-of-work consensus mechanisms fail to come into an agreement

I’m excited to see how these facts and fantasies materialize, or don’t, eventually and how they impact my own theories, methodology, and strategy. The main focus should be aimed at standardizing, scaling, and maturing the overall crypto ecosystem. Crypto as a whole still has a long way to go and every day it gains regulatory clarity, greater OTC and futures trading volumes, new traditional as well as innovative exchanges and trading venues, and more people interested in it brings it closer to becoming fully adopted. The capital markets are shifting and investor demographics are changing too while in the meantime the search for yield is intensifying. Crypto assets fundamentally provide a unique combination of low correlations and high potential returns in comparison to traditional asset classes making them uniquely attractive as a diversifying asset class for long-term investors that have potential to make a large impact on their overall portfolios. Even the smallest of allocations to gain some exposure at 0.25% up to even 10% of an investment portfolio, crypto assets’ powerful performance and historical risk-adjusted returns have shown that they are to be taken seriously as an up-and-coming asset class and infrastructure. As an investment, crypto assets offer investors exposure outside of the traditional financial system as an alternative that may actually turn out to be more dangerous NOT to have in your portfolio. If you are in the U.S. geographic area, please let me know if you would like to consult my opinion on a specific investment or portfolio, know more about my proprietary ratings system (patent pending), or are interested in the systemic bliss crypto index. Additionally, if you’re in Chicago feel free to connect with me and drop me a message if you’d like to meet for some coffee and chat about crypto.

Hope you’re having a happy new year!

To the moon,

JH

Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in crypto assets.

10th Anniversary of Hal Finney’s “Running bitcoin”

10 years ago today, Hal Finney tweeted “Running bitcoin” and stated publicly he was instrumental in Bitcoin. He was known to have worked for PGP Corporation as the second developer hired after Phil Zimmermann and more famously is validated as the first bitcoin recipient. Satoshi Nakamoto (the anonymous founder/s of Bitcoin) sent the initial transaction to Hal Finney, and the longtime cryptographer and cypherpunk decided to share it with the world! He enthusiastically worked and contributed to the project that was the Bitcoin network despite his own health troubles. ALS completely paralized Hal and he passed away August 24, 2014. Hal is a legend and we would like to remember and honor him for his work and dedication to Bitcoin and crypto in general.

(Click here to donate to ALS Association National Office and help in the fight to cure Lou Gehrig’s Disease)

In Crypto We Trust

George Washington back in 1776 used encryption, and it was revolutionary. Now, it is a standard issue tool to combat cyber attacks and for compliance. It has been claimed by many voices within the crypto and digital asset community that, “It is still early days!” While these could not be truer words, the window of opportunity for that phrase’s use is closing. The rate at which it closes is uncertain. For now though, there are plenty of reasons that Bitcoin despite being a decade old resembles the Internet much in its nascence. The World Wide Web was birthed out the protocol wars over the Internet that played out in the mid-1980’s followed by the browser wars in the 1990’s. The feverish progress of that time also shifted the PC Era into Web 1.0 where the focus was primarily on gaining users “on the net” and connecting them to information and documents via hypertext links. Bitcoin is experiencing a similar progression as many altcoins have surfaced over the years to challenge it as the leading crypto asset. As long as bitcoin remains “The King” atop of the crypto market capitalization ranks, it will likely be triumphant and be chosen as the standard or money protocol of the emerging Internet of Value. It needs to be leader in order for crypto’s success because people need to trust that it will be there tomorrow as well as into the foreseeable future. Essentially, the past few years in the crypto asset market has been the face off between various blockchain standards and protocols. If things continue in this direction, let’s just say that Bitcoin will have its own Web 1.0 moment in Web 3.0 with a consolidation of standard networks and protocols that power the applications of Web 4.0. All it takes for widespread mainstream use is further development of the ecosystem for users to simply interact with the decentralized payment network. Allowing them to connect value over the Internet via wallets and private keys, enabling users to transact securely and trace value over a public ledger powered by the blockchain technology as easily as it is to use email today. It took 18 years to shake out the ideas and protocols that are underlying and solidify the Internet we all use now. I believe what we are currently witnessing with Bitcoin closely mirrors the rise of the Internet, specifically the World Wide Web.internettimeline

In the 1990’s, nobody knew what Web 1.0 was and the term was not applied only until it bit the dust. Web 1.0 is practically synonymous with the World Wide Web as it meant connecting to the network via modems that forbid landline usage elsewhere in a household because it used dial-up to link users to static websites and loads of information. The problem at this stage was the lack of interactive content due to the infrastructure not quite being ready for it. As connectivity and speeds over the Internet rose with emergence and rising popularity of wireless fidelity (WiFi), it created the foundation that was the basis of the massive rise of Web 2.0. As users gained access to the network, it paved the way for interactive content and applications to be built on top of the network. Global sharing of information surged with the explosion of social media through Google, Myspace, Flikr, Facebook, YouTube, LinkedIn and more like-minded communities where anyone could realistically Read-Write-Publish. It thrived as users were generating content and utilizing new platforms to voice their views, opinions, research, and more. The latest iteration of the Internet, Web 3.0, is the antithesis of Web 2.0 and seeks to balance out the power structures of the Internet. The main reason it differs from 2.0 is because it’s decentralized. It comes as a solution to the network becoming monopolized and privatized by companies like Amazon, Facebook, Google, Netflix, Uber, and AirBnB. Instead, its focus is primarily on democratizing the network to share value across multiple profit centers over open source and cryptographically secured networks accessible to anyone. Besides concentrating power and data in the hands of huge Internet behemoths with questionable motives, privacy will be returned to the rightful owners through a more fair and transparent architecture. Decentralization was the idea behind much of Web 2.0, but the tools and technologies were not available for it to materialize yet. Web 3.0 offers dramatically improved uninterrupted service, permission-less networks, interoperability, reduction in hacks and data breaches, and greater ownership of data due to the lack of a central point of control.

ResizedImage600391-Bitcoin-Puzzlre

This next generation of the Internet encompasses the otherwise missing piece of the above jigsaw puzzle (originally authored by Pantera Capital), which shows Bitcoin filling the void as it has spawned an Internet of Value around itself of other protocols that can potentially become parts of the standard on their own. Some suggestions have already been made for smart contracts, storage and access, asset exchange, settlements, and document notarization. It should be kept in mind that this has not gone unnoticed by major technology companies like Microsoft and Oracle who originally wanted a private internet and their own version with protocol standards, respectively. Sergey Brin, co-founder of Google, even noted this summer that zk-SNARKs (zero-knowledge proofs for private transactions) are so new that it is almost incomprehensible that Zcash had successfully deployed them in a real-life application so fast. The project’s founder even expressed how most people do not understand that they compressed the normal timeline by several years. It was driven by strong crypto economics. The market literally helped fund the creation of another revolutionary technology. For purchasing, using, and holding their assets, users as early owners of their portion of the network gained value as they saw the addition of new users make it more valuable. Bitcoin and its original blockchain are secured by the largest computer network in the world today, with more processing power than all supercomputers combined. By now it is clear with hindsight, standards and protocols are inevitable. Day-by-day we are inching closer for Bitcoin (or possibly another blockchain network) becoming embraced by governments, or be implemented commercially on a global scale using some form of blockchain to replace the SWIFT network, or serve as the back-end infrastructure for banking network settlements. A big headline a couple of days ago was the announcement of a Singapore government owned venture firm called Vertex Ventures investing in Binance, the crypto asset exchange platform, to launch a crypto-to-fiat exchange by the end of 2018. The goal of their investment is to build-out gateways, tools that make it easier for people to participate in the crypto economy and ecosystem. It bodes well for the emerging asset class and hopefully sets a positive precedent that is assumed by many others to follow. Traditional finance is catching up with trends albeit at a pace that is cautious as to not seem to act irresponsibly, especially given light to the past behaviors that have gotten them in hot water in the public’s perception.

york stock GIF

Since the Web 1.0 era of the Internet, the open outcry on trading floors around the world slowly became quieter and quieter until they fundamentally became extinct with some rare exceptions due to the business becoming digital with electronic trading. It has taken its time for our traditional markets to shift from analog to digital too. Even today, bonds are still traded over the phone or for the more sophisticated trader by Bloomberg chat or a similar medium. As a millennial that loves a good mobile application with solid services and exceptional user experience, it seems like only a matter of time before all of these markets are easily maneuvered through a neat app or platform that connects and synthesizes them in one place where users can navigate them all easily by the push of the button. Now it appears that many individuals are getting out of public markets either out of fear or as a protest to the outdated and fragmented legacy financial system. Many people between the ages of 18 and 35 years old use applications for simple payments and hold not an insignificant amount of crypto and digital assets. Money itself has largely become digital around the world (92% of the supply is not in paper notes) and will only continue to do so if the course we are on persists. The idea of digital bonds, equities, funds, trusts, and shares in other private companies and startups is already being spurred by technology companies like Carta and AngelList. The movers and shakers in the Web 3.0 movement will be the ones more interested in leading the charge to “digitize the world” rather than the silliness of creating a token and blockchain for everything simply to “tokenize the world.” This is playing itself out now in the crypto market as the cream will eventually rise to the top in the next 3 to 5 years at least. If the world is digitized, there will be an immensely rich amount of data to drive risk management, decision-making, machine learning, and artificial intelligence. Currently, the crypto market is saturated with many projects and use cases for tokens and blockchains that are not viable or suitable for institutional investment. Sparking the interest of regulators like the SEC and CFTC, who are looking to crackdown on the bad actors, shady practices, and ponzi-scheme projects in the market to uphold proper protections for retail and institutional investors alike. This is good for the growth and maturation of the emerging asset class according to many insiders within the space.

vault GIF

“Smart money,” as it is called among in some circles of investors, is known usually to get in on investments before the institutional and mainstream herds enter the trade. As a result, they benefit greatly usually from having the intelligence to see the opportunity and to notice the inefficiencies of the other two groups aside from taking the initial risk. In recent news the University of North Carolina, Dartmouth College, Harvard, MIT, Stanford, and Yale endowments have all announced they have placed significant amounts of money on the asset class by making investments directly or into at least one cryptocurrency fund. This exceptional report indicates the growing acceptance among serious institutional investors with a reputation for outsized returns, especially in alternative investments. It is a sign that the asset class is not going anywhere and that it might be a good idea to go long. From an investing standpoint, the levels at which many of these assets are trading at are almost too complex to rationalize from a retail perspective making price calls basically all personal opinions in the current market structure. The best explanation of the price of bitcoin is that it’s a proxy for one portion of the network’s value and/or how desirable it might be relative to some future value or date. An investment in bitcoin if you are long-only, keeps it simple enough that it boils down into a binary bet of whether or not it will succeed in growing to become massively adopted and put into mainstream use. As an alternative to fiat currency, bitcoin has a known supply without borders or a central group controlling it. Whereas the US Dollar is also clearly a digital currency with an unlimited and unknown supply, border restrictions, and controlled by a central banking cabal. Bitcoin’s inflation schedule is set for the next 100 years and known to all parties. The US Dollar’s inflation schedule is antiquated, political, and uncertain even 1 year out making it opaque. Let alone, the reality that the FOMC (Federal Open Market Committee) is allowed to manipulate the schedule monthly. Donning both the best technology and best security, it seems only logical that it is the best investment due to the fact governments cannot regulate or kill it. The US Dollar is the first digital currency the world interacted with, and Bitcoin is just an improved version built for a digital world. The value of Bitcoin like land fluctuates in the short term, and over long periods of time due to scarcity rises in value. Just like the old investing chestnut says, “Buy land — they’re not making any more!” The same principles apply to Bitcoin virtually as they’re not minting more than 21 million bitcoins.

Internet Penetration Comparison (chart)

If Bitcoin is growing in the same fashion as the penetration of the Internet as compared from 1994 to 2016, it still has a long way to go. Referring to the chart above, given that Coinbase had 13.3 million accounts in November 2017 and as an exchange roughly made up only 5% of the bitcoin trade as a percentage, implying that there are a total of 266 million crypto exchange accounts and after assuming that there are 6 accounts per household; it can be estimated that the total penetration of bitcoin and/or other crypto assets as a percentage of internet households is 1.29% and 0.60% as a percentage of the total world population using the latest figures from 2016. Now in 2018, Bitcoin and/or other crypto asset adoption in the United States could possibly stand as high as 8-9%! By examining the growth trends in the Internet Penetration Comparison chart above, the trend of the network sizes with respect to time takes after the netoid function as defined by Robert Metcalfe (co-inventor of Ethernet, founder of 3Com, and formulator of Metcalfe’s Law) in 2013. Principally, its slope (the adoption rate) is proportional to the product of the fraction of the population already adopted multiplied by the fraction awaiting adoption. It peaks when adoption is 50 percent (global population). Both lines of the chart resemble the same S-curve shape as the sigmoid. Metcalfe used Facebook’s data from 2003 to 2013 to show a good fit for the netoid function, and then Xing-Zhou Zhang, Jing-Jie Lui, and Zhi-Wei Xu used the actual data of Tencent (China’s largest social network company) and Facebook to fit the netoid function. Their work displayed the growth trends of Monthly Active Users (MAUs) of Facebook and Tencent over the past decade can be modeled by the netoid functions seen below.

Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the connected users of the system. It postulates that the utility of a network is derived from the number of connections between nodes. Therefore, a large network with many connections and users is more useful than a small network. This law carried over to applications with the of globalization of the Internet, and its original intent was to describe the Ethernet purchases and connections. This law provides a basis for the theory of network effects. Take for example, telephones, they are highly useful and valuable to people as long as there is more than one. A single telephone would be worthless technology if there were only one in existence since it has no utility. Thus, if there is more than one telephone it can connect to then the value of that network of telephones rises as it becomes more useful by allowing more people to connect to one another. Bitcoin is like the telephone providing a utility and as technology lends itself to a winner-take-all competition against other crypto assets seeking network dominance. The blockchain and crypto asset wars have begun and are engaging in intense competition for market share. The winner will be whoever gains a compelling lead and sees their supremacy snowball as network effects allow it to consolidate their hold over the market. Bitcoin is in the obvious lead as the front-runner for a crypto asset monopoly with an impressive ten year history as well as being the largest, most valuable and secure crypto asset network.

networkeffects

Facebook in its early days experienced network effects as they gained new colleges and universities. As a result, its valuation grew almost exponentially. Similarly to Bitcoin and new crypto assets being listed on new exchanges, they also typically see rises in their values from the addition of new potential users. It begs the question, will Bitcoin and other crypto assets over the long-term have network effects that follow suit? If it does, the highs that were posted back in December 2017 are likely not even half as much as of the value we could potentially see it hit in the years to come. The peak of the crypto market cap was $800 billion last year, a far cry from the dot-com bubble peak of $3 trillion. Putting us not too far out from the hockey stick shaped part of curve. The true madness of crowds has yet to take place, in my opinion, and it will not happen until Bitcoin and crypto assets are even more globally ubiquitous. For now, I think we need to believe it will only succeed because the performance as an investment over the past ten years has been so strong. If Bitcoin and crypto assets are not considered by investment professionals, it should be a violation of their fiduciary duty. They need to understand the concept that as investors in these crypto networks they are able to invest directly into the protocol or infrastructure layer underlying new and future applications of Web 3.0. These crypto assets are the base for these decentralized applications (“dApps“), which are being built on top of their blockchains. The crypto market’s constant run-time and other investment-worthy qualities, not to mention, the growing user bases have proven they are not only possible but inevitable as the future of digital money on the Internet. The rise of Bitcoin and the digital revolution it is inspiring makes it a noteworthy candidate for alternative asset investing after exhibiting cues and characteristics of the early Internet, social media networks, and its maturation as an asset class with increasing liquidity, accessibility, and qualified custodian options. The best use cases for payments are the ones best for sending both $5 or $5 million simply and securely without breakage. Remarkably, last week someone processed $194 million on the Bitcoin network moving funds for less than a $0.10 fee! By design Bitcoin is deflationary, contrary to the non-commodity money experiment that has been running for about 50 years now and having no real value behind the greenback except belief has not gone great. Take back control and trade your belief for code, it’s more transparent. If notable investors and wealthy individuals keep pouring in and back the right horse, they will own a piece of the next Internet or Facebook, except it will be even more valuable!

Mark Twain famously said, “History doesn’t repeat itself, but it does rhyme.”

IMAGE: CNBC (George Washington)

The Crypto (R)evolution

Depending on your perspective an evolution or revolution in personal finance is just around the corner… (Hint: It’s crypto.)

Unlike the informational revolution the Internet created, the costs are relatively low considering most of the infrastructure of the World Wide Web has been established and maintained successfully. Most of the groundwork has already been made for this new type of progress. Its infrastructure exists and works relatively well today as people use smartphones, other mobile devices, and personal computers daily to connect to the Internet and communicate with one another practically anywhere in the world. Changing consumer behavior, tastes, and preferences have shifted away from traditional financial services to the more vogue fintech service providers as internet access has risen dramatically. The impact of mobile and digital payments has become more evident as organizations and governments are working towards developing growth in emerging economies by driving financial inclusion and creating more tailored products and services in developed markets .

By observing recent trends and technological developments, it seems that the future of money and banking will consist of mega-funded disruptors and startups that will revolutionize the landscape. They need to develop a functional framework of standards and protocols before making any waves in the financial services industry. Much of fintech investments, estimated about 73%, have gone into efforts to disrupt the personal finance industry seeking to capture market share specifically from the half of the population (3.5 billion people) with limited access to the financial system. Not to mention that at the current stage, 95% of small and medium sized businesses have insufficient access to the financial system (roughly estimated at 245 million businesses). Technologies such as blockchain and mobile devices can be used to solve the problem of providing access to services to those who were previously unserved and undeserved in emerging markets, and have the potential to drive economic growth. The organizations and people that can address the main challenges of scaling the infrastructure, security, and pricing will be the next behemoths in money and banking for this next generation of finance.

The first step will be the establishing the rules of the road by making laws, contracts, and regulations prior to the infrastructure being adopted and made mainstream. Though, it will be tricky as it needs to be within a fine equilibrium. Regulations need to keep pace with the technology to protect consumers, but not be too tight to stifle growth and innovation and not too loose to assist or increase high risk behavior. Generally, regulation tends to be reactionary and slow to respond to new advancements and does more to hinder modernization than support it. Next, coded mechanisms for decision support will be key for consumers before any of the users begin paying for goods or services, moving money for saving or investing, accessing credit, and managing risk. This applies to cryptoassets, distributed ledger technology, peer-to-peer transfer technology, and mobile banking. These trends are very difficult to predict and imagine, though from a high level perspective, their potential and logical progression can be analyzed.

Having been mostly disregarded by many large institutions and financial authorities, they are no longer being ignored as the themes around money and banking are changing from its value to how people are thinking about it now. New services enabling users to easily transfer, convert, and send their money at higher speeds and at lower rates compared to traditional financial services are emerging in the mobile payment space. Taking these services and combining them with cryptoassets, a new paradigm for financial services emerges that allows consumers far more flexibility and security across a broad spectrum of applications such as open application program interfaces (APIs), digital wallets, cold storage, in-app payments, two-factor authentication (2FA) and biometrics. These applications and use case solutions exist or are being developed with some of the most lucrative tech players and VC’s in Silicon Valley backing them. There’s a few impediments in the way of the evolution of cryptoassets and their influence over the future of personal finance and payments: volatility, the digital identity problem, and their crossover from the “Wild West” to Wall Street.

Investors see the robustness and inclusiveness for users and consumers who previously could not access financial services, as well as the opportunities to capitalize on the emerging markets of Africa, Asia, and South America that may very well increase their viability for increased adoption and take demand to the next level for blockchain technologies and cryptoassets. Over the past decade as more users have begun to participate and transact over the various blockchain networks and hold cryptoassets, it has been clear that pricing is something that has a high degree of fluctuation and unpredictability. As a hedge against fiat hyperinflation, cryptoassets offer an alternative to government currency but lack safety as a haven from a risk management standpoint. The VC firms and other investors know that volatility is not everybody’s friend, so naturally it occurred to them to create a product that can act as a store of value and offers stability. That’s where stablecoins come into the picture, peace of mind. In their most ideal form, they are simply cryptoassets with a stable value for a medium of exchange and unit of account. There’s a number of competing projects whose various use cases aim to address this specific problem like Basis (algorithmically-collateralized), MakerDao (crypto-collateralized), and Tether (fiat-collateralized) each wanting to be the quintessential “dry powder” for the cryptoasset universe being the global, fiat-free, digital cash reserve.

The next obstacle is the self-sovereign identity issue, which will be a major the key for large advancements and institutional interest in blockchain technology and cryptoassets. With the physical world around us becoming more and more digital each day, it raises questions around the concept of identity and the rules and rulers of it. Translating people’s autonomy and control over personal identification in the physical world over to the digital world is tricky and a muddling business. In our modern society, nations and corporations have amalgamated identity with driver’s licenses, social security cards and other state-issued credentials. It is complex because this current situation indicates that a person can lose their identity by a state revoking his or her credentials or if they simply cross state borders. Digital identity is multiple times more complicated because it too is very balkanized across one Internet domain to another and its control to a large extent is also centralized. User-centric customization and consent systems within interoperable federated identities are likely going to be the future by requiring the users to be central to the administration of their personal identity. People and organizations storing their identities and its related data on their own devices and managing the validation of their own identifying data is most probable. It presents a unique crossroads to the question of what identity means and if it should be redefined to see that individuals are allowed to have more autonomy over their own identities (and data) in the digital world. This topic specifically is relevant to new platforms and exchanges and their ability to identify, facilitate, and process accredited investors as well as be compliant with Anti-Money Laundering (AML) and Know Your Customer (KYC) policies.

Lastly, the hurdle that blockchain and cryptoassets need to fully take it over the edge is the movement from the “Wild West” to Wall Street and eventually to Main Street. In order to do this successfully, it will need support from lobbyists and representatives in Washington along with the legislators there to help spur institutional interest and investment. The Federal Reserve chairman, Jerome Powell, in his testimony this week before the Financial Service Committee of the United States House of Representatives (“The House”) outlined his thinking on cryptoassets stating,

“… I think the question I was asked that you are referring to was ‘Do cryptocurrencies currently present a serious financial stability threat?’, and my answer was ‘They are not big enough to do that yet.’ That’s what I was saying, not that they are not a longer term thing… They are very challenging because, you know, cryptocurrencies are great if you’re trying to hide money or if you’re tying to launder money… So we have to be very conscious of that. There are also significant investor risks. Investors, relatively unsophisticated investors, see the asset going up in price, and they think ‘This is great! I will buy this.’… In fact, there is no promise behind that. It’s not really a currency… It doesn’t have any intrinsic value. So, I think there are investor and consumer protection issues as well. Another thing I’ll say is that we are not looking at this at the Fed as something that we should be doing, that the Fed would do a digital currency. That’s not something we are looking at. So, mainly, I have concerns. I mean, if you think about what currencies do, they’re supposed to be a means of payment and a store of value, basically, and cryptocurrencies are not really used very much in payment. Typically, people sell their cryptocurrencies, and then pay in dollars… In terms of a store of value, look at the volatility, and it’s just not there.”

His comments were made prior to a hearing called “The Future of Money: Digital Currency” held before a Subcommittee on Monetary Policy and Trade of the House Financial Services Committee. The purpose of the hearing was for the Subcommittee to “evaluate the merits of any uses by central banks of cryptocurrencies, and discuss the future of both cryptocurrencies and physical cash.” Powell has maintained his stance since his confirmation hearing as the central bank’s top executive where to the Senate Banking Committee he expressed,

“They don’t really matter today; they’re just not big enough. There isn’t close enough volume to matter… in the long, long run, cryptocurrencies and things of that nature could matter.”

It is interesting that despite the undeniably bearish perspective for crypto markets during this year that there has been a “counterintuitive” pace of investment that has accelerated to unprecedented levels. According to Grayscale Investments (a firm overseeing investments into cryptoassets for over five years) and its first ever digital asset report released this week, it revealed that the majority of capital inflow (56% of all new investments) during the first half of 2018 was institutional capital. Grayscale’s report also suggests that major investors potentially see this year’s drawdown as a prime “buy the dip” opportunity to enter the crypto markets just as the infrastructure to facilitate institutional entry is materializing. Other significant news this week came from the $6.3 trillion asset management giant BlackRock – the world’s largest provider of exchange traded funds (ETFs) – saying that they were beginning to explore Bitcoin.

At a time when fear, uncertainty, and doubt is high in the markets, the financial watchdogs in the United States are increasing their scrutiny over cryptoassets and blockchain projects, especially initial coin offerings (ICOs). This comes after the SEC has said it is currently investigating dozens of token projects, and its chairman Jay Clayton recently said in a public hearing that he believes every ICO he has seen is a security. The SEC chairman after expressing his distaste that people were conducting them when they should know they ought to follow the private placement rules in the same hearing remarked from a regulatory perspective,

“I want to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story.”

Pending that cryptoasset platforms and exchanges get the SEC’s approval, they may be able as federally regulated venues for listing and trading digital tokens and coins deemed to be securities. Coinbase, who has predominantly regulated by a patchwork of state authorities, made news this week regarding a trio of acquisitions saying it got the nod from the SEC. In reality, it did not as that authority was not involved in the approval process. Although FINRA also seemingly granted its approval, one of their spokesmen declined to comment to Bloomberg. Work still needs to be done before they can allow clients to trade security tokens (or participate in Securitized Token Offerings) and the company provided an update indicating that they will be in ongoing talks with regulators. Circle Internet Financial Ltd., one of its competitors, plans on seeking a federal banking license to provide more services to customers as well as pursuing registration as a brokerage and trading venue with the SEC. It is very clear at this time that there are many more steps before the journey is complete and investors can buy and sell tokens deemed to be securities.

Over the next year, these topics and trends will likely be the primary focus as the blockchain and cryptoasset space experiences expansion and maturation. Decoupling governments and money may provide a remedy to hyperinflation, politically driven economic controls, and other damaging policies that result from mismanagement of national economies. New doors and possibilities open up for decentralized applications, especially insurance, prediction markets, savings accounts, trading pairs, credit and debt markets, remittances, and much more. If it continues down the road that its heading on, very soon individuals and institutions will be able to utilize platforms and exchanges to issue and invest in tokenized assets whether they are bonds, equities, funds, companies, real estate investment trusts, fine art pieces, antiques, or collectibles. These trading platforms and exchanges hold the potential to handle billions to trillions of dollars eventually in tokens sold by companies in securitized token offerings. So long as progress is made towards making these hurdles, the demand for the blockchain technology and cryptoassets so too will increase for the foreseeable future. These are important precedents in the crypto universe and community making it a stronger ecosystem for more users, better applications, and an enhanced suite of financial services and investment grade products available to accredited investors and institutions.

Do you think the crypto (r)evolution will be tokenized?

IMAGE BY Johanna Pung – OWN WORKCC BY-SA 3.0LINK

Crypto Assets: Whose Value Is It Anyway?

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A new set of topics is up for debate around investing and finance, including whether crypto assets should be treated as money, property, a security or something else as there is no clear regulatory designation set at this point. Perhaps it could be something completely new, sui generis if you will. When thinking about this new technology and the changing landscape of finance, it may help to explore the significance of the island of Yap and its historical background regarding some similar issues. It was about a thousand years ago that an island and its society decided it needed a currency system. Since neither silver nor gold was available to the islanders, they naturally used shells and what they had available to them. Until, they began creating wheels called “rai stones” that would be carved out of limestone and that sometimes were so large they could dwarf a modern car (see above). The coin wheels served as a store of value, a form of money, a form of property that someone could use in special situations such as a daughter’s dowry, insurance for loss of income such as crop destruction, or traded for food, goods, or services.

These rai stones were not meant to serve as a form of currency that changed hands regularly but the islanders viewed them as an easily divisible, portable, and secure means of exchanging value. This made how people felt about money especially exceptional, this idea paved the way for money becoming abstract. Ownership for these limestone wheels had to be broadcasted to the villagers since they could not easily change hands or even sometimes never moved at all. They could also give out rights to proportions of the rai stones if they sought fit too. It’s been said that a newly commissioned giant wheel while moving between islands had sunken off the coast after its vessel capsized. Yet, it continued to hold its value and trade owners according to their oral tradition since the crew and rest of the island knew about it. This system continued as trust was maintained and relied upon, even when the physical assets were not present or seen. Milton Friedman has famously used this island in an essay to compare their rai stone monetary system to that of the gold standard policy. Its historical significance and economic theory illuminates the mystery and phenomena around money and seems very relevant to the times in which we are living.

Contemplating this history brings to light the subject of monetary commodities. Money has traditionally been regarded as something that has scarcity, fungibility, divisibility, transferability, and durability. These satisfied the islanders with their stone money, but to the wider world society it needed a more advanced and sophisticated means to address those qualities. Around the globe monetary policy used to be managed by issuing currency backed by commodities. Often it was gold, the archetypal form of commodity money. Since that time, the world has continued to evolve and now relies on government entities and central banks to manage fiat currencies, interest rates, and so on. Using history as our guide, it does not seem as though our system will likely last forever. It’s human nature to make meaning out of something that is nothing, which is not always rational. With money though, it’s something that is deeply personal and so interwoven into our society that people’s lives revolve around it because they naturally ascribe meaning to it. It’s key to keep in mind that technology changes, economic laws do not.

Today, investors and portfolio managers are facing an ever more burdensome task of finding investments that offer both high returns and low correlations relative to their other assets. Recently having entered the mainstream discussion, crypto assets are developing a unique opportunity for investment professionals to enter an emerging asset class that checks both of those boxes. By complementing their other strategies and positions with crypto assets, this new asset class is demonstrating better performance and risk management qualities for investors with exposure to them relative to other major asset classes like equities, bonds, real estate, commodities, emerging markets and currencies. By spreading out risk further and idiosyncratically with an allocation in this new crypto asset class, managers will have the benefit from both black or white swan events. The white swan if the internet continues to expand and synergize with crypto assets, and the black swan if an economic collapse in capital markets results in restrictions and boundaries set for capital flows across borders since these assets are free from government control. They also may offer a valuable protection against hyperinflation should an event like that arise from economic instability and/or political unrest.

Investing in crypto assets rather than companies or commodities alone may add additional layers of risk, but being a unique asset class it distributes it out into a rational approach that justifies it. As an investment, tokens, networks, and protocols in the blockchain space are under similar constraints compared to traditional technology companies, but they also remove two major layers of risk that the conventional technology companies cannot. Those exceptions are that the company must execute well for their ultimate success, and secondarily that the investor base must hold until a liquidity event occurs. Striping these elements out reduces the normal layers of risk from these assets and only leaves the remaining layer of risk that the underlying assets themselves must appreciate to be successful. A major setback for their adoption exists though, as they are highly technical assets and widely misunderstood likely due to their complexity delving into topics of cryptography, computer science, economics, and game theory.

It is not only their intricacies that make these new assets difficult to follow, but the buying mania over the past year led to price swings over short periods and volatility that normally would churn the stomachs of investors. Also, the fact that there are also over 1300 currencies listed on the website CoinMarketCap makes performing due diligence tough. To confidently assess the market can be quite tricky, aside from tracking the valuations and pricing for these crypto assets. As investments they are not for those who are unversed, inexperienced, or unprepared for the worst. As hedges against inflation or as means of utility enabling people to make more efficient cross-border payments, supply-chains, trade settlements, and transactions. These are all fair arguments for the value of blockchains and crypto assets, though, many brilliant minds are rightfully contesting that those aspects do not fully capture the scope of their capabilities and fundamental value.

Monetary value follows from belief, and its always hard to believe in something new; especially something as complicated and convoluted as crypto assets. With a few lines of code, companies now can issue and sell tokens to a secondary market instead of registering as a Delaware C Corp and restricting fundraising to domestic accredited investors. Ethereum, the programmable internet crypto asset has allowed this to occur and leads the space as a programmable crypto asset. Over the last year, initial coin offerings caused a stir among investors as some projects capitalized millions of dollars in a matter of minutes or hours! Each day these crypto assets continue to transact, add users, and grow their networks, it counts as another day that people familiarize themselves with them. Future generations will look back and see that crypto assets were a logical choice for a monetary commodity since they are akin to the rai stones of Yap and has resemblances to the gold standard that predated the fiat currency system.

Technology and economics will inexorably be linked together if these trends persist and the crypto asset ecosystem continues to grow. It is foreseeable that in the future that one without the other will not offer as much value without the other considering the current advancements in the financial system’s infrastructure. Blockchain technology will be to economics as a bottle is to wine; technology will be the packaging that will allow the value to flow, be stored, or transferred. In short, we are seeing the beginning of a new technological infrastructure being built for the internet of value in order to make currency, capital, credit and prosperity more accessible and hence more valuable. A fact that needs to be realized is that the Internet was meant to be an information superhighway, as opposed to an informational resource. The recent US elections, fake news, and social media advertising fiascos can be great examples of this point.

More than 3.5 billion people in the world have limited access to the financial system, which is more than half the population. This technology has the power to do more than the Internet ever could before being the conduit for the people outside the financial system so long as they can reach getting a smartphone and/or assess to the Internet. New innovative technologies such as blockchain have led to the rise of digital currencies and other distributed technologies for instantaneous and secure peer-to-peer transfers that realize massive cost savings relative to their conventional counterparts, attributable to the disintermediation. Venmo and other similar mobile banking or payment applications have become popular, but are only small patches to an otherwise archaic practically analog financial system. Crypto assets are unique in that they provide inexpensive yet precious services to the individuals and users while incentivizing the founders and developers, and still offering benefits to the businesses, partners, and early adopting investors who also may be able to capitalize on their implicit value from the disruptive impact they pose and rapid user expansion on top of their networks.

In the beginning of 1998, HTML had as much text on the world wide web as about 1.5 million books, but there were university libraries around the world that had over 10 times the number of book volumes with much higher quality and more meaningful content. Once people realized technology would facilitate more “useful” information being repackaged and hosted online, its infrastructure grew with its userbase and provided end users easier, quicker, and cheaper access to information. By adding more simplicity and quality, it incentivized users as well as augmented its value. Now, the world is seeing a similar infrastructure being built. Rather than being for information, this time it is for money, capital, wealth and value in general. The emergence of blockchain technology may displace some technologies and disrupt some industries, but switching to this new infrastructure can dramatically increase security and cost savings, pose tremendous investment upside, and create new options and strategies for people and firms in its innovative economy.

Improved technological infrastructure can vastly increase our ability to store, spend, receive, sort, filter, and distribute value thereby enhancing the value of the blockchain technology itself. In an environment that has political uncertainty, rising interest rates, and economic policy debate, crypto assets as unique forms of digital monetary commodities will likely only gain more attention and users as its infrastructure improves and scales for mainstream adoption. It may not be likely that a new sort of monetary policy will be enacted anytime soon, but it may not be crazy to imagine that crypto assets are used for a new type of gold standard system. Compared to the total market of gold at this moment, they only account for about 0.3% of the yellow metal’s value. Thus far, crypto assets have presented themselves as a more capable type of monetary commodity with extremely more upside and potential. They have a long way to go to create a widespread positive belief for this opinion. In the end, it all comes down to network effects.

Image By BeadesOwn work, CC BY-SA 3.0, Link

The Crypto Wave

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It’s 2018 and the Internet has evolved and changed considerably over the past twenty years, especially as of late its economic model. The infrastructure of the world wide web in recent news headlines also has shown it to be unsafe and a surveillance haven where most common communications, information sharing, and accessing information has turned people into targets and commodities. The framework of the traditional media outlets as well as online social media sites has perfected informational asymmetries and gaps on algorithmic levels to produce sensational headlines to influence people into bringing out their worst impulses and act probabilistically within a vacuum of fear, uncertainty, and doubt. Psychologically, biologically, economically, ideologically, politically, and socially the Internet reflects our society as a whole, and at this current state presents itself to be the battleground over our hearts and minds. You shouldn’t be exploited for browsing based on any of those possible factors that make a potential “user profile”. For this reason, the world wide web is ready for a new set of standards and protocols to enhance privacy and security while still providing incentives to the interested parties.

Living within this new Age of Fear, these concerns have become more pertinent for companies and organizations in the Internet industry to address them, conduct proper research, and remain state-of-the-art. After late 2017, it is hard to find someone who isn’t familiar with or aware of the existence of Bitcoin, Ethereum, or other related networks. For many people, that was just the gateway for them to enter the landscape of thousands of cryptoassets based on blockchain or distributed ledger technology. The feverish investment last year mostly was due to nontechnical reasons and mostly led by speculation from investors trying to catch the next “hot thing.” Bitcoin as an asset has existed for nearly a decade, though, in the last year or so people around the world began trying get rich quick and cash in on the asset class. They are now finding out that they were trying the catch a wave that’s about to crash on them. Investors following lemming-like behavior in the asset class have caused a stir and raised issues and debate over whether certain aspects are in fact “features” or “bugs.” Leading lawyers in the space have been outspoken to say that class action suits relating to cryptos are coming in at a rate of about one per week. Being so complex and complicated these assets require much research and due diligence to position yourself within the breaks of the tide for the next wave, or, so you may ride this wave out safely when it eventually does crash.

Just like the Great Dotcom Crash in the early aughts, a massive drawdown in the cryptoasset market could act as a cleansing event that effectively washes away the bad projects, shady developers, and scam artists while giving rise to the next class of Amazon, Facebook, Google, and Netflix’s on the new web. The status of the crypto-market as a whole at the time of this writing has dipped below $300B as bitcoin nears a long-term support known to many traders as “the death cross.” Should the price fall below that critical level, strategists have suggested that the price of bitcoin could see levels as low as $2800. Bitcoin futures also just began entering a contango market suggesting that the pain will continue for some time. The volatility is also causing a shake up with investors moving them away from passive strategies of “hodling” and towards more active strategies and brokers as available to them. According to Bloomberg and their industry tracker, more than 150 bitcoin or cryptoasset funds emerged out of the frenzy last year and so far this year 9 funds have shuttered. Many of them have losses and some are down as much as 23 percent year-to-date. David Young, Gemini Hedge Fund Services, at a recent conference about the Internet of Value attests, “There is a huge amount of activity in the crypto-fund space… from advisory to valuation.” Though the distributed future is hard to predict, fiat money itself has come under much scrutiny following the past financial crises and arguably shares similar monetary network effects relative to its crypto peers. The Internet cannot be judged on the follies of the late 1990’s alone.

It seems inevitable that there will be future world currencies backed by the full faith of the blockchain technology as central banks around the world have been studying, testing, and experimenting for years now tinkering with the idea of CBCC’s (central bank crypto-currencies). Moreover, companies like Amazon who has one quarter of their merchant sales now being cross-border will prefer these types of assets for their speed, security, and stability. The hype and frothiness of late 2017 gave way to a massive influx of capital that created a deluge of new projects, tokens, and funds opening and operating within a greater market which was far more mature than themselves. With respects paid to the surrounding landscape and regulatory confusion, it also seems many of them are just setup to fail as investor demands and disputes may arise from a contraction around the corner. Undoubtedly, this is where the best investments will be made through the noise and panic, but not without the risk of other negative externalities. It will be the proving grounds of tomorrow’s great entrepreneurs, portfolio managers, and investors whose stories will be told for generations. Find yourself a good local or two with experience and knowledge to follow… The Crypto Wave will almost certainly crash and wash away the debris. The key will be looking past the carnage on beach and still paddling out regardless in order to position yourselves to catch the NEXT big ones! As some mystic once said, “Don’t fight the wave,  learn to surf.”

Style notes: “Cryptoassets” includes all coins, tokens, and digital assets traded on cryptoasset exchanges. “Bitcoin” refers to the Bitcoin ledger, network, or protocol, while “bitcoin” refers to the asset or unit of account on the Bitcoin ledger. This is reflected for all cryptoassets in this post. (Also, “hodling” is common jargon among traders and enthusiasts meaning to ‘hold’ the asset/s through times of high volatility and periods of capitulation.)

Image By TequaskOwn work, CC BY-SA 4.0, Link

The Automation Apocalypse & Gig Economy

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Today, it may be easy to forget just how intertwined humans have become with technology. While at the same time, though, it may be too difficult to ignore just how much more efficient our lives are when we are able to communicate, share, and connect with one another so quickly and seamlessly.  Across all ages and through the many different generations, there is a realization shifting in the public perception that a brave new world exists. Seismic shifts societally, culturally, and economically have slowly begun taking place as students in the current American education system hardly know a world in which PCs, tablets, and smartphones did not exist. As this new paradigm shifts, technology will be the means by which humans break away from traditional 20th century concepts, ideologies and philosophies. Leading the charge is the rise of automation and advanced artificial intelligence, and it is a new beginning for humankind. Also, the economy has been restructuring itself for more customization and personally tailored work for corporations and individuals at a volume and frequency that maximizes productivity that humans cannot on their own compete with. By examining the technological and economic breakthroughs of AI from a cost basis holding a long-term view, it comparatively is going to be cheaper than employing humans as it does not need food, water, or sleep. As the rise of multi-stream contract work emerges, demand for traditional jobs and corporate positions will plunge from technological advancements and a new sort of economy will burgeon.

The labor force currently is seeing independent contractors and freelance workers, or “gig jobs,” on the rise as it stacks up to more than 53 million individuals and gains about one-third of the labor force. According to the Wall Street Journal, roughly 50 percent of Millennials are working or participating in the new “gig economy.” In 2017, Lyft and Uber’s ride sharing services provided 50% more daily rides than Yellow Cab with quintuple the number of cars they had in service. It is staggering, especially given that only a few years back the City of New York had more yellow cabs than ride-sharing vehicles than Lyft and Uber combined. This is Exhibit A for the massive, rapid, and intense growth that this “new” economy has over its prior counterparts. It is an early indication that a large majority of the labor in the United States will be freelance in less than a decade. Aside from the economic landscape shifting, there is another arms race occurring in automation and advanced artificial intelligence.

It appears this realization is beginning to influence Wall Street’s mentality according to Goldman Sachs as this March it claimed, “Machines have replaced humans.” Whether or not this true, they will certainly affect the economy and likely have an impact on, or, be the direct consequence of the next financial crisis. Millions of the traditional jobs, many of which are now occupied by skilled individuals and college students or alumni, will be lost. It will devastate people to learn that they have been replaced by a new set of coworkers, bots and robots. It has been a belief for a while in Silicon Valley and on Wall Street that the future will be separated into two main sects: those who tell the machines what to do and the people who be taking instructions from the machines. The mastery of statistical modes of thinking began with the rise of the Internet giants like Facebook and Google, and will continue as the dominant path to the future for these new technologies and forms of intelligence rather than the deterministic calculus of prior centuries.

The future workplace and/or the lack of one will have great consequences on society for better or worse. Topics like Universal Basic Income are just coming back into the realm of public debate as people begin to fear these bots and robots. Others have suggested that digital commodities and cryptoassets could offer a means of a new form of income as they typically are set to a fixed supply and/or on a deflationary schedule by nature of their programming. Industries in the new “gig” economy like ride-sharing, car sharing, residence sharing, food deliveries, smartphone banking and freelance taskers have blossomed and grown immensely in 2017. For example, Airbnb grew from merely 3000 listings in 2009 to 2.3 Million in just last year with bookings growing at a 40 – 50% clip. If you gathered the world’s largest hotels and combined them, Airbnb would have more listings than all of them now as it saw user growth jump from 80 Million in 2016 to over 100 Million users in 2017. This adoption trend is so strong that it is also starting to sweep around the globe beginning in new countries and regions where it can rapidly secure more users and growth.

To get an idea of just how large that may be, Uber has over 2 million drivers around the world of which the United States accounts to be about 65 percent of that figure. TaskRabbit, another booming startup for freelance contract workers, has over 50,000 drivers for food deliveries through services like Ubereats, Doordash, and Postmates. The trend is clear that the “9-to-5” or W-2 salaried job is on the decline as much of the new job growth is stemming from the alternative job space as a result of freelancing. What is also fascinating about these “1099” independent contractors or “not employees” working in the booming gig economy is that over a third of freelancers according to some estimates elect not to be covered by the Affordable Care Act (ACA). This has sparked new ventures and ideas for preventative care and a better self-insurance marketplace as Warren Buffet, Jeff Bezos, and Jamie Dimon announced plans to roll out a new initiative to provide cheaper coverage.

In a one-two punch, the combination of the massive retirement wave of Baby Boomers along with the rise of gig workers will create one of the widest gaps of unfilled job openings throughout history. The economy has been accelerating for years, but the start of this 2018 indicated sluggish growth prospects and an uncertain future of sustained growth. Aside from those facts, automation and advanced artificial intelligence will soon make millions of more jobs and employees obsolete whether they are executives, managers, accountants, lawyers, or drivers as it poses a massive threat to the current state of employment in the United States. It is possible that it could lead to Great Depression-level unemployment and a total societal meltdown, which would imaginably includes the handing out of trillions of dollars in cash. Self-driving cars alone could destabilize our society with truck drivers and these gig drivers out of work with educations that on average are about high school level or freshman year in college. All it takes is one innovation before any of it is a reality.

Retail workers, routing specialists, call center workers, fast-food workers, insurance underwriters, analysts, accountants, and bankers are all included in this gloomy narrative. A 2017 report by the consulting firm, McKinsey & Company, concluded that by 2030 as many as one-third of American jobs may disappear because of automation. Some have argued and are studying to see if cheerier forecasts exist, predicting that new jobs will be created to replace the ones that are lost somehow. The aforementioned report also forecasts out to a horizon that is three presidential terms away, and perhaps includes skeptical candidates to the new economy who would try to capitalize on the opportunity. Scrutiny over tech companies like Facebook and Google has increased in the past year as worries of monopolistic behavior, malicious exploitation of social media and the addictive and parasitic effects of smartphones have made a once bulletproof industry vulnerable. Even with industry backlash along with insiders joining in, fending off the bots and robots will arguably require public payments, regardless of income or employment status, on a regular basis to help bring Americans all to the poverty line whether or not they were hit by automation or advanced artificial intelligence.

Although there has been a considerable amount of popularity around Universal Basic Income, it is a leaderless movement that has not yet broken into mainstream politics. As a policy, it is not entirely a new idea and has been in previous accords including the likes of think-tank circles, Rev. Dr. Martin Luther King Jr., the economist Milton Freeman or more recently Elon Musk, Mark Zuckerburg, Marc Andreessen and other technologists in Silicon Valley. Y-Combinator, the legendary startup incubator, is testing out a basic income experiment with 3,000 participants in two states. Knowing that it is an old idea that has become relevant again because of our societal expectations, Universal Basic Income is seemingly more and more necessary. There is a major need to find a reasonable price tag for this sort of project before it’s too late, unrealistic, or the opportunity is gone and before anything can be done about it.

There is an ample amount of optimism for small business and entrepreneurs in this growing gig economy with 42% of small businesses using contract labor. It’s cheaper and more flexible to add workers. As traditional W-2 employees stagnate and 1099 workers grow, there are Millions that have fallen through the cracks of measurement, working multiple part-time jobs that earn less than the required $20,700 reporting threshold. (59% of cryptoasset investors do not report to the IRS). Would a Lyft driver who earns $15k driving and owning an Airbnb making $15k or contracting freelance programming work even report her income without an accountable employer? The new tax regulation offers discounted rates for pass-through business making it highly likely that the trend of contingent labor will continue, if not accelerate.

A record amount of VC money in 2017 was deployed into startups, cryptoasset funds, and blockchain and AI-themed ventures – including machine learning, advanced robotics, and self-driving vehicles – and they are projected to cultivate a $15 – 20 trillion market opportunity by 2025. These shared economies and distributed workers will eventually have unmet needs in job finding, health insurance and tax advisories that will continue to grow and innovate. The dynamic digital landscape has also been budding symbiotically with freelancers and now accounts for a significant portion of the USD GDP and employment within the United States. Self-driving vehicles, automation, and advanced AI will be disruptive and potentially dangerous trends to manage in the years ahead, but at the same time an exciting, innovative moment full of opportunities to prosper as a worker, entrepreneur, and investor. Now, at least, you know that the gig is up!

Image By GDJ – Own Work, CC0, Link