History will reveal how I timed my entrance in to the world of cryptocurrencies. After 25 years building and running financial services businesses, I began to take a look into Bitcoin and its brethren at the beginning of 2017.
The subject of cryptocurrency is currently generating passionate arguments across the globe. The believers have insisted that cryptocurrencies and blockchain will take over the world, so time to hop on that train before it is too late. The cynics argue that crypto is nothing but pyramids and schemes and only a fool would consider getting involved. Both sides are often so convinced of the righteousness of their position that they create no space for sharing doubts and posing questions in an open discussion. [sociallocker]
I have never been comfortable around true believers. I prefer a grounded approach to most things, especially when the topic is investment and building businesses. So it was not until I had a conversation with my good friend, John Quinn, founder and CRO at Storj, that I began exploring cryptocurrency in earnest. John helped me understand not only that blockchain and cryptocurrencies represent truly transformative technology and a burgeoning new market, but also that there are fundamental reasons to believe this emerging asset class and the revolution which Bitcoin began, are here to stay.
I am now convinced that the transformative nature of blockchain will have a substantial, sustained and enduring impact on our world and that this will lead to the growing importance of cryptocurrency and tokens as a valuable, if volatile, asset class. I can see how whole industries – not least the financial services industry – will be disrupted, providing an opportunity for many to profit by finding ways to participate in the disruption. I can see, too, that this disruption will bring huge benefits to humans all over the world, particularly those who are underserved by financial institutions and lack access both to the basic financial instruments so central to modern Western life and to sources of capital to build and grow businesses.
Like any emerging asset class, cryptocurrency markets are volatile and illiquid, bring great risk with the great rewards they brought to those who invested before now. From my vantage point of running Russia’s largest brokerage house in the 1990’s, I see many similarities between cryptocurrency and the wild times that followed the birth of Russia’s capital markets in that period.
As there was in Russia during the ‘Wild East’ days, there are indeed no shortage of charlatans and thieves in the crypto world. Buyer beware is always good advice and I encourage all to remember this whenever investing, especially in crypto.
My belief in the future value and success of cryptocurrencies and blockchain companies is based upon five key components:
During the headiest days of the run-up of the value of Bitcoin and other cryptocurrencies towards the end of 2017, the capitalization of all cryptocurrencies was around $500 billion. And this in a great bubble with many tokens clearly overvalued! That seems like a large number, of course. For example, Goldman Sachs capitalization is under $100 billion.
That said, tokens are generally not securities and rarely provide rights to dividends or profits nor do they represent equity in the company. Reflecting upon that led me to consider what Bitcoin and other altcoins are. If they are money, then it seems to me that the right metric for analysis is the capitalization of the world’s traditional, ‘fiat’ currencies. At the end of 2016, global money supply (M2, for you economists out there) was just under $81 trillion.
What this means is that the capitalization of all cryptocurrencies is currently far less than one percent of global money supply. We can debate whether we think that Grandma will buy coffee with Bitcoin one day, and we can wonder whether crypto will one day represent one-third or one-half or more of the world’s money. For me, though, I have little doubt that in the next five years crypto will grow to no less than to five percent of global money supply. That will provide phenomenal returns for those who prudently invest today. For that reason, I joined my good friends at Spring Group to launch a fund for institutional investors and HNWIs, providing a classical portfolio approach for those seeking exposure to this exciting new asset class.
Moving from a world based around large, centralized institutions to a decentralized one makes it much easier to transact with people you don’t know or trust. Decentralization also creates the opportunities for ‘mining’ and ‘farming’ that have brought many to cryptocurrency. It has also brought currencies that easily cross borders and businesses that can quickly scale to serve users all over the world. It’s important, too, as it will help to break the domination of the wealthiest nations and largest institutions, generating opportunities for those far from global financial centers.
The wave of ICOs (over 30 a month, it’s said) is breaking the grip Wall Street and Sandhill Road have had on financing businesses. There’s much that scares me in this brave new world as I have seen more than my share of empty offerings by unqualified teams. Indeed, figures reveal that 46 percent of last year’s ICOs have already failed.
However, I think that the ability to raise capital rapidly without having to know a venture capitalist or jump through a stock exchange’s hoops is a powerful idea. Indeed, my team at Tradingene and I are raising our own money using this strange, new tool.
Alongside the brazenness of many seeking only to make a quick buck, I have been struck by the ambitious dreams of very talented and experienced teams seeking to build transformative businesses using blockchain. It’s clear that much of the work of crypto investors in the coming years will involve separating the massive flow of weak or dishonest proposals from those that warrant a deeper dive.
- Apply Existing Rules of Investment
A word of advice. With all of the hype surrounding the brave new world, the age-old rules of investing and entrepreneurship have not changed.
If you’re investing, make sure to focus on the fundamentals of portfolio management – diversification, correlation, risk management, numerical analysis. Don’t just buy one coin, no matter how strongly you believe in it. And only invest what you are ready to lose. If investors in our industry follow these rules, then it will thrive.
As I have travelled around the world on our investor road show, I have had the pleasure of meeting many eager people in the cryptocurrency world who are creating a warmth that is quite different from the world of traditional finance.
I have met some of the founders and evangelists of Bitcoin and blockchain as well as many who, like me, are on the steep end of the learning curve. What’s struck me most has been the welcoming community, full of people who are ambitious and kind, creative and fearless, bold and bright. They all have one thing in common. They can change the world for the better.
The last year has been a mind-blowing ride for me. I am thrilled by the energy and the audacity I have found exploring blockchain and cryptocurrencies. I look forward to spending the next 25 years in this nascent industry while generating returns for my investors as we unlock the power of a decentralized world. Time and history will judge whether we succeeded. [sociallocker]
Daniel L. Wolfe is CEO of Tradingene (www.tradingene.io) – a new ready-to-use Blockchain-based platform that allows investing in trading algorithms and Managing Director of the Simoleon Long-Term Value cryptocurrency fund.
Daniel’s next column will be at the end of March