Thoughts on Crypto assets, Initial Coin Offerings, and the Utility Value of Blockchain Technology
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A new asset class
I am a believer, or maybe I just want to believe. Is this Amsterdam in the 17th century? My view is: no; a new asset class is emerging, and we are about 45 seconds into the evolution of the species.
I have read yet another sceptical article on Seekingalpha this morning, specifically focussed on the Bitcoin (BTC)/Bitcoin Cash (BCH) split. The author’s supposition is that there is evidence of a bubble in Bitcoin because the combined value of the two coins (BTC and BCH) straight after the split did not closely equate to the value of Bitcoin before the split. Discuss.
It is a reasonable argument that someone coming from equities perspective would (or perhaps should) make. However, there is a large debate to be had around the utility value of the new coin (and the original coin) – this is not a stock split, after all. Then there is a further debate to be had regarding the value of an asset that is perceived to be neither created in significant quantities, nor destroyed or consumed in significant quantities; this is the gold (aka ‘store of wealth’) argument.
As I see it: Bitcoin (as well as other cryptocurrencies) is currently acting as a store of wealth; the bet you place is that in the future it will remain worth something to someone who also wants to store wealth (or to whom Bitcoin has utility value). From the wealth manager’s perspective, I can also see the portfolio diversification argument: to date, cryptocurrencies have not moved in line with any of the major asset classes (unless we make the argument that quantitative easing related asset value expansion-which appears to have taken place in most asset classes in many major markets- has driven cryptocurrency values upwards).
From a personal perspective, I agree with the portfolio diversification and store of value arguments. From a professional perspective, I continue to seek to understand how this emerging technology fits in with businesses, which for me, is anywhere it has utility value.
A view on utility
Over the last three years the investment community has made an argument that value lies in the underlying blockchain concept as much, if not more than, the individual ‘currencies’ – and that blockchain use cases can drive value in cryptocurrencies/assets/ tokens (some of the many terms applied – and from here in this article, ‘crypto’) through giving them utility. Off the back of this narrative we have seen a diverse group of businesses emerge where the phrase ‘blockchain’ appears, to some extent, to be relevant to their business models. That word alone has led to millions of dollars of capital has been raised through initial coin offerings (ICOs), preselling crypto before its utility value can be unlocked – normally because the environment for its application has not yet been created.
The value of these ICOs has become so significant that major regulators have taken an interest in the market. I would argue that the prior lack of interest related not so much from a failure to recognise some of these ICOs as ‘pump-and-dump’ schemes, but more because the value involved is low with very few (retail) investors involved. Not a place to deploy the limited resources of any national regulator.
The first thing that readers should understand is that, as I currently perceive this technology class, there are two aspects that provide utility to businesses: one is as a currency, i.e. as a tool for enabling transactions. The second is through the crypto token concept, where ‘tokens’ represent a play which is either equity-like (so get regulated if you want to participate here), or as single use objects that can be applied in a specific ecosystem.
Initial coin offerings
These tokens are interesting: one could use these purely to raise capital for a business, and in fact with good governance regime it may make the concept ‘shares’ significantly less relevant – why seek to operate an international business, yet confine business ownership to those who can access the confines of a single regulatory domain (which may not be easy to access to all those who wish to participate in the business)? Instead, one can buy-in at the inception of the business via a token (usually exchanged for Bitcoin), which is subsequently easily transacted on exchanges in the major markets i.e. China and the United States.
Tokens also have a single (/limited) use utility model, i.e. as a non-equity type instrument, enabling an entity to buy in bulk a token at an ICO that will provide utility in markets that currently do not exist, and through doing so providing upfront capital to enable that community to come into existence.
A key part of the process for those seeking to raise capital through an ICO is the ‘white paper’, and I see no likely change to this approach soon. Somewhat like a share prospectus, a white paper demonstrates to readers how a team (primarily a technology team) intends to use crypto technology (blockchain) to create a marketplace, often to replacing existing markets. The quality of this white paper cannot be understated – it is critical to raising capital in an increasingly educated market. Other critical elements that support capital raises are emerging to support the white paper – particularly a detailed track record of those on the team (because now some individuals are into their second or third crypto business), as well as the existence of a quality advisory board (and the existence in that team of those with significant experience in the proposed market operation adds considerable weight).
One challenge I foresee for the ICO marketplace is that of credibility – we will have a bust, or a series of busts, because many of the teams who have raised tens, if not hundreds, of millions of dollars in funds will either squander the capital (or incompetently deploy the capital, depending on perspective) whilst seeking to create markets. Investors will lose confidence on many occasions.
Practical application within growth technology businesses
Coming back to the companies I work with, the concept of blockchain and crypto is less interesting from the perspective of ‘imagining’ a new business (and running speculative ICOs), as it is to supporting businesses that already exist. Many companies, although they will not be aware of it today, will need to implement this type of technology in the future. This will be either to retain competitive advantage or to source new funds. Where I believe companies that I work with can leverage significant advantage is where they have an existing business and a proven business model. Given the nature of crypto tokens – they can be created, destroyed, and traded – and the enthusiasm that exists around ICOs today-they represent an extremely interesting way to propel a business forward.
Yesterday I presented one company I work with to a group involved in fundraising for crypto. To say that the response was ‘enthusiastic’ would be an understatement. What they saw was a valid application for blockchain technology (as opposed to paying ‘lip service’ to the concept), along with a significant number of market participants already working within the defined ecosystem – which to me is what these blockchain-based technologies best enable, given their role as a medium of exchange. To someone seeking differentiation during fundraising in a market dominated by ‘get rich quick’ scheme noise selling ‘ vapourware’, seeing a real business is something that creates significant excitement.
My subsequent call with another business I am working with moved to crypto. Within two or three minutes we were discussing how this type of technology could apply to his business – where two days previous there was an awareness of blockchain, but no detail around how support could be provided by the technology class – and within five minutes we had identified how blockchain technology could be leveraged by their business (again, a business with a considerable number of customers, and a strong blockchain applicable model foundation) to provide differentiation, and utility.
I am a strong advocate of blockchain and crypto, and will continue to be so. The ICO market is increasingly hard to ignore – if only because of the vast amounts being raised through these crypto sales. It is certain the crypto market will go through a few booms and busts, but where there is utility value within well understood marketplaces there is a significant opportunity for businesses. I expect to be working with several companies over the coming months of projects to investigate how this emergent area can bring value to their work.