How BTC, ETH, BCH and Other Crypto Derivatives Will Change the Industry in 2018
5 years ago, investors were asking themselves: “Does Bitcoin have a future?”
Back then, the coin had enough market capitalization and trading volume to ensure short-term liquidity. But there were also some serious problems. Practical uses were limited; theft was common; the technology was new and unfamiliar to non-techies.
As a result, few investors took Bitcoin seriously. Even those who bought it rarely saw it as a long-term financial asset. Most users simply spent, traded or lost their over time — and one man even threw away $12 mln worth of Bitcoin (in today’s money) by accident.
Things have changed since then. Bitcoin has matured and grown, reaching $273 bn in market cap this year (as of writing). You can now use it to make digital payments in Japan, Australia, and — in the near future — Norway.
Nobody’s wondering if Bitcoin has a future anymore. Instead, there’s a new round of question marks.
One is the possibility of a future hard fork. Another is the legality of cryptocurrencies going forward. But perhaps the most important question of 2017 is:
Will Bitcoin be securitized?
To understand the importance of the answer, consider the following. When the Winklevoss Twins bid for a Bitcoin-backed ETF fund got rejected by the SEC, Bitcoin’s price fell 18% in a matter of hours.
Yes; in the massive Bitcoin rally that was 2017, a single piece of bad news about securitization dropped the coin’s value by nearly a fifth.
The question is, why? Why is securitization so important to investors; what’s the future outlook; are there any Bitcoin-backed securities you can invest in today?
We’ll start by looking at the strengths and weaknesses of Bitcoin — and how securitization creates value by resolving some of the latter.
Bitcoin’s Strengths
Bitcoin is a digital asset that’s hard-coded to be finite, untraceable and easily transferable. This makes it a useful situational alternative to money. Below is a straightforward example.
In the US, you can use PayPal to transfer funds at very little cost. In Europe, you can do the same using SEPA transfers. In Russia, citizens have instant, inexpensive card-to-card transfers. And so on and so forth around the globe.
But what if you want to transfer money across borders and/or in large amounts?
Well, using PayPal to send money from Hong Kong to Russia costs 7.5%. In this specific situation, PayPal also auto-converts incoming transfers into Russian rubles for an extra 4.5%. This raises the total commission to a whopping 12%.
(For comparison, the standard VAT rate in Luxembourg is 17%).
Here’s another example. Say you need to wire $700 to South Africa. A wire bank will cost you $50 and take days to reach its destination. This is cheaper than the Paypal example above — but still expensive.
Compare these scenarios to Bitcoin transfers that cost 1–2% (plus exchange slippage) and minutes to process. The superior option is clear, right?
Right.
This means that Bitcoin is an efficient, inexpensive payment system. The Winklevoss brothers estimate its value at $400 billion — and over $100 billion is already on the blockchain. This gives the Bitcoin enough trade volume and liquidity to mitigate a lot of the risk that investors fear.
This is one of Bitcoin’s main strengths. The coin is a digital financial asset, but the protocol itself is (amongst other things) a payment system. The transactions in that system provide a market for the coin, minimizing the risk of Bitcoin suddenly becoming illiquid.
The problem is that this risk protection is limited. Bitcoin’s value is partly guaranteed by its use as a trade platform, but the coin is still an unregulated, unsecure asset. This limits its attractiveness to investors, which is the key problem facing Bitcoin and all cryptocurrencies today.
The Problem With Blockchain
JPMorgan CEO Jamie Dimon famously said:
“…People invent currencies out of thin air… it won’t end well… It’ll eventually blow up; it’s a fraud.”
Many felt he was being facetious. Bitcoin has since rallied from around $3000 to over $8000. Dimon’s own company — JPMorgan — plans to trade Bitcoin futures on the Chicago Mercantile Exchange.
But that’s not the point.
The point is that, in the eyes of a traditional investor, Bitcoin is made “out of thin air.” It’s magical internet money. It’s not a regulation-compliant security backed by real, physical assets. This makes it highly risky, because Bitcoin’s nature means it’s:
Impossible to recover once stolen
Impossible to recover once access is lost (due to lost passcodes, hardware loss, death, etc)
Partly or fully illegal in many jurisdictions
Traded by young online companies with no proven track records
Historically prone to hacks, exploits and heists
This is why people like Jamie Dimon don’t trust Bitcoin. This is why Wall Street is holding back trillions of dollars in broad money from the blockchain. This is why Bitcoin needs to be securitized to continue its exponential rate of growth.
And it’s why the securitization of Bitcoin is the question of the hour.
In the United States, tightly regulated markets and miles of bureaucratic red tape have made securitization a challenge. The SEC will continue to block Bitcoin ETF funds for the near future. The failed Winklevoss bid showed us that.
But while the Winklevoss brothers were preparing their bid, another team has come up with a viable way to make cryptocurrency derivatives. This organization — Cybertrust — went another route, using a different mechanism to create Global Crypto Notes for Bitcoin and other high-cap cryptocurrencies.
Cybertrust’s Global Crypto Notes
The Winklevosses wanted to create a Bitcoin-derived, exchange-traded asset. The SEC rejected the fund because in their eyes, there were no assets inside it; just thin air which could disappear at any time. The brothers were on to a great idea, but they tried to securitize Bitcoin in the wrong way.
The Cybertrust team learned from this outcome — and went a different way. Their mechanism is simple: to issue BTC, ETH, BCH and other Global Crypto Notes (GCNs) that derive their value from crypto keys held by a Luxembourg SPV and protected by Xapo in their Swiss nuclear vault.
As Luxembourg SPVs are created with the specific goal of securitizing assets, this is 100% legal under EU law. Eventually, you will be able to trade the notes on the Irish stock exchange. There are no grey areas or question marks. GCNs aren’t just viable; they’re real and already available for pre-sale.
What does this mean for you?
Let’s go back to the cryptocurrency that started it all: Bitcoin. Bitcoin isn’t a true security — but a BTC GCN is. It’s legal; it has auditable ownership; it can be cleared risk-free.
In other words, the BTC GCN is an asset that’s more than just “magic internet money.” It’s a true security that appeals to institutional investors, banks and other parties that wouldn’t normally touch Bitcoin.
The implications are obvious. With a Bitcoin-based, exchange-traded derivative, investors will be able to invest trillions of dollars into the blockchain while owning a real security.
And this mechanism isn’t limited to just Bitcoin. As of right now, Cybertrust also offers Ethereum and Bitcoin Cash GCNs. By the end of 2018, they’ll have GCNs for the world’s top 10 high-cap coins and tokens. Through 2019, this number will rise to 20.
Once these financial instruments are created, a wealth of derivative products such as indexes, 2x, 3x, and 4x instruments, futures, and options becomes easy to produce. This creates even more possibilities for investors, and attract a truly unprecedented amount of broad money — we’re talking trillions — to the blockchain.
This is what the Winklevoss fund wanted to accomplish — and then some. Most people may not know it yet, but the crypto question of the hour — can Bitcoins be securitized — has already been answered.
To learn more about Cybertrust and Global Crypto Notes, visit their website (and read their whitepaper) at www.cybertrust.io.
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