There is value in cryptocurrency, and the market is changing all the time. This is an article about where is might go in the next two years, based on a conversation between Ari Paul, CIO of BlockTower Capital and Sara Silverstein of Business Insider in November 2017. In particular, it considers the current value of cryptocurrency to the world, the benefits of blockchain to other financial assets and when investment in cryptocurrency will go mainstream.
What is the fundamental value of cryptocurrency in our modern world?
Cryptocurrency is used in many different ways. But the largest, most vivid, easy to understand example of how it will change banking is that is can perform the same function as off-shore banking (which aims to protect a person or firm’s wealth) in much, much safer and more secure way. There is huge global demand for what cryptocurrency can offer. Already the current offshore banking market is worth $20 trillion. Offshore banking is not just about tax avoidance. It is used by legitimate people and businesses to protect their assets. Firms like JPMorgan are getting rich providing a service to Apple, Amazon, and the richest people on the planet to keep their wealth offshore in a way that protects it from a single judge in Brussels from freezing their entire asset base. The offshore banking system does a pretty good job of this, but there is always a risk that decisions will get made that result in arduous international legal battles. On the other hand cryptocurrency is able to store value and is much less at risk of being censored or seized.
What are the benefits of a decentralized database for financial products?
One of the most frustrating things about the current banking system is the way that trades and exchanges are made between different traders and different banks throughout the day and it all needs to be reconciled at the end of each day. In one day, the same treasury bond might get traded between 12 banks. And if something goes wrong at one of those banks that day – either accidentally or maliciously – it can take weeks to figure it out, find the cause and fix it. Blockchain, which is the foundation of cryptocurrency is revolutionizing the way institutions can share and use data. It allows for the creation of shared databases which are kept up to date in real time and accessible to all of the banks involved. This would mean that manipulations – either accidental or malicious – are made impossible. It would also mean that everyone knows who owns what and when, potentially eliminating half the need for the back offices in big banks like Goldman Sachs, Credit Suisse and JPMorgan which presents an opportunity for significant cost savings. This is an example of blockchain being used for other financial product beyond stored value or monetary uses.
How is blockchain going to disrupt things in the future? What are the short term implications and what does this mean for cryptocurrency in the long term?
Realistically, blockchain isn’t a fundamentally new concept, and it’s not particularly revolutionary. Essentially it’s just a distributed ledger, or a really effective database. Blockchain technology could and should be used by banks and other organizations in their back office to improve their data storage efficiency, accuracy and effectiveness. This will lead to improvements, but nothing ground breaking.
However, once you make a blockchain publicly accessible and decentralized, that’s when things get exciting. Add money to that equation and you have a cryptocurrency. As per the offshore banking example this then has the potential to be hugely disruptive to the way we do things now. Not just financially and economically, but it also has the power to disrupt how politics and political systems work.
Where did the interest and investment in cryptocurrency originate? What does the future look like for institutional money in cryptocurrency?
Like any new technology, there are different waves of adoption throughout society. Cryptocurrency was originally in the realm of ‘cypherpunks’ and engineers who understood what this was about and were excited by it. Then you had the tech elites getting interested. These were people who did well through a successful exit in Silicon Valley and were up for taking a risk on new technology with the money they made. Next came the more traditional financial types – people with wall street experience or wealthy individuals – who has an interest in tech and were fairly risk tolerant. At this point it is still a fairly marginal area without broad investment. But now we’re at a time when all of the Venture Capital firms are getting into cryptocurrency as ‘the next bit think’ and they’ve really already been playing in the space for a few years. In fact they are directly investing in new cryptocurrencies. The next wave is all the people and firms that currently want to invest in cryptocurrency but can’t. This refers to endowments and pensions who are unable to invest in this type of thing at the moment for regulatory, security and operational reasons. But what they can do is buy future. With CME futures likely to launch in the next month or so, this presents a massive opportunity for new investment steams into cryptocurrency. As this space becomes more mainstream endowments and pensions will get more comfortable and you will definitely see a huge wave of money flow into this asset class soon.
How soon will we see more mainstream investment in cryptocurrency?
Realistically this is going to start soon, but it will start small. We will probably see the a small check written by the first endowment in the next few months, but overall endowments are probably six to twelve months away from really getting into this space. Pensions are further behind. There are a number of regulatory hurdles that we have to get through first as there are fiduciary responsibilities that must be up held and third-party custodians qualified to manage cryptocurrency assets are probably 18 months away. They still need to filter through the system. But they are definitely on their way.