[VIDEO] Anatomy of an ICO
What do Paris Hilton, actor Jamie Foxx, rapper The Game, and boxer-slash-convicted-woman-beater Floyd Mayweather all have in common? They’ve all recently> READ MORE
What do Paris Hilton, actor Jamie Foxx, rapper The Game, and boxer-slash-convicted-woman-beater Floyd Mayweather all have in common? They’ve all recently> READ MORE
On Sunday evening, I had the privilege of attending a small dinner with a handful of financial market gurus, plenty of whom had more experience in financial markets> READ MORE
The world of cryptocurrencies is in the midst of a tornado just now. Since the beginning of September, total cryptocurrency market capitalisation is down by US$60> READ MORE
I spent nearly six years on the derivatives desk at JP Morgan here in Hong Kong. I held the CEO Jamie Dimon in extremely high regard, as I think did most other> READ MORE
A couple of weeks ago, after a long day fly fishing on the Yellowstone river in Montana, a group of us were talking about the day’s fish count (specifically the> READ MORE
Bitcoin for now is still outside the realm of traditional personal and investment finance. By that I mean, for the most part you can’t buy bitcoin through the> READ MORE
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What do Paris Hilton, actor Jamie Foxx, rapper The Game, and boxer-slash-convicted-woman-beater Floyd Mayweather all have in common?
They’ve all recently promoted “Initial Coin Offerings” or ICOs, the fund-raising process by which a cryptocurrency token is sold to the public in exchange for capital (usually in the form of either bitcoin or ethereum).
Celebrities jumping on the ICO bandwagon doesn’t help the credibility of the cryptocurrency space as a whole. And I have to feel it’s a less-than-ideal introduction for those less familiar with cryptocurrencies.
I would also hope that – at a bare minimum – folks realise that these celebs aren’t doing all this promotion for free. To Paris Hilton, an ICO is just another commercial venture like her limited-edition fragrance ‘Can Can Bling’. These people are likely either given tokens for free, or allowed to buy them at a deep discount to the ICO price. So it’s in their interest to hype these tokens as much as possible.
There are plenty of extremely promising cryptocurrency projects both in the pipeline and already issued. These have the potential to completely displace entire existing industries, create brand new ones and deliver hundred-fold returns on investment.
But – like with stocks, for example – the reality is that the majority of what’s out there should be avoided. Just because you can buy, doesn’t mean you should buy.
For every Amazon or Google of the dotcom bubble era, there are dozens of failed Pets.com’s, or worse.
And I’ve been spending a lot of time finding which ICOs I think have the best potential. (And we have a report available that tells you about three of my favourites right now… see more here.)
This video below however, walks you through one that doesn’t…
It’s about project I came across recently and I put it together yesterday just to walk you through some of the things that I look at when doing a quick “sanity check” on a potential new ICO.
This review is far from comprehensive, but I wanted to share some of the obvious red flags that I look for in potential projects. It’s a quick primer on how to avoid the ICO equivalent of penny stock scams.
(I recommend watching this on a desktop computer rather than a mobile device – you’ll also have to excuse the parts in this video where I am clearly finding it difficult to contain my amusement at what I’m seeing.)
On Sunday evening, I had the privilege of attending a small dinner with a handful of financial market gurus, plenty of whom had more experience in financial markets than I have years on the planet. And for the most part, they are all gold bugs of varying degrees.
“Gold bugs” are those for whom gold is less of an asset class, and more a belief system… for them, gold is the only real form of money – one which cannot be debased by profligate central bankers who can print more paper money with the snap of their fingers.
I was fortunate enough to sit next to one of the world’s pre-eminent gold authorities, an individual who’s up there with the likes of investment gurus and financial commentators like Jim Rogers, and Jim Rickards, author of 2016’s The New Case for Gold.
Somewhat inevitably, discussion turned to bitcoin. I shared what I believe is one of the most overlooked factors affecting bitcoin’s future prospects…
You see, the mistake that the likes of Jamie “It’s a Fraud” Dimon and Warren “It’s a mirage” Buffet make when it comes to bitcoin is that they fail to realise that bitcoin isn’t some digital trinket. And it’s not a fad or a craze (although there is plenty of speculative participation).
Rather, when you scratch beneath the surface, you’ll find that bitcoin is an asset that has not only survived but thrived, because at its core sits a community of what I’ll call “bit bugs”.
The T.V. talking heads, newspaper articles and mainstream media frequently overlook the existence of this community and its conviction. And once you spend any time in the bitcoin community (in chat groups, internet forums, conferences, meetups and social media), you’ll see that bit bugs share many traits with their gold bug cousins.
First, as mentioned earlier, both “bugs” adhere to investment rationales that are underpinned more by a belief system, an almost religious affectation, that outweighs any cold, hard analysis. You will never, ever hear a gold or bit bug say you shouldn’t own gold or bitcoin respectively. A real “bug” never capitulates.
If the price goes down? Then, “Buy more, it’s cheap!”.
Price goes up? “I told you so, if you don’t own some then you should!”
The second commonality is the overlapping shared political philosophies of libertarianism and anarcho-capitalism – this might sound scary but it is just an advocacy of individual sovereignty over the state, i.e., personal liberty as a core principle.
And the third commonality is a deep scepticism (to put it mildly) towards government and central banks.
Both gold and bitcoin camps are deeply cynical when it comes to the motives of banks in general and central banks in particular, and both will point with disgust to the waves of money printing and trillions of dollars of fiat debasement that was carried out in the wake of the Global Financial Crisis as a key reason for owning their respective favourite assets.
As for bitcoin, one only needs to read the second paragraph of Satoshi Nakamoto’s original communiqué that accompanied the release of the bitcoin whitepaper in 2009, the original “road map” for developing the Bitcoin blockchain:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Where the bitcoin and gold worlds collide, and in fact assume diametrical opposition to one another, is here: Gold bugs see gold as a physical, tangible and real asset.
You can pick it up and feel its satisfying weight in your hand. Gold has unquestionably been money for thousands of years.
Bitcoin? That’s just a piece of code. The government will eventually close it down – right?
As for the bit bugs? Well, bitcoin is the ultimate in freedom of asset ownership. The government can’t confiscate it from me as it did to owners of gold in 1933 in the U.S. under Executive Order 6102.
I can cross national borders with bitcoin in my possession, on a USB-stick device, a piece of paper… or if I can memorise my private key, with no physical object in my possession of any kind.
Whether my bitcoin is worth US$100 or US$100 million, it makes no necessary difference to how I move and store it (which is clearly not the same with gold). I don’t need a trusted middleman to send it from me to you, and I can send it around the world, securely, in a matter of minutes.
…a little bit of both. Like I said a couple of months ago:
“Gold has stood the test of time as a medium of storing value. For that reason, it deserves a place in your portfolio. Bitcoin’s time, on the other hand, is just beginning. Blockchain is the future, and when you have an opportunity to buy the future and tuck it away, you should take it.”
But don’t underestimate the bit bugs. The price of bitcoin may have gone from US$600 to US$4,000 over the past 12 months – a fact that understandably garners the most attention – but there have been five corrections of 25 percent or more along the way, including in the past week or so a correction of 40 percent. Yet bitcoin endures for the time being. The bit bugs are nothing if not resilient…
The world of cryptocurrencies is in the midst of a tornado just now. Since the beginning of September, total cryptocurrency market capitalisation is down by US$60 billion to around US$109 billion. That’s a fall of 40 percent.
I spoke to a colleague this morning based in the U.S. and he was in a total panic about “what’s happening in China”.
First of all, let me give a quick overview of what’s been happening over the past few weeks with regard to cryptocurrencies in China, what’s happening right now, and more importantly, what I think will play out over the next couple of months.
At the end of August and early September, we saw the first signs of imminent changes in China’s attitude towards cryptocurrencies with the larger ICO (initial coin offerings) broker platforms ICOINFO and ICOAGE suspending their ICO services.
(ICO platforms in China aggregate global initial coin offerings into a single access point for Chinese investors. So instead of investors having to open lots of different cryptocurrency wallets and familiarise themselves with lots of different ICOs, they can simply allocate whatever money they want to put to a range of ICOs through a single platform).
We then saw Caixin, a mainland China media outlet, publish an “exclusive” that ICOs would imminently be labelled as “illegal fund raising” and banned. Cryptocurrencies sold off across the board.
Two days later, the People’s Bank of China (PBOC), along with half a dozen other regulators, released a joint regulatory notice banning ICOs.
Last night, one of the largest mainland China exchanges, BTCC, announced that it would be suspending operations by the end of the month.
Earlier this afternoon (approximately half an hour ago as I’m writing this), ViaBTC, another exchange, also announced closure of its exchange.
One by one the others, like Huobi and OKcoin will follow.
The process will be as orderly as possible. If there are any exchanges that have been running fractional reserves, and badly (i.e. lending fiat or cryptocurrencies for crypto margin trading, and not running their trading risk properly), then the last thing the regulators want is to trigger a ‘bank run’ on an exchange which ends up not being able to pay back its customers.
After last night’s BTCC announcement, we saw another heavy round of selling, with bitcoin falling another 15 percent, and second largest cryptocurrency ethereum fall by around 17 percent.
Anyone who’s familiar with how the Chinese government works will understand – first of all – that the ICO ban was long overdue. Speculation was indeed getting out of control, with hundreds of millions of renminbi being funnelled into projects with little or no viability.
ICOs represented a clear threat to financial stability. Remember, when a lot of those renminbi start to evaporate on the back of shoddy ICO companies looking for a quick-buck round of speculative financing, you can be sure that punters nursing losses will go straight to the government to complain.
That’s a threat to stability. Enough upset speculators who lose their cash can cause a lot of problems very quickly for a government that prizes keeping the peace above everything else.
With regard to the exchanges, I’d note a few things…
Firstly, despite BTCC announcing plans to suspend trading, there has not been any official announcement from the PBOC (similar to what we saw with ICOs) regarding the exchanges.
Both BTCC and ViaBTC cite the public statement from the PBOC as cause for closing their exchanges. I’m told that the regulators are visiting the major exchanges one by one. And this is the result.
Secondly, bear in mind that the National People’s Congress (NPC) is being held in Beijing on the 16th of October. It’s not unusual to see the Chinese government flex its muscles in the run up to this event, whether it’s political (i.e., sharply reminding Hong Kong that it belongs to China), cracking down on potentially overleveraged (and overambitious) Chinese conglomerates, or social media – this week the government announced that the administrators of any WeChat messaging groups would be liable for whatever people said on their chats, coinciding with the crackdown on cryptocurrencies which use social media for the majority of communication.
If you’ve been following any of the China regulatory crackdown over the past few weeks in China, you’ll realise that there has been no mention at all of bitcoin “mining”.
A huge amount of the total computational hashpower underpinning bitcoin contributed by miners comes from China. These miners in effect run huge server farms, and are rewarded with bitcoin for their efforts.
It’s tremendously lucrative. Bitmain, run by Jihan Wu, is the main company behind the production of bitcoin mining chips, and a major miner itself. It’s considered to be one of the most profitable and wealthy bitcoin-related companies there is.
For China, bitcoin mining generates millions of dollars a day in bitcoin that can be sold offshore – i.e., it’s a potential source of foreign exchange income. What’s more, the more bitcoin rises in price, the higher the dollar-equivalent value of those mining rewards (i.e. currently 12.5 bitcoin every 10 minutes approximately).
And take a look at this statement from the exchange ViaBTC from earlier this afternoon (announcing its closure). Its mining pool is unaffected.
Putting this all together suggests to me two possibilities over the next couple of months:
In either of these circumstances, ICOs will still potentially be possible, but will require substantial regulatory oversight prior to listing – similar if you will to a framework used by regulators for traditional equity issuance.
This isn’t “the end of cryptocurrencies in China”. Rather I think it’s the beginning of a more highly regulated market… one that favours domestic blockchain related companies in particular (I will cover this in a separate note).
However, in the short term we are going to see plenty of selling pressure across the board in cryptocurrencies.
If you do not own bitcoin or cryptocurrencies yet, then it’s a good opportunity to start nibbling, and averaging in over the next few months.
If you are already long, then just sit tight – as you well know by now, this is one of the most volatile asset classes in existence, but nothing that’s happening in China right now affects the long-term potential of bitcoin whatsoever.
It’s worth noting that there is plenty of liquidity in non-China exchanges taking up the slack. Of the top 10 largest bitcoin exchanges by volume over the past 24-hours (which account for 52 percent of global volume), only two are Chinese… accounting for around 9 percent of total global volume.
Prices will continue to fall over the next few days as more exchanges are closed, but the next few weeks should represent an excellent buying opportunity.
I spent nearly six years on the derivatives desk at JP Morgan here in Hong Kong. I held the CEO Jamie Dimon in extremely high regard, as I think did most other employees, and many others in the finance industry. He’s probably one of the most highly respected bank CEOs around.
But at a conference, yesterday, Jamie had some pretty strong opinions about bitcoin, saying:
“It’s a fraud”
“It’s just not a real thing, eventually it will be closed”
“It’s worse than tulip bulbs. It won’t end well”
“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars”
None of this makes sense to me… I hardly even know where to start.
If you’re a murderer, then “you are better off doing it in bitcoin”?
Likewise, if you’re a drug dealer – then you should be using bitcoin?
His comments were absurd.
If bitcoin is the currency of corruption and crime… I have to wonder, when JP Morgan’s fellow global bank, HSBC, was fined US$1.9 billion for laundering money for Mexico’s Sinaloa Cartel and Colombia’s Norte del Valle cartel… how many bitcoin were involved? That would be… zero.
But less logical than all of that is Jamie’s suggestion that “eventually [bitcoin] will be closed”.
As it happens… Bitcoin can’t be “closed”. It’s not an overleveraged credit derivative fund. It’s a distributed blockchain running on a global network of computers.
As for “fraud” and “tulip bulbs”… it’s a statement from someone who would appear to know fraud well. The US$66 billion-dollar current value of bitcoin in circulation is only 5 times bigger than the US$13 billion then-record settlement that JP Morgan bank paid for its alleged role in underwriting fraudulent securities prior to the 2008 financial crisis. That should help put the numbers in perspective.
Just to clarify, bitcon is a terrible currency for crime.
As many people know, every bitcoin transaction is recorded on the blockchain for anyone to see. A suitcase of cash, albeit impractical, is less traceable than bitcoin. Gold is an even better for criminal value transfer, as it resides completely outside of government issuance, and doesn’t even touch the digital realm.
When it comes to bitcoin, there are companies that specifically help law enforcement to follow digital money trails and track down suspected criminals that use bitcoin.
Bitcoin is just a relatively uncomplicated, cryptographically secure medium of exchanging value. It’s scarce by design, unlike fiat currencies which can be created in their trillions at the push of a button.
Is bitcoin volatile? Absolutely. Is it in a short-term price bubble facing correction? It could well be.
But Mr. Dimon’s commentary reeks of a lack of basic understanding of not only the mechanics of bitcoin. It also helps explain why there is such a passionate, and growing, base of users.
Bitcoin was born in banker discontent
Any blockchain has a first “block”, known as the genesis block. On July 3, 2009, the person (or persons) known as Satoshi Nakamoto, responsible for the bitcoin whitepaper (the technical roadmap for the bitcoin blockchain protocol), released the genesis bitcoin block.
This block (effectively a ‘block’ of data) includes the headline from the front page of British newspaper The Times, “Chancellor on brink of second bailout for banks”.
It’s unknown whether this was simply intended as a form of time stamp, or as a nod to the disarray that engulfed the financial system at the time – in particular, the hundreds of billions of dollars paid to bail out banks. (Note: Jamie Dimon told the U.S. Senate Banking, Housing and Urban Affairs Committee back in 2012 that JP Morgan did not need bailout funds but that he was instructed to take them.)
Either way, the American public in general retain a pretty dismal view of U.S. banks (see chart below).
Since a high of 60 percent in the late 1970, popular confidence in the U.S. banking system has fallen to just under 30 percent.
More importantly, a substantial proportion of the global population simply doesn’t have faith in the fiat currency issued by its respective government as a way to store value.
Now, you might be fine sitting in a Wall Street office, content with your U.S. dollars, and running a bank that is profiting from the relentless money printing largesse on the back of perpetually low interest rates and financial asset inflation. (Earlier this year, Mr. Dimon’s JP Morgan announced that it had earned US$26.5 billion in profit over the preceding 12 months, a record by any major U.S. bank.)
But the 1.3 billion people in India who were told last November that nearly all the cash they were holding was now invalid and needed to be exchanged for new ones – they have a little less confidence in their currency.
Bitcoin can’t be printed by a central bank. There’s no “fraud” unless it’s perpetrated by dishonest users of bitcoin, which is no different from any other form of value transfer. It can’t be “closed”. It’s just an alternative that offers a huge number of advantages over traditional fiat currency.
I wrote the other day that I relish hearing the counterarguments, the reasons not to own bitcoin. But I don’t think Mr. Dimon has presented any valid ones yet.
So until he does, Mr. Dimon’s bitcoin eulogy takes the top spot on this bitcoin obituaries website (well worth a browse to see how many financial luminaries have announced the death of bitcoin over the years).
A couple of weeks ago, after a long day fly fishing on the Yellowstone river in Montana, a group of us were talking about the day’s fish count (specifically the lack thereof) when the discussion turned to cryptocurrencies.
Peter and I were attending a small annual investment offsite run by a U.S.-based Asian equity fund manager. The handful of partners in the room, unwinding with a cold beer, collectively held over a century of fund management expertise. When it came to financial markets, and Asia in particular, these guys know their stuff.
But bitcoin? Not so much.
I was the resident sounding board… and these were the issues that most concerned my fishing partners about the world of cryptocurrencies…
This was the first point of concern when it came to bitcoin. It’s one that a lot of people have.
And if you take a step back for a moment, it’s utterly absurd.
For example, I’ve never once in my entire life ever heard anyone query the wisdom of investing in Google, Facebook, or any other technology company because of the risk of the “Internet going down”.
Similarly, I know of nobody personally (in developed countries at least), who insists that all their personal monetary wealth be kept in physical notes and coins in their possession rather than at a bank (where your savings represent little more than numbers on an electronic ledger) – because they’d “lose it all” if the Internet went down.
And in the event that the entire global Internet communications system permanently collapses (which is what would need to happen for bitcoin to become totally worthless), I think you’d have bigger concerns than the small allocation of your portfolio that’s in cryptocurrencies.
In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking – thanks to some high-profile hacks of cryptocurrency exchanges.
I point the finger at ignorant journalists who propagate their own poor understanding of cryptocurrencies to the broader public.
(Just a couple of weeks ago, for example, an op-ed in the Wall Street Journal entitled “The Bitcoin Valuation Bubble” stated that “Bitcoin is a favourite of money launderers and those evading capital controls”. Of course, there was no data to back up that assertion… there’s no need for “opinion” to be backed up by facts, I suppose.
Bitcoin is one of the most secure assets an individual can own. BUT it’s 100 percent up to the individual to secure it themselves!
Just to be clear, cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers’ digital assets are being secured. That’s why I’ve said repeatedly that you shouldn’t keep large amounts of bitcoin on an exchange because when it’s on an exchange you don’t own it, they do.
And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities – just look at U.S. credit reporting agency Equifax who announced last week that the Social Security numbers along with other personal information of up to 143 million Americans may have been compromised.
That’s a catastrophic breach. And this kind of thing happens all the time. So there’s no use worrying about bitcoin “hacking” when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).
China last week announced a ban on initial coin offerings (ICOs), where companies create and issue cryptocurrencies to the public in exchange for bitcoin or ethereum (the second-largest cryptocurrency). I wasn’t surprised at this, given the sheer volume of ICOs taking place – especially those with seemingly little to no business viability.
But China didn’t “ban” bitcoin. And even if a government did want to ban it, the question is “how”? That cat’s already out of the bag. And bitcoin doesn’t answer to any government.
There is no bitcoin head office, no CEO, no board of directors.
What’s more, there’s no incentive for a major economy to “ban” bitcoin. Any government that does is simply saying “we don’t want innovation, technology jobs, new companies, or enterprise in general”.
Now don’t get me wrong – there is and will be regulation, and there may even be a temporary shutdown of the exchanges. But regulation is a different story altogether. For example, don’t think for a second that Uncle Sam is going to let you make 10x on a cryptocurrency trade and not pay your “fair share” of tax to the coffers.
Bitcoin is a completely new type of asset class for most people, so it’s right to ask questions. That’s a prudent approach for anyone considering allocating capital to any venture, let alone one you’re unfamiliar with.
But we all suffer a natural tendency to seek and interpret new facts as confirming our existing opinions. This is called confirmation bias.
So, if all you’ve ever read about bitcoin through the mainstream media is negative (“it’s just a bubble digital currency used by criminals”, for example), then you might have formed a highly negative view of bitcoin and cryptocurrencies in general. Furthermore, you will be more likely to look at news like the China ICO ban as confirmation of your existing biases.
I sit on the other side. I’m already long-since of the opinion that you should own some bitcoin, for example, and whilst finding further reasons to own it might feel nice, I’m more interested in reasons not to own bitcoin.
That’s why I like hearing counterarguments like the ones above. So if you happen to have any other reasons, concerns, worries or criticisms, please just reply to this email and let us know.
Bitcoin for now is still outside the realm of traditional personal and investment finance. By that I mean, for the most part you can’t buy bitcoin through the channels that you would typically buy financial assets. You can’t buy bitcoin from your bank like you would foreign exchange. You can’t put a buy order in with your stock broker and leave him to fill it. And you can’t use your online brokerage account either…
For the most part.
Back in March of this year, the Securities Exchange Commission (SEC), the American securities regulator, rejected an application for the first publicly traded bitcoin ETF. At the time, a lot of bitcoin bears pounced on the SEC’s decision. But in an article titled “This is why bitcoin doesn’t need an ETF”, I argued that the ruling wasn’t important to bitcoin’s price trajectory:
“It’s still a good time to buy. If anything, the SEC’s reticence keeps bitcoin out of a lot of investor portfolios for a while longer. This means you have more time to get familiar with it, and start accumulating some.”
Bitcoin was trading at US$1,200 at the time. Currently bitcoin is trading at US$4,500 (and Bitcoin Cash, an additional currency that was spun off to holders of bitcoin early last month is trading at US$600… so your total position today is worth over US$5,000).
The SEC has not approved a bitcoin ETF. There is, however, still a way to buy bitcoin through the traditional channels I talked about earlier.
It’s called the Bitcoin Investment Trust (Exchange; OTC, Ticker; GBTC), a traditional investment vehicle with shares titled to investors name, and it invests exclusively in bitcoin.
It is sponsored by Grayscale Investments, a company that focuses on offering investors digital assets wrapped in familiar investment products. The fund trades in the over-the-counter (OTC) market, not on an exchange, and there is currently around US$800mn in assets under management (AUM).
Sounds great, right? An easy “institutionalised” way for investors to own bitcoin – without the rigmarole of opening bitcoin exchange accounts or figuring out bitcoin wallets and how to store bitcoin safely. (We’ve explained this in detail… go here to read our complimentary beginner’s guide to bitcoin.)
And it gets better! This trust is eligible for tax-advantaged accounts. This means U.S. investors can buy this trust for their retirement 401k accounts. I asked my colleague Kim Iskyan (who holds a U.S. passport) to log in to his U.S. online brokerage account to double check.
But right now this trust is easily the worst way to buy bitcoin.
Take a look at the chart below. This shows the historical share price of the trust (blue line), the net asset value (i.e., the value of the underlying bitcoin per share, red line), and the premium/discount (i.e., how much more or less the share price trades to its underlying intrinsic value).
As you can see, the share price has recently been trading for over 100 percent its underlying asset value. In other words, people buying bitcoin through this trust are paying more than twice the amount they would pay if they were buying bitcoin directly. This is like paying 2 bucks for a 1 dollar note. It’s absurd.
Ignorance, desperation, and/or sheer recklessness are the only reasons I can think of for someone to pay a 100 percent premium to buy a digital asset like bitcoin. Sadly, none of these traits make for good investing.
This kind of extreme froth is becoming worryingly pervasive across the cryptocurrency space.
Just take a look at the below tweet from Paris Hilton hawking the initial coin offering (ICO) of a new cryptocurrency token.
Now, Ms Hilton might be famous for lots of reasons, some perhaps less savoury than others, but I don’t recall investment analysis being one of them. It’s one thing to market your perfume – but it’s quite another to recommend investing in a cryptocurrency token.
(Note: I have not taken much time to analyse the Lydian Coin. When I went to their website and clicked on the “Team” link there were no names provided. That’s not a promising sign.)
When regulators see the likes of Paris Hilton shilling “#ThisIsNotAnAd” cryptocurrencies, and when traditional regulated trusts trade at twice their intrinsic valuations, they get itchy trigger fingers. The regulator will want to… regulate.
And rightly so.
The token sale process is a gamechanger for early stage venture funding, especially for ideas that properly leverage and innovate on top of blockchain technology.
But the flipside is that we’re seeing a huge number of ICOs whose businesses have nothing whatsoever to do with blockchain. They are just using tokens as a means of crowdfunding capital.
Donald Trump and Chinese leaders are about take off their gloves in a full-blown war… rewarding prepared investors with 1,000 percent gains over the next 18 months. Go here to see how you can profit from this global conflict.
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Because there’s so much froth in the market, any enterprise even vaguely attached to cryptocurrencies – even if it’s just as a means of fundraising – can find “investors” willing to throw money in.
It’s like companies back in the late 1990’s tech bubble adding a “.com” to their name – just to attach themselves to the red hot technology sector.
My Facebook news feed is littered with paid advertising from companies I’ve never heard of that are advertising their ICOs. That’s not something you see with the initial public offering (IPO) of a stock.
A few days ago, the ICO of a token called Protostarr was halted after the SEC contacted the company. The SEC has already weighed in on ICOs with their opinion.
But what is truly shocking is the fact that according to Forbes magazine, Protostarr never even consulted a lawyer before starting their ICO! Again, that just tells you the whole ICO process is crying out for a regulatory clampdown.
In China, one of the biggest markets in cryptocurrencies, the the People’s Bank of China (PBOC) today issued a notice halting all ICOs immediately. China has also seen a number of high-profile ICOs with seemingly little viable businesses behind the multi-million-dollar capital raises and the speculative froth has been particularly bubbly in China ICOs.
Not only have all ICOs been suspended, but two major blockchain conferences scheduled to be held in Beijing this month were also abruptly postponed. The latest one being the Bitkan Summit, where some notable blockchain evangelists were scheduled to speak, which was cancelled due to authorities’ “upgraded requirement for public security”, whatever that may be…
We are about to see a big flight to quality in cryptocurrencies. In the short-term we’ll see a shift from the more speculative cryptocurrencies into “crypto-quality” (i.e. bitcoin).
Investors sitting on “junk” tokens will convert back to bitcoin, not cash. Bitcoin will still likely take a correction against fiat (i.e. it will fall in dollar or renminbi terms), but much less than the vast majority of cryptocurrencies.
We’ve seen the Chinese government take these kinds of steps before. In late 2013 the PBOC prohibited Chinese financial institutions from using bitcoins. The price of bitcoin subsequently fell by around 40 percent over the next couple of weeks to just over US$400.
And since then we’ve seen periodic bouts of regulatory noise, particularly directed towards the exchanges. This time the regulator sights are set on the ICOs. And like I said earlier, rightly so. There are so many junk ICOs hitting the market and trying to capitalise on abundant speculative capital that it’s time for a shakeup.
This doesn’t change my overriding recommendation which remains the same – investors interested in cryptocurrencies should simply buy a little bit of bitcoin and tuck it away. As I said recently:
“I own bitcoin the same way I own gold. Locked up, out of sight, and out of mind. The gold will always be there… as for bitcoin, I can’t say that with 100 percent certainty.
But if you ask me which one is likelier to be up 1,000% three years from now, the answer is bitcoin. It’s still just a $45 billion-dollar market cap.”
When it comes to the financial markets, how can an individual compete against the big institutional asset managers who dominate the markets?
These guys have trillions of dollars of assets under management, multi-million-dollar compensation packages for the world’s best traders and analysts, and massive budgets for technology and trading systems. And their relationships with investment banks usually give them first pick for a hot IPO and access to all the research that Wall Street has to offer.
It’s not often that individual investors get the upper hand on the big institutional asset managers. But there’s one frontier asset class where you truly hold the advantage over the bigger guys. And that’s in cryptocurrencies.
Let me explain.
Right now, the current total market capitalisation of the cryptocurrency space is approximately US$160 billion. (Bitcoin accounts for around 45 percent of the total, followed by Ethereum at around 20 percent.)
This is still extremely small when you consider that it’s the same size as the market capitalisation of the Walt Disney Corporation or Intel.
When it comes to other global financial asset markets, consider that the world’s total debt market is around US$215 trillion. And global equity market capitalisation is around US$80 trillion.
This month a friend of mine by the name of Lewis Fellas launched a cryptocurrency hedge fund. Anyone can launch a fund, but Lewis isn’t just anyone. He’s a world-class trader who’s worked for top U.S. investment banks, one of Asia’s most successful hedge funds, and, most recently, for the US$35 billion Harvard University endowment.
What I found particularly noteworthy, when talking with Lewis recently, was the amount of interest his fund has generated from institutional investors. After an article mentioned the launch of his firm, Bletchley Park Asset Management, appeared in Bloomberg, he told me he was “blown away” by the number of institutional inquiries he received… from sovereign wealth funds, endowments, funds of funds, family offices… you name it.
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This tells me a few things.
First, there’s obviously a lot of interest in cryptocurrencies as a new financial asset class from big institutions. But right now there aren’t enough “bridges” between traditional asset managers and this new, less well-understood arena of cryptocurrencies.
People like Lewis create a credible “bridge” for these traditional asset managers to cross into the cryptocurrency realm.
Let’s say you’re the manager of a sovereign wealth fund, and you’re interested in making a small allocation to cryptocurrencies, how do you go about it? Do you build an internal team and do it yourself?
Or do you look for people with strong backgrounds in asset management, who have transitioned over to crypto, and who know how to responsibly invest other people’s money (i.e., institutional level security, compliance and reporting etc.)?
The latter, of course.
There are already a few cryptocurrency funds out there. Notables include MetaStable Capital, a San Francisco-based hedge fund and Polychain Capital run by 27-year old Olaf Carlson-Wee with US$200 million in assets under management. These funds however are usually backed mainly by big Silicon Valley venture capital names like Sequoia Capital and Andreessen Horowitz, not traditional institutional asset managers like pension funds for example.
The institutional level of participation in cryptocurrencies is still very, very small by any measure… but it’s increasing.
This means there’s every likelihood that over the next year or so, we will see much greater sums of money flow into cryptocurrencies, and Bitcoin is likely to be the biggest beneficiary.
The advantage you have as an individual is that right now you have far fewer hurdles to overcome to put some money into cryptocurrencies than the big institutions.
A sovereign wealth fund or endowment manager that wants to buy cryptocurrencies needs to jump through a lot of hoops. There’s all sorts of compliance required, legal opinions, not to mention expanding the scope of your investment mandate (which defines what assets you can invest in) – which is no easy task.
But all you really need to do is open a cryptocurrency exchange account, and allocate a little bit of money towards bitcoin. You don’t have to put a lot of capital at risk either.
You have the opportunity to “front-run” a wall of institutional capital that will likely pour into cryptocurrencies as the asset class becomes increasingly mainstream, and increasingly difficult for asset managers to ignore.
If you want to start, check out our beginners guide to bitcoin… it’s here.
I’m writing this from 35,000 feet above the Pacific Ocean, and we’re about to begin our descent into San Francisco.
On the obligatory Customs Declaration form, provided by U.S. Customs and Border Protection, I notice I’m required to answer Yes or No to the following:
Here’s a hypothetical question: What if I had US$100mn worth of bitcoin on a USB thumb drive in my pocket… would I need to declare that?
What if I had my bitcoin wallet on my phone?
Or better yet, what if I didn’t have anything at all except my public and private bitcoin keys – which are the “passwords” I need to access, spend and transfer my bitcoin from any internet connected device – simply memorised and tucked away safely in the recesses of my brain?
Would I need to declare that?
I’m pondering this question because, despite bitcoin’s increasing mainstream adoption and price appreciation, there remains huge debate and skepticism about whether or not bitcoin is really money.
One of the positive side effects of bitcoin’s march towards mainstream acceptance is that it pushes everyone to re-assess their own personal concept of “money”.
Plenty of critics say that bitcoin isn’t money. Why not?
Let’s take a quick look at some of the hallmark characteristics of what we consider money.
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Transferability. Can I move it around, and transfer it from myself to another party and vice versa? Yes.
Bitcoin is far more transferable than traditional fiat currencies (like the dollar, euro and yen). I can open my phone and securely transfer US$100,000 of bitcoin (or more) straight into your digital wallet, in an instant.
Of course, you can hand me US$100,000 in cash in a briefcase. But I’d need to count it, and check that the notes aren’t counterfeit. And then I’d need to secure it. The bitcoin blockchain does all the above for me. Once I’ve made the bitcoin transfer and you’ve seen the balance in your wallet, it’s done. That’s it. You own those bitcoin.
Usability. Money isn’t much good if I can’t use it. Can bitcoin be used to buy goods and services? Yes, and increasingly more merchants are accepting bitcoin as a means of payment.
Incidentally, I’m scheduled to shortly meet with the CEO of a company which is launching a service that allows you to spend your bitcoin the same way you would a simple debit card. And it’s acceptable in over 30 million locations globally.
Mainstream acceptance is growing every day. Bitcoin is already legal tender in Japan.
Scarcity. Central banks can, have, and continue to create tens of billions of dollars in fiat currency out of thin air. And as a result, currencies the world over collapse, time and again.
Try talking to folks in Venezuela about how much faith they have in the bolivar (the national currency), now essentially worthless. Or Zimbabweans, whose currency collapsed after hyper-printing by their central bank. Or the billion-plus people in India who had their cash lifesavings declared no longer legal tender in an instant last year, when Prime Minister Narendra Modi made a surprise televised announcement informing them they had until the end of the year to exchange their notes for new ones before they would become worthless.
The west is truly spoiled when it comes to relative currency stability versus the rest of the world.
As for bitcoin, only 21 million will ever be minted according to the Bitcoin protocol, and only around 16 million are in circulation today. No central bank or government can “print” more bitcoin.
And as for the concern that bitcoin is purely “digital”, it’s worth remembering that more than 90 percent of all money that exists today around the world is not physical (i.e., not notes or coins).
When you’re buying bitcoin, you’re taking a view that more people around the world will accept bitcoin as a form of money. And with a total market cap of a little over US$60 billion, I think it’s a worthwhile view to take.
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