2017 was a wild year for cryptocurrencies. The cryptocurrency market cap grew by more than 1,200% in 2017. Bitcoin and Ethereum were major participants in these stratospheric gains. For the year, Bitcoin and Ethereum posted returns of 1,318% and 9,162%, respectively. This growth has attracted interest from retail and institutional investors alike, but their approach to market entry has differed.
The former contingent predictably dove straight in, while the latter has taken a much more measured stance. Market participants and observers have found these assets equally tantalizing. The old guard of higher finance has called the growth a bona fide bubble. “Just wait,” they say.
Blockchain technologists and early adopters have remained bullish despite this mixed messaging. The discourse has become a storming sea of opinions, and the media coverage wildly vacillates: Everything from $100,000 BTC price predictionsemanating from the world’s leading finance minds to the total collapse of all things crypto seen by others of similar repute. But what is actually going on in these markets? Why the confusion, and how does this relate to market participation? Let us take a step back and look at a couple of examples from the history of traditional finance. Because we have seen this before.
Edmund O’Connor And Derivatives
There was a time, in the not too distant past, when derivatives markets simply did not exist at scale. All of that changed in 1973 in Chicago with The Chicago Board Options Exchange (CBOE). The CBOE was born of the iterative thinking and calculated risk-taking necessary to bring a new value paradigm into focus. The creation of the board was just the beginning. Traders needed support. Edmund O’Connor and his brother formed a clearing firm and pushed with both hands. The instrument took off, and financial markets were never the same. Today, estimates on the low end put the gross market value of derivatives at $544 trillion. Some more extreme estimates put the total derivatives marketplace globally at a nearly incomprehensible $1.2 quadrillion.
Warren Buffett And Value Investing
Benjamin Graham and David Dodd pioneered and codified value-based investing by focusing on the margin of safety. While this sound strategy showed compelling returns, it was not mainstream by any means. It took one of their protégés to further distill and codify execution of the strategy in order for its full potential to be unleashed.
Buffett’s most well-known tool now has become commonplace. He mastered and refined the value investing thesis brought forth by Graham and Dodd. Buffett’s personal fortune is now roughly $73.4 billion. The focus should not be on Buffett’s personal wealth, however. Instead, it should be on the conceptual perspective: This man took an existing financial instrument, focused, honed and massively scaled it. He has personally amassed billions and those staked in his businesshave been returned many times that.
Cryptocurrency: Using Historical Lessons To Focus A New Value Paradigm
Cryptocurrencies are emerging as a completely new asset class that represents a new perspective on economics. Distributed storage and computation methods for data are being built and the underlying structures that support this ecosystem are being tokenized for investment. This new paradigm is evolving at lightspeed.
2009 brought us the first tradeable digital currency and, barely than nine short years later, the market is moving to tokenize most everything in the form of Initial Coin Offerings (ICOs). These new financial assets attracted more than 100 funds solely dedicated to trading these assets. Today, regulators are offering soft judgments to the ICOs creating and trading digital assets, but the perspective is changing and regulations are expected to harden.
In 2017, digital assets saw explosive growth. In 2018, it appears the growth could continue. But, in order for adoption to continue, refinement of these assets as bona fide financial instruments will need to begin in earnest. We have the seen the emergence of Rick Marini’s first Fund of Funds, and we recently saw Block Asset Management step into the same arena. This is exciting because it is illustrating the evolution of thought in the financial instruments made available in cryptocurrency.
Another group of note, Apex Token Fund, is tokenizing a Fund of Funds to break out liquidity between initial investment into the fund and when the fund winds down and returns a dividend. Apex Token Fund has said their goal is to reign in returns and produce a calculated financial product worthy of institutional capital. This type of perspective is a clear step towards the evolution of the space — and an important one — as this emerging asset class begins to take flight. Groups like Apex Token Fund will need to continue to take the lead and develop next-generation financial vehicles for this next-generation asset class.
As the total market capitalizationof cryptocurrencies surpasses $700 billion, companies raise billions of dollars in ICOs and Fortune 500 enterprises implement blockchain in every industry, the Blockchain Economic Forum comes back to facilitate the discussions of the most important topics of the crypto economy and its growing influence on the global economy.
I had a chance to speak to Valentin Preobrazhenskiy, CEO of LAToken — one of the market leaders, aiming to design sustainable rules and governance framework for blockchain industry in cooperation with entrepreneurs, investors, academics and regulators. “The forum is a great place for the market leaders to introduce and reinforce rules of self-conduct protecting uninformed contributors and preventing misuse of crypto transaction while scaling benefits such as built-in rights registry, early adopters acquisition and low transaction costs due to absence of middlemen,” said Preobrazhenskiy.
The value creation that will happen in this space may be hard to understand within the context of the other examples in this piece. Suffice to say it could be magnitudes of order larger. Who will develop the winning perspectives and lead their stakeholders to the next generation of financial fortunes? It is hard to say. But remember, even though the class is still nascent, the principles of the development of financial instruments remain.