$90 billion market — wish I’d got a Bitcoin and not a chocolate coin for Christmas!
Who is investing?
I was at a dinner in London this week with an eclectic group of entrepreneurs, all who have been around a while building and selling businesses. The conversation turned to Crypto currencies (tokens) and Initial Coin Offerings ( ICOs) and the massive price rises we have seen in the last few weeks, along with the increase in people owning these tokens. If you remember last week I told you how Ethu had risen in value by over 44,000% since its launch in July 2014 and now has risen by over 66,000%!
There are now over 14 Million (1) individual holders of wallets; you need to open a wallet before you can buy a token like Ethu, Ripple or Bitcoin, and this number is going up FAST. However, if you take today’s value of tokens at $90+ Billion (2), this means that the average holder has only just over $6,400. But how much further will prices rise? Well, over dinner we all agreed none have us have yet heard a London Cabbie talking about tokens — but hang on, we all use Uber. Then today, in a WhatsApp group dedicated to Blockchain and its uses, someone quoted that they had told their friends about tokens and one of them was a builder who has now taken up night classes to learn more, having made a quid or two from an ICO. How many of you will hear such stories over the next few weeks about people making money from these digital “Golden Geese”?
How many of these 14 million token-holders can be classed as sophisticated high net-worth individuals, since this is what the regulator normally insists you need to be to put money in to unregulated ventures? Tokens are well-spread in terms of number of holders, but I suspect the price of these tokens will move at lightening speeds down, as well as up, at some stage. Holders need to be digitally ‘savvy’ to be involved, in order to sell faster if they decide to — no phoning a middle man, just click and sell potentially 24 hours a day, 7 days a week. Some holders, I suspect, already have trailing stop losses, 10% or 20% just in case, but I wonder how many others have done this?
If you are sitting on a handsome profit and not sure what to do, you could consider protecting your position and get some insurance i.e place a bet (3). It is possible to have a bet, so if Bitcoin falls below say $1,700 sometime in 2017, your bet pays out. However, this is sounding more like buying a derivative, and didn’t these contribute to kicking off the 2008 banking crisis?
Is it likely the party will be stopped?
Well, if you look at the initial proposals in the 5th Anti Money Laundering Directive (due 2018) Crypto currencies are included — as to be expected the regulators are coming. This, in itself, ought not to be a problem as we have not even implemented the 4th Anti Money Laundering Directive yet. Interestingly, some tokens have been issued to help make Anti Money Laundering checks easier, but these checks will need to be carried out.
At a conference this week in New York, a leading lawyer reminded us “When everyone’s making money, then everyone’s happy, but when everyone’s losing money and their houses -which has happened in the past — then you’re going to start to see regulatory action.” (4).
On top of this, a number of companies have issued tokens which are based on potential customers having to spend tokens to pay for the services they offer, but now the price of the tokens has risen so high, it potentially makes the services too expensive to be used.
Another real issue is that there are just not enough coders and programmers to implement the vison and dreams that have bought in the tokens. This means that some of the firms which have issued tokens are now are struggling to find a way to deliver on their promises.
A new way of funding
It is being claimed “… that over half of venture spending in the space now comes from ICOs, rather than older, arguably less democratic, methods of raising money” (4). A spoke-person at a conference in New York this week from the Commodity Futures Trading Commission (CFTC) noted “… that this form of funding is exploding, doubling just in the last few weeks” (4).
As I mentioned in my last article, some are seeing tokens as ‘democratisation of capitalism’. ICOs have enabled ‘Joe public’ to be involved and gain access to these new businesses, which were in the past the preserve of institutions and the rich. However, how quickly will they cash in their tokens when prices start to fall, and who will be the natural buyer? It could be a sharp drop! Meanwhile, capital has been raised to find solutions to real business challenges. If the net effect means that companies using Blockchain, AI, Robotic and other technologies are being financed and the benefits can be tangibly measured and enjoyed by society, it that such a bad thing?
I suspect that the traditional financial institutions are not impressed that the value of tokens has risen fourfold since the beginning of this year, and many of their clients have not been holders. More worryingly is that there is a new asset class the public can hold, which the banks and their various middle men do not control and earn fees from. But while prices may have over-stretched for now, tokens are not going away. This is good news for companies that want to raise capital, as they have a new source of finance, and for institutions who will surely start offering funds for people to invest (as I am sure we will see emerging before the end of 2017).The gradual adoption of tokens can be seen by commentators on CNCB now recommending investors who are looking for protection that they hold Bitcoin as part of their portfolio(.
I would like to leave you with a further thought….
Is this really anything new? Tokens were largely developed as a way for the people who use a company’s product or service to be able to benefit from that company’s success. They have been given to employees, sometimes in lieu of being paid for the work they do, or in a similar way to how employees are given share options. There is a growing discussion about the possibility of tokens being used to replace cash. How could this happen? Well it is already a reality if you are off to Glastonbury in the UK this summer. Here is the drinks menu(6)
· All Pints 4 tokens
· Pint cocktails 6 Tokens
· 250ml Wine 5 Tokens
· J Bombs 3 Tokens
So how long is it before Google, Facebook, Amazon, Apple and Aliba issue tokens to use their services and products, so locking you in to them even further? Just think of the $billions they would be holding in their bank accounts, while you wait to spend them! With current interest rates this is not a great money spinner but, as interest rates rise, sitting on your cash until you redeem your tokens will be increasingly more attractive.
By the way, if you had invested $100 in to Bitcoin in 2010 it would now be worth a staggering $75million!(7)