Danny J. C.
“Crypto Spring” as about to arrive...
...and, institutional capital, a.k.a. smart money, could possibly usher in this new season.
Cryptocurrency is a new asset class with different characteristics from the current assets VCs have in use. Assumptions, selections criteria and funding structure must be upgraded. To cope the new challenge, traditional VCs can either launch a new fund or work with experts and preexisting funds (manage the pool independently/ invest into another fund).
Reasons why institutional investors could rally crypto in 2019:
Technological disruption in many industries
Finding the next Apple? Innovation takes place faster than ever before. Exponential growth opportunities are apparent. Distributed Ledger Technology has many advantages applicable in many industries globally. DLT enables a shared system of records among business network members which eliminates the need for reconciliation of different ledgers, Incorruptibility, where consensus is required from the members on the network. In addition, the transactions are permanently recorded. Even system administrators cannot delete transactions. Additionally, the possibility to reduce operating costs by one-third in the banking payments and other financial infrastructure costs.
Regulators recently have been constructive about crypto
Regulators across the world have realized that cryptocurrencies are here to stay. Still, there are numerous issues to negotiate: 1) Identifying players who have been defrauding investors with phony initial coin offerings (ICOs). 2) Defining the differences between utility tokens and security tokens; 3) Working with crypto businesses to create appropriate regulations to protect investors without hurting innovation. Especially active is the US, Switzerland and Singapore, but also Bahrain has shown its 'sandbox to boost the development of the fintech'.
Cryptocurrencies provide an attractive combination of returns and volatility
Wait a minute. Volatility is attractive?! Crypto assets are appealing because they enjoy relatively low correlation to other asset classes, like bonds (negative correlation) and gold (zero correlation). Therefore, crypto assets can be an ideal way for investors to diversify a portfolio consisting of stocks and bonds. Five percent exposure to crypto assets in a portfolio could boost performance nearly double that of a typical stock/bond blended portfolio. Risk and rewards is calculable to certain extend when trading or investing in startups. Also obviously is, that simply investing in asset fund's Top 10 or Top 20 coin bundles or portfolios may be a risky bet.
Institutional custody solutions set to come to market soon
There is an urgent need for qualified custodians to safeguard the growing amount of crypto assets. Very few crypto custodians meet the strict security requirements demanded by regulators and institutional investors. Coinbase, one of the more popular exchanges, has launched custody services by partnering with Electronic Transaction Clearing (ETC), a regulated broker-dealer.
Cryptocurrency futures, derivatives, and forward contracts
The volatility of crypto prices at the beginning of the year dramatically boosted demand for crypto derivative products. With derivatives, investors do not need to hold the underlying crypto asset, but they can still enjoy the potential benefits while possibly minimizing loses, much like they hedge regular currencies. While many exchanges do not yet allow direct sales of Bitcoin, investors can speculate on cryptocurrency pricing by trading futures on exchanges like BitMEX and OKCoin.
Regulatory approval for a crypto ETF is likely to happen
There is an obvious need for a sector or a market-based exchange traded fund to help investors diversify risk. Several crypto companies, such as Gemini and Bitwise, have filed for crypto ETFs, but so far, regulators have not approved any. However, my vote goes only to physically backed Bitcoin ETF.
Large financial institutions are moving ahead with crypto products
Crypto assets have drawn the attention of institutional investors. Large institutions, such as Goldman Sachs, Fidelity and Blackrock, have started to develop cryptocurrency products and the underlying Blockchain technology. Industrial and Commercial Bank of China: Filed patents using Blockchain technology to verify digital certificates instead of a trusted central authority | Bank of America: Working to automate the process of creating letters of credit using the Ethereum Blockchain | Royal Dutch Shell: Working with BP to create an energy commodities platform | and the list goes on. We expect to see more institutions enter this industry and offer a variety of crypto-based derivative products.
Blockchain technology can help democratize access to an asset class traditionally only available to elite institutional investors by providing investors with the opportunity to invest into a fund via a liquid, tradable, digital token. Security token allow fractional ownership, leading to smaller requirement of investment amounts, virtually everyone can participate. Further, token can be traded on secondary markets, providing much better liquidity to investors. And its low fee structures as regulatory compliance is incorporated on the blockchain (ie automated processes for dividend events).
Previous, illiquid type of assets turns into a liquid one
Trade finance stands out in adaption by gaining immensely from distributed ledger technologies (DLT), due to the traceability, transparency, and operational efficiency. Banks are some of the biggest advocates of the technology because it is secure and accessible to a select group of trusted parties. It allows for more transparency around trade transactions and operations, including everything from tracking invoices to digitizing documents.
Tech giants like IBM, Oracle, and Amazon are developing already their own DLT.
Industry is seeking more efficient and effective ways to manage their value chain. Blockchain is made for Enterprise Resource Planning (ERP) and Supply Chain Management by revolutionizing IOT (Internet of Things) decentralized security and traceability.
Venture capital (VC) is always at the forefront of progress.
The smell of ROI. VCs have entered the crypto world with confidence, resulting in exploration of switching from classical model and investment sectors into crypto.
41.1% growth with tendency shift into early stages and technology growth
A great example is Robinhood, a zero-commission stock trading and cryptocurrency app, ranking 6th in terms of top VC funding rounds in 2018, with whopping $363 million raised in their Series D.
Strong financial-resource deal-flow growth during 2018
The first nine months of 2018 brought us $12.3 billion in total ICO volume. Excluding Telegram ($1.7 billion) and EOS ($4 billion) heavyweights we got $6.6 billion.
2016 — $667 million; 2017 — $1 billion (x1.5); 2018 (Q1-Q3) — $3.9 billion (x3.9)
“Based on our experience, the rapid growth in blockchain investment overall can likely be attributed to a number of factors — including the widespread applicability of blockchain to help harness efficiencies within financial institutions. Blockchain’s capabilities extend from recordkeeping and the registration of transactions to documentation management and supply chain management. While it has primarily been looked at from a banking and insurance point of view to date, the reality is blockchain opportunities abound and could enhance processes for any number of US and global businesses." KPMG (The Pulse of Fintech 2018)
Median deal size of blockchain investments has increased by more than $1mil in 2018
Smart money is coming, and improve overall market performance. This, in turn, will contribute positively the image of the industry over the middle- and long-term perspective. Businesses and investors will run lower risks when entering the industry, and the market will get additional participants and resources for development.
"The truth is, there is no lack of resources on the market — there is a lack of competence and professionals, passionate leaders who are able to feel the market’s heartbeat, to contribute market growth and development." Andrew Zaichenko
Sources: crunchbase, Applicature, CB Insights, Forbes, Diar