Investments and Funds in the age of Cryptocurrencies

[This article was original published in BL Global]

The fast moving pace of technology has recently given rise to a number of revolutionary ideas and concepts that can provide attractive investment opportunities all based on Blockchain technology.

A blockchain is essentially an immutable, de-centralised & distributed database or ledger with cryptography that ensures it is completely tamper-proof.

The most famous example of blockchain technology is of course bitcoin, the biggest cryptocurrency with a current market cap of $68 billion (USD), although this had reached $80 billion earlier in the year.

As a pure cryptocurrency investment, investing in Bitcoin might appear to have been a safe bet. The price of a Bitcoin has gone from approximately $600 USD to a peak of just over $5,000 USD in the past 12 months. Not many assets can match this. Institutional investors such as JP Morgan and Morgan Stanley even bought XBT, the ISO code being used for bitcoin, despite JP Morgan Chase CEO Jamie Dimon saying cryptocurrency “is a fraud”.

There are a number of opinions that counter this including John McAfee, the serial entrepreneur, founder & former head of McAfee Associates, the well-known computer security and anti-virus company, who believes that a Bitcoin will reach $500,000 USD. This may be far-fetched but with a maximum possible number of 21 million bitcoins in circulation expected to be mined (created) and put into circulation by about 2048, classic supply and demand economics and this unusual deflationary model are reasons that investors are bullish about Bitcoin’s future.

So what does this mean for the funds industry? The cryptocurrency market is bleeding edge and volatile at present, however there exist actively managed cryptocurrency funds which aim to beat the performance of Bitcoin (e.g. Alphabit[1]). These funds also use a relatively new phenomenon of Initial Coin Offerings (ICOs) or token sales – a mechanism for crowdsourcing funds for developing blockchain-based products and services. Some successful ICOs have raised up to $250M (USD) with the total amount raised far superseding traditional venture capital in 2017 for initiatives in the blockchain space.

However, regulators including the SEC are rightly cautioning investors[2] due to the lack of regulation, and the Chinese authorities have temporarily banned ICOs[3]. The first regulator to address the lack of regulation in this space and provide a safer environment for investors will provide great economic benefit to their jurisdiction, attracting numerous startups and businesses looking to provide innovative new services and investment opportunities. Contrary to popular belief, most cryptocurrencies are not anonymous; for example, all Bitcoin transactions are stored publicly and permanently on the network. Anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances – this is where regulation and anti-money laundering approaches will provide the protection that is needed for the industry to mature.

What is undeniable is that there is significant activity in the area of cryptocurrencies and blockchain technologies; a significant shift in momentum which is now giving rise to start-ups and investment funds that are looking to bring traditional funds and investment approaches to an industry that has been described by some as the Wild West;

  • Bitwise HOLD 10 Private Index[4] is one such fund, currently available only to US accredited investors currently, but there are plans to launch additional funds in future. The fund indexes the top 10 largest cryptocurrency coins, accounting for 85% of the overall market. One of the key goals of the fund is to create a way for investors to gain exposure to cryptocurrency with the ease and economy of investing in an S&P 500 index fund. With 12 months past returns of 744% (versus Bitcoin’s 537%) approaches like this are bound to start attracting investment from traditional markets.
  • Closer to home, Jersey’s Global Advisors[5] created the first Bitcoin Investment fund (the world’s first regulated cryptocurrency fund) in 2014, the first institutional-grade program for managing exposure to Bitcoin.
  • Blackmoon[6] aims to bridge the gap between “between the crypto universe and the traditional investment market”, providing an alternative to the majority of existing approaches that are either pegged to cryptocurrencies or tradable assets such as gold or USD, claiming cost-effective structures and flexibility.
  • A little bit further in the future of trading is Spectre[7] (Speculative Tokenized Trading Exchange), at the time of writing it’s about to launch a token sale. Spectre is aiming to be the first broker-less financial trading platform with an embedded decentralised liquidity pool initially funded from their ICO.

There are numerous other examples, with 15 new crypto hedge funds[8] in this area; unsurprising perhaps when there have been extreme examples of 82,000% gains in the case of Ethereum. It is also reported that wall street firms are expected to move trillions to Blockchains in 2018[9].

It is a brave new world out there and of course the cryptocurrency world is not without controversy, with many believing it is akin or worse than the tulip bulb mania of the 17th century[10]. There are numerous regulators banning ICOs or Cryptocurrency exchanges due to their unregulated nature (although the SEC is now treating virtual tokens or coins as securities in certain instances), but it is only a matter of time before the regulators catch up with the market. This will be a good thing and will give rise to even more areas that should be of interest to the funds industry, with the overall market cap of cryptocurrencies now at approximately $150B USD.

Goldman Sachs[11] is considering trading in Bitcoin, IMF chief Christine Lagarde has advised that ignoring virtual currencies would not be wise[12].

Being aware of this fast moving world and the developments from a regulatory as well as technological perspective will be key for funds looking to diversify and capitalise on opportunities in this exciting new space. Blockchain technology including Bitcoin is here to stay. Yes, the industry is immature and untested, but as regulation, oversight and investor protections begin to be adopted and the ecosystem comes into line with real world norms and expectations, this is going to prove to be one of the most fast moving and exciting technological emergences of our lifetime.

Let me know what you think in the comments 🙂

[1] http://www.alphabit.fund/about-the-fund/

[2] https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings

[3] https://www.cnbc.com/2017/09/04/chinese-icos-china-bans-fundraising-through-initial-coin-offerings-report-says.html

[4] https://www.bitwiseinvestments.com/fund

[5] http://globaladvisors.co.uk/

[6] https://blackmooncrypto.com/

[7] https://spectre.ai/

[8] https://www.forbes.com/sites/laurashin/2017/07/12/crypto-boom-15-new-hedge-funds-want-in-on-84000-returns/#35d4a7cf416a

[9] https://spectrum.ieee.org/telecom/internet/wall-street-firms-to-move-trillions-to-blockchains-in-2018

[10] https://en.wikipedia.org/wiki/Tulip_mania

[11] https://www.wsj.com/articles/goldman-sachs-explores-a-new-world-trading-bitcoin-1506959128

[12] https://www.imf.org/en/News/Articles/2017/09/28/sp092917-central-banking-and-fintech-a-brave-new-world

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