Cryptocurrency In The World Of Finance: Part 1
In 2009, when Satoshi Nakamoto released his Bitcoin White Paper to the world, no one could have foreseen the powerhouse that Bitcoin has become in the last eight years. Even harder to fathom would be the massive wave of innovation and the financialization of digital assets to follow.
Original cryptocurrency such as Bitcoin or Litecoin focused on being a tool for wealth preservation (Saving) and a tool to be a medium of exchange (Transacting). As the crypto space has advanced, the uses and types of tokens (digital assets) has become increasingly diverse. As the cryptocurrency sector continues to develop, there are a variety of crypto centric tools being built for investment, raising capital, delivering value and even preparing for retirement.
Photo by Chris Li
The Financialization of Crypto
The two most well-known examples of cryptocurrency being brought into the world of finance are the use of Initial Coin Offerings (ICO) and the establishment of cryptocurrency ETFs or trusts.
Crypto ETFs
A proposed Bitcoin ETF received a lot of attention in March when the proposal, made by the Winklevoss twins, was rejected. A second BTC ETF was rejected in the following days. There is yet another proposal seeking approval at the moment. Grayscale’s Bitcoin Investment Trust (GBTC) is being reviewed and a decision is due by September 22, 2017.
Grayscale, a Digital Currency Group Company was successful in launching an Ethereum Classic Investment Trust earlier this year.
“The Ethereum Classic Investment Trust’s shares are the first securities solely invested in and deriving value from the price of ETC.”
“The Ethereum Classic Investment Trust enables investors to gain exposure to the price movement of ETC through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping ETC.” Source
You may be asking yourself, why would someone want to buy a BTC or ETC ETF when they can just as easily buy the real thing?
There are really two reasons. The first is that many traditional investors want exposure to crypto assets without having to go through the process of purchasing and storing their cryptocurrency. While many of us take certain aspects of cryptocurrency for granted, it is important to remember that the majority of people have no clue about cryptocurrency, let alone how to purchase and store it safely.
The second reason, which in my mind is more important, is that many insurance companies and investment funds are hesitant to get involved in the space due to security concerns, issues with custodial rights and some funds are restricted to investing in designated assets and investment vehicles.
This could be one of the factors that will cause a price explosion in the sector if these ETFs get approval. A lot of money will be trying to squeeze through a very small door. That being said there are several funds that deal almost exclusively in cryptocurrency or other digital assets, but the majority of institutional money has yet to enter the sector.
Initial Coin Offerings (ICO)
There seems to be an endless list of ICOs these days.
For those of you who are unfamiliar with the term ICO, read the Investopedia definition below!
"An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.Also called an Initial Public Coin Offering (IPCO)."
Read more: Here
Initial Coin Offerings are very similar to Initial Public Offerings you may see in Stocks. ICOs however are unregulated at the moment and springing up everywhere.
The good news is, this puts more power in the hands of entrepreneurs who can raise funds for projects by going directly to their target audience or investors. ICOs also provide flexibility for how value will be passed on to the investor. For example, some ICOs may issue buybacks at a higher price, their value could be tied to a specific service or benchmark and they could be traded on the open market at a potentially much higher price.
What kind of potential is there for funding?
A recent ICO raised $35 million in 30 seconds! Brave, the upstart web browser founded by Mozilla co-founder Brendan Eich, completed an initial coin offering May 31.
“Brave's Ethereum-based Basic Attention Token (BAT) generated about $35m and was sold out within blocks, or under 30 seconds.” Source
The financialization of cryptocurrency is not just limited to ETFs and ICOs.
Bitcoin IRA
Are you looking for a Bitcoin IRA? Done.
Bitcoin IRA, a company headed up by former Director of the U.S. Mint, Ed Moy, offers Bitcoin IRAs as well as the first ever Ethereum IRA.
“A Bitcoin IRA works pretty much like other types of IRAs. You fill out a form and you invest. You can invest in a traditional IRA (with pre-taxed assets) or a Roth IRA (with after-taxed assets) if you’re under 70 ½. Remember, you can’t take distributions in either type of IRA – a traditional or Roth – without a penalty unless you’re at least 59 ½. Generally, employees invested in their employer’s 401K are subject to the same penalty if they take distributions before they’re 59 ½.” Source
Many have been quick to write off cryptocurrency and the accompanying investment vehicles as a fad or novelty, but do so at your own peril. The world of finance is being turned upside down and FinTech is the future. If you still have doubts, read this quote from Abigail Johnson the CEO of Fidelity Investments.
“Even we at Fidelity can see that the evolution of technology is setting up our industry for disruption. What if this new technology could do for the transfer of value what the internet did for the transfer of information? Blockchain isn’t just a new way to settle transactions; it can fundamentally change market structure, or maybe even the architecture of the internet itself. When combined with things like the Internet of Things or the cloud, there’s no underestimating the potential that’s on the horizon.” Source
This is just the tip of the iceberg for crypto based assets. Part 2 of this series will cover some of the less traditional investment options that are forming because of blockchain technology.