Cryptocurrencies and blockchain move centre stage
It’s a true sign of the times. The two top performing hedge funds of 2018, according to data providers Preqin, are both focused on cryptocurrencies and blockchain.
Silver 8 Capital – read about them further on in this report – managed the highest returning hedge fund last year focusing on financial technology, with a particular focus on blockchain and the crypto world, returning 770.74 per cent, while Global Advisors’ Bitcoin Investment Fund came in second with returns of 330.08, according to Preqin.
Further evidence comes from HFR, whose Cryptocurrency Index was up 155.70 per cent for the last 12 months to end June, while its Blockchain Index was up 142.07 per cent for the same period.
Traditional fund managers may hate the sector but investors love it. Warren Buffett has been steadfastly ‘bashing bitcoin’ for a number of years. During his recent Berkshire Hathaway annual shareholder meeting, Buffett referred to bitcoin as ‘rat poison squared’.
The crypto industry has responded with typical vigour with a billboard response from Genesis Mining and a huge bet from an Aussie crypto expert that bitcoin’s price will beat the Berkshire Hathaway share price by 2023. But all of this is just the theatricals and pantomime that surrounds an extraordinary new investment phenomenon that can no longer be easily dismissed.
A quick summary of the cryptocurrency industry, for those who have not yet been exposed, reveals that bitcoin is the best known and biggest of the digital – or crypto – currencies, first named in a paper in 2008 and launched in 2009 by a mysterious and anonymous figure who goes under the name of Satoshi Nakamoto.
At the time of writing bitcoin now has a market cap of around USD131 billion and a value of around USD7,660 per coin. The power behind bitcoin lies in its ledger, the register of bitcoins recorded in a distributed database. This ledger is based on blockchain and even for those for whom digital currencies are a step too far, blockchain’s inherent strengths offer a compelling development. To achieve independent verification of the chain of ownership of every bitcoin, each network node stores its own copy of the blockchain which gives consensus to all who use it and in theory defends it from potential hackers.
One of the key strengths of cryptocurrencies, or other systems based on blockchain, is that it has no one central governing body which controls it and everyone who is involved in it has some degree of control over it.
The technology used through crypto coins or tokens creates an investment democracy that allows customers and suppliers to connect directly, without the need for a central entity like a bank or a financial institution to make a transaction, which means that assets can be shifted safely, swiftly and cheaply.
Interviewed in GFM’s AlphaQ on the launch of his blockchain and tokenised investment grade diamond investment, Abacus Capital’s Hogi Hyun explains: “You can trade bitcoin 24/7 on any one of 200 exchanges and you are not stuck with the usual fund administrator route for subscriptions or redemptions. If you cash in a PE or hedge fund, you are probably looking at 30 to 40 days from redemption to get your money, but settlement is 10 minutes on a crypto exchange.”
The strength of the blockchain has led to the launch of a huge number of cryptocurrencies. The top three in terms of being closest in form to an actual currency (bitcoin has its own cash machines, for instance) are bitcoin, ethereum and ripple but just the process of stepping away from a fiat currency – one that is backed by a government – has enabled investment creators who are on a mission to create a currency that supports their goals.
Within this report, we interview Veridium which has developed a token and used blockchain to develop its carbon neutralisation programmes for corporates and in the past GFM’s AlphaQ title has followed the fortunes of Swarm. This is a firm that uses blockchain to democratise traditionally institutional investments such as private equity, giving the retail investor of all sizes access to institutional investment funds.
Swarm CEO Philipp Pieper says: “We are building a regulatory compliant exchange for asset-backed tokens designed around true cooperative ownership. So, in the end, when someone buys security tokens of one of the assets on the platform, there is a real ownership of that entity.”
If there is a new financial industry, there must be a new index and where there is an index, there must be an index fund or an ETF. The battle to get a bitcoin ETF launched has been fought long and hard. Global Advisors, mentioned above, now CoinShares Group, and its subsidiary Swedish firm XBT Provider AB, have been offering ETPs on cryptocurrencies for some time.
In 2015 XBT Provider started by launching Bitcoin Tracker One and Bitcoin Tracker Euro on Nasdaq in Stockholm, which, it says, became the world’s first bitcoin tracking ETPs to be offered on a regulated exchange. 2017 saw XBT join CoinShares and launch Ether Tracker One and Ether Tracker Euro. XBT saw asset growth for their products grow by a factor of 36 in 2017, finishing the year with assets under management of USD1.06 billion, having peaked mid-December at USD1.53 billion.
Figures for April 2017 – March 2018 from NASDAQ Stockholm reveal XBT Provider ranks as the second largest issuer by exchange traded volume (USD6.5 billion, 37.9 per cent), with its four crypto tracking ETPs ranking in four of the top five spots for total volume traded on exchange in the same period, out of 1600+ ETPs.
So, the demand is there, even if the products are not coming out of a major financial centre, such as New York. And it is in the US that we have seen the bloodiest of battles in the attempt to create a crypto ETF, with the SEC firmly fending off all efforts from the great and the good, saying, most recently, as it knocked back the Winklevoss twins for the second time: “The arguments submitted in support of this claim are incomplete and inconsistent, and are unsupported or contradicted by data.”
However, maybe the first digital crypto index and ETF from Kryptoin ETF Systems, interviewed in this report, will be the one to crack it. Donnie Kim, Kryptoin CEO explains how his patent pending invention sidesteps equity exchanges to create a digital ETF.