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Lex Sokolin – How Digital Assets will Take Over Your Asset Allocation

2018-09-25T14:13:00-07:00

Lex Sokolin | Autonomous Research

How Digital Assets will Take Over Your Asset Allocation

Here is how Digital Assets will Take Over Your Asset Allocation

Over the last 10 years, there have been four separate themes for blockchain-based assets.

The first, Bitcoin, is a global macro motivated play with aspirations to power payments and store inflation-protected value. Conceived by cypherpunks and techno-utopians, Bitcoin has dozens of millions of users and has run a production-level platform for a decade. Whether we like it or not, it works, and $7 trillion of traditional gold investment is at play.

The second, enterprise blockchain, is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the back office. Nearly $250 billion of industry cost across payments, banking, capital markets and insurance is available for transformation. That’s a net present value of $3-5 trillion, but requires competitors to co-operate.

The third wave, Initial Coin Offerings and Decentralized Applications, posited scarce and functional digital objects into digital economies. Tokens, like a coin at an arcade, power up the use of consumer applications and serve as a proof-point that blockchain-based assets can be involved in economic activity. Over $20 billion has been raised in this way.

And fourth, the Security Token wave is re-running the crowdfunding theme through token-based securitization on public blockchain rails. While original crowdfunding platforms like Kickstarter and SeedInvest captured some public imagination, the crypto version of the same is both far more global in capital and much more functional in its infrastructure.

We do not have to believe any one of these particular themes to accept and believe in another. For example, you may think that the only true cryptocurrency is Bitcoin and that all the other innovations will fail given the network effects off the original. Or perhaps, you may think that digital assets are a technology solution looking for a business problem, and only inside large financial organization can that problem be solved.

The real question for today’s asset allocators and investors is how to treat blockchain technology within the existing allocation framework. The narrowest approach is to see it as any other technology theme sold into financial incumbents, and invest into the private equity of Fintech companies delivering such platforms. This would imply an investment into a venture capital fund that targets Fintech companies.

One step broader would be to treat these new digital assets and currencies as alternative commodities, looking to endowment investment strategies for inspiration. Such large investment mandates for decades have kept 5-20% of their portfolios in private equity, commodities, hedge funds, and other esoteric bets. Crypto is no more esoteric than pork bellies.

Yet another level would be to understand that securitization as married with tokenization allows for fractional liquidity across all asset classes. This implies that everything from interests in commercial real estate to valuable art can be sliced into digital pieces, and held publicly by the crowd. Exchanges like Binance and Huobi already facilitate trading in hundreds of digital tokens, and adding an asset-backed one is not a meaningful technical challenge. They can also be bolted onto a roboadvisor and directed at a consumer.

Such tokenization can extend further to the entire portfolio, including the core holdings of equities and fixed income. As an example, the Australian Stock Exchange is working with Digital Asset to swap in a blockchain-based trading chassis that will power over a trillion of equity value. Similar efforts are under way with the world’s largest custodians. It is only a matter of time until such chains are interoperable with the public ones, under common standards, with machine regulation. Until then, adjust your risk accordingly.

Lex Sokolin – How Digital Assets will Take Over Your Asset Allocation2018-09-25T14:13:00-07:00

Lou Kerner – Over the next 7-10 years, Security Token market cap will top $10 trillion

2018-09-20T12:24:45-07:00

Lou Kerner | CryptoOracle

Over the next 7-10 years, Security Token market cap will top $10 trillion

Lou Kerner is a Founding Partner of CryptoOracle. He is recognized as one of the most influential crypto bloggers. At one point in his storied career, he was an angel investor, best known for investing in Facebook and writing the first Wall Street style research report on the company in 2010. We recently sat down with Lou, who will be providing the keynote luncheon address at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared his thoughts on the economic impact of tokenizing private assets.

Lou KernerDigital Asset Strategies Summit: Bringing liquidity to private assets through tokenization will undoubtedly affect private company valuations. Where do you see valuations of emerging growth companies headed as a result? How do you think the tokenization of private equity will impact the venture capital industry?

Lou Kerner: Depending on the asset, liquidity should provide 10%-20% increase in value.
Liquidity will also significantly increase the amount of capital committed to PE or VC, because no liquidity is a deal stopper for the majority of global capital.

Digital Asset Strategies Summit: What do you predict the economic impact of tokenizing private or illiquid assets could be?

Lou Kerner: Tokens are a new asset class, similar to how junk bonds used to be. When they come out they are shiny, they are volatile, and they are shunned by most of the traditional world. Over the next 7-10 years, I think Security Token market cap will top $10 trillion.

Digital Asset Strategies Summit: Can you discuss how tokenizing private ownership will enable the scalability of fractional ownership? How will this impact cap tables?

Lou Kerner: Ownership of things that people want to own, like art, or sports teams, can easily be fractionalized in a token world, bringing liquidity and massively increasing the pool of potential owners.

Digital Asset Strategies Summit: Why do you see digital assets as the golden age of securities innovation?

Lou Kerner: It’s the beginning of a brand new Medium, like TV was at some point. We’ll use these new tools to design securities that blow people’s mind.

Digital Asset Strategies Summit: It seems like Wall Street is eager to embrace blockchain, yet many influential names on the Street are negative on bitcoin. Why do you think so many conventional players are having trouble “seeing the crypto light”?

Lou Kerner: I wrote an article “The Top 10 Reasons People Can’t See The Crypto Light”” For people on Wall street, I think success is an impediment to seeing the light.

Digital Asset Strategies Summit: Thanks Lou. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Lou Kerner – Over the next 7-10 years, Security Token market cap will top $10 trillion2018-09-20T12:24:45-07:00

Ric Edelman – Most Wall Street executives are older, scared and unaware of the speed of innovation brought about by exponential technologies

2018-09-20T12:20:03-07:00

Ric Edelman | Edelman Financial Services

Most Wall Street executives are older, scared and unaware of the speed of innovation brought about by exponential technologies

Ric Edelman is the Executive Chairman of Edelman Financial Services. Previously ranked the nation’s #1 Independent Financial Advisor three times by Barron’s, Ric is regarded as one of the nation’s top financial advisors We recently spoke with Ric, who will be speaking at our Digital Asset Strategies Summit (DASS) Oct. 16 – 17 in Dallas, TX, as he explained why firms pledging to stay away from cryptos “will be eating their words”.

Ric EdelmanDASS: You recently stated that Vanguard and wirehouse firms that have pledged to stay away from cryptocurrencies “will be eating those words.” Why do you think there is such a backlash from conventional Wall Street players?

Ric Edelman: Two reasons: most Wall Street executives are older. They went to college in the 1970s, 1980s and 1990s. Many are simply not keeping up with technology, and they are unaware of the speed of innovation brought about by exponential technologies. They believe the old rules apply, and many of them point to absurd comparisons, like tulip bulbs and Beanie Babies. They simply don’t understand blockchain technology.

Second, many are simply scared. Cryptoassets and blockchain represent existential threats to their business models – just as buggy manufacturers once derided horseless carriages as nothing but a fad. Many of these companies have infrastructures and costs that render them obsolete when compared to these new platforms, and they don’t know what to do about – so they pooh-pooh the newcomer in desperate hopes it’ll go away. It won’t.

DASS: How much of one’s portfolio, if any, should be allocated to crypto?

Ric Edelman: No more than five percent of your portfolio. For many investors, that figure should be much less – even zero. There is little regulation at present in the cryptoasset world, and lots of bad players. It’s really the Wild West for now, with massive price volatility. So buy a variety of cryptos because diversification can help reduce your risks somewhat (nothing can truly protect you from losses, of course), invest only what you’re willing to lose, and be prepared to hold your investment for years – especially through periods of volatility.

DASS: Will bitcoin remain the bellwether digital coin, or will it be replaced by some other cryptocurrency – much like Facebook replaced MySpace or how the cassette player replaced the eight-track? Is bitcoin a Google or a Webvan?

Ric Edelman:
No one knows. Bitcoin has a huge head start. But so did Lotus 1-2-3, until Microsoft Excel came along. Bitcoin has some technological limitations, which is what prompted the creation of other coins. And let’s see what happens when governments stop their foolish game of denial and finally embrace cryptoassets. Will they adopt Bitcoin? Or will they issue their own like they’ve done with currencies? No one knows. Run away from anyone who claims to have the answer.

DASS: You have stated that advisors can use blockchain to improve how they collect and store client data as well as make financial plans more accurate, easier to maintain and update, and more secure. Do you think that if more advisors are actually incorporating blockchain technology into their business, they would have a better understanding of digital assets as an investment opportunity?

Ric Edelman: Perhaps, but not necessarily. You don’t need to understand the principles of internal combustion in order to drive a car. It’s likely that advisors will use the blockchain because it’s provided for them by vendors – Vanguard has already shifted its S&P 500 stock fund to the blockchain, for example, so anyone buying that fund is using the technology whether they know it or not. In the not-too-distant future, advisors will be buying blockchain services just like they currently buy photocopiers.

DASS: You’ve recommended that investors treat crypto like a lottery ticket. As the industry matures, are you seeing new or innovative ways for investors to hedge their crypto holdings?

Ric Edeleman: Of course. Innovation is constantly occurring, and new tech is being developed at a faster pace than ever before. Just as the Model T inspired the need for roads, traffic signs, line painting, toll booths and parking garages, blockchain and cryptoassets are creating the need for exchanges, trading platforms, reporting programs and more. I’ve personally invested in several start-ups and I continue looking for what’s next, because what didn’t exist yesterday is state-of-the-art today and will be obsolete tomorrow.

DASS: Thanks Ric. We look forward to hearing more of your thoughts at the DASS October 16 – 17 in Dallas.

Ric Edelman – Most Wall Street executives are older, scared and unaware of the speed of innovation brought about by exponential technologies2018-09-20T12:20:03-07:00

John Davi – Bitcoin is neither a legit currency or a mere tulip right now

2018-08-23T17:35:43-07:00

John Davi | Astoria Portfolio Advisors

Understanding the catalysts behind Bitcoin’s volatility

John Davi is the Founder and Chief Investment Officer at Astoria Portfolio Advisors; an investment management firm that specializes in quantitative & cross asset investing. We recently sat down with John, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he explained the catalysts behind Bitcoin’s volatility and what’s needed to temper it going forward.

John DaviDigital Asset Strategies Summit: Is bitcoin a legit currency or a mere tulip?

John Davi: Neither. Right now, bitcoin doesn’t satisfy the criteria of being a legit currency. There have been too many cases of exchanges being hacked, it’s not overly liquid, bid/ask spreads are wide, and there are limited places that accept bitcoin as payment. Does bitcoin have any value? Yes. Ultimately, Bitcoin’s value will largely depend on what people determine its market clearing price to be worth – this is how the price of gold is determined. Bitcoin and gold are storage of values and neither produce cash flows so traditional stock/bond valuation models (i.e. discounting future cash flows) cannot be used. More Bitcoin users + more knowledge + more access/hedging solutions will empower investors to determine its value in society. Ultimately, Astoria views bitcoin as another form of an alternative asset class but faces significant challenges (little regulatory oversight, difficult to access, etc).

Digital Asset Strategies Summit: What do you attribute bitcoin’s extreme volatility to?

John Davi: From 2011 to 2017, Bitcoin experienced on average 7 times the volatility of the S&P 500. There have been times during this period where Bitcoin was 20 times more volatile. We believe this volatility premium is justified for 3 reasons 1) We are in the early infancy stages for the adoption of digital assets 2) investor knowledge base is low 3) Bitcoin has characteristics of 3 different and distinct asset classes. Let’s dive a bit further into the 3 different asset classes that characterize bitcoin.
1.) Currency: Bitcoin can be used to purchase goods and services – hence, it has characteristics of a currency.
2.) Commodity: There are production costs to create bitcoin which influences its price. Miners are paid for their efforts. Hence, bitcoin exhibits commodity-like characteristics.
3.) Private Equity / Venture Capital: Purely from a price volatility perspective, bitcoin resembles a private equity, venture capital start-up where risk of failure is sky high. There is no cash flow generated from owning bitcoins – which is very similar to private equity and venture capital where future growth is significantly more important than generating cash flows.

Digital Asset Strategies Summit: The SEC recently approved plans for public comment which would make it easier for investment companies to bring new exchange-traded funds (ETFs) to market. Could these new rules inspire a new wave of crypto ETFs?

John Davi: Digital assets remind me of the internet and technology stocks of the late 1990s. People argued these companies were going to change the world and paid insane valuations. Some of these internet companies did indeed change the world but a large number of these startups failed. Only a few select (ie. FANG stocks) maintained pricing power and developed into truly elite companies from an earnings perspective. We think the same protocol will follow with digital assets.
Ultimately, we believe US regulators will allow the creation of pooled vehicles. However, not all 2,000 digital assets will survive (and neither should they).

Digital Asset Strategies Summit: Should investors fear or embrace crypto regulations?

John Davi: There have been many instances of crypto exchanges being hacked. It’s pretty obvious that there are investors who won’t touch digital assets for fear of hacking. Bitcoin fanatics shouldn’t fear more government or regulatory oversight. This will bring more credibility and elevate the stature of digital assets.

Digital Asset Strategies Summit: You have likened the pricing of Digital Assets to stock trading in the early 1900s or emerging equities 15-20 years ago where spreads were wide, volatility was sky high, and information flow was low. Can you discuss what you believe is needed to temper price volatility?

John Davi: More knowledge of digital assets + more education + more technology + more access/hedging solutions should temper price volatility. This will all take time, however.

We don’t doubt that digital assets are uncorrelated to traditional asset classes and can help diversify investor portfolios. But currently the majority of the digital assets are not liquid, spreads are wide, and the costs to trade them are very high. Astoria is pulling for digital assets to evolve as we believe the capital market system desperately needs uncorrelated assets to traditional capital markets. We hope that as the liquidity of digital assets improve, their uncorrelated nature remains intact. Investors should realize, however, that liquidity and correlation tend to go hand in hand (more liquidity tends to result in higher correlation).

Digital Asset Strategies Summit: Thanks John. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

John Davi – Bitcoin is neither a legit currency or a mere tulip right now2018-08-23T17:35:43-07:00

Dara Albright – Cryptocurrencies will ultimately displace equities

2018-08-23T17:52:24-07:00

Dara Albright is the President of Dara Albright Media. She is a recognized authority, thought provoker and frequent speaker on topics relating to fintech, digital-, peer- & crowd- finance. Dara co-founded Lendit – the largest and most recognized global p2p & online lending conference as well as FinFair, the first conference platform to feature the leadership, products and technologies driving the crowd-centric retail alternatives market. We recently sat down with Dara, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as she shared with us the game-changing impact cryptocurrencies will have including ultimately displacing equities.

Dara AlbrightDigital Asset Strategies Summit: How will the current political environment influence the cryptocurrency market?

Dara Albright: On my current radar are a number of recent legislative and politically-driven events which I believe could have widespread implications for the cryptocurrency market.

First, I am keeping my eye on the JOBS and Investor Confidence Act of 2018 – also referred to as JOBS Act 3.0 – which just passed the House by a 406-4 vote and received praise by President Trump. Among other things, the bill broadens the definition of accredited investors from those who qualify based solely on meeting financial thresholds to include those with financial job experience and investment knowledge. Expanding the accredited investor definition is something that I have been advocating for quite some time as I believe it is a significant step towards democratizing access to investment opportunities as well as narrowing the national wealth gap. If nothing else, the strong bipartisan support for JOBS Act 3.0 demonstrates a willingness by both parties to ease some of the regulatory restrictions and injustices presently faced by smaller retail investors. Shifting the barometer from net worth and income to knowledge and expertise could significantly alter the domestic ICO landscape by fueling the growth of STOs (Security Token Offerings) – especially Reg D STOs – thereby empowering crypto to become a more mainstream financial product.

While JOBS Act 3.0 looks very promising, I found the comments made by Rep. Brad Sherman at the recent congressional hearings on virtual currencies to be extremely troubling. Sherman essentially called for a blanket ban on buying or mining cryptocurrencies – including the incarceration for issuers of crypto-offerings. While Sherman’s harsh and ill-conceived views were certainly in the minority, I worry that the ongoing Russia investigation – which seems to implicate cryptocurrencies as the method used to fund illicit activity – may give them more prevalence.

I am carefully following the Russia investigation as it relates to the usage of cryptocurrencies, for I believe it will increasingly force crypto into mainstream news conversations as well as create the impetus for regulators to expedite the implementation of the regulatory regime for cryptocurrencies. I am optimistic that both the intensified mainstream awareness as well as the regulatory clarity will only help accelerate the growth of the cryptocurrency marketplace.

Digital Asset Strategies Summit: Does the SEC have the infrastructure necessary to properly regulate cryptocurrencies?

Dara Albright:
According to the SEC’s 2019 budget request, it appears to be lacking the resources presently needed to effectively regulate cryptocurrencies.

In its FY 2019 budget, the SEC is requesting $1.658 billion – a 3.5% increase over its FY 2018 budget request of $1.602 billion. While that seems like a substantial figure, consider that the SEC presently oversees approximately $75 trillion in securities trading annually on U.S. equity markets and the activities of over 26,000 registered market participants. Additionally, the SEC also oversees 21 national securities exchanges, 10 credit rating agencies, and seven active registered clearing agencies, as well as the Public Company Accounting Oversight Board (PCAOB), Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), the Securities Investor Protection Corporation (SIPC), and the Financial Accounting Standards Board (FASB). Furthermore, the SEC is responsible for selectively reviewing the disclosures and financial statements of over 8,000 reporting companies including 78 of the top 100 public companies in the world.

In addition to all of that oversight, the SEC has the daunting task of keeping pace with financial innovation which is continuously advancing at warp speeds.

A mere 3.5% increase in funds is barely enough for the SEC to meet its present responsibilities. How is it going to be able to meet the challenges of overseeing an entirely new and complex asset class that is rapidly scaling and constantly evolving through technological innovation?

The lack of adequate resources will not only result in a logjam of issuer qualifications but also delays in framing and implementing the rules for cryptocurrencies. The longer the wait for regulatory clarity, the greater the risk of the U.S. being surpassed by nations that are all too eager to seize leadership of global financial markets.

Digital Asset Strategies Summit: What kind of impact will crypto have on equities as an asset class?

Dara Albright: I believe that Crypto will ultimately displace equities. Now, I am not saying that equity markets will simply disappear. However, based on technological and cultural trends, I predict that equities will ultimately evolve into a novel hybrid asset class that retains some of the characteristics of equities, but look and feel a lot more like token-type assets.

Thanks to technology, at approximately a $300 billion market cap, crypto is already by far the fastest growing asset class in the history of mankind. And with the amount of digital wallets increasing at unprecedented rates, the growth of the crypto market shows absolutely no signs of slowing down.

But it is the technology which underpins cryptocurrencies that will ultimately transform equity markets. At some point, blockchain or distributed ledger technology will drive the digitization of all conventional securities – making all securities more trackable, liquid as well as easier to clear.

But, if you look at it from a cultural standpoint, support for the displacement thesis is even stronger. There are a number of significant cultural trends that have had and continue to have monumental implications on the equities market.

Despite a 9-year bull market where the S&P 500 saw gains in excess of 300%, retail’s appetite for equities has been declining for more than a decade. According to Goldman Sachs, U.S. households have $900 billion less invested in stocks today than they did in 2007. And millennials, especially, have a particular disdain for equities. According to a recent survey by Blockchain Capital, more than 1 in 4 millennials prefer bitcoin to stocks.

With an estimated $30 trillion – the current size of the U.S. equity market – expected to imminently pass from baby boomers to millennials, millennial mindsets will soon have tremendous influence over the economy and financial markets. Thus, in order to predict how the markets will perform, it is imperative we understand how millennials see the world. And, their view is diametrically different from all previous generations.

Even more pronounced than their negative attitudes towards traditional financial institutions, are millennials’ views on economic structure overall. Millennials – who have been drivers of the “sharing economy” – have exhibited a growing distaste for ownership in general. Whether it is car-rides, living quarters, office space or even luxury watches, millennials simply prefer “access” or “sharing” to “ownership”.

As a result of this fundamental move away from ownership, the sharing economy is estimated to grow from $15 billion to $335B by 2025.
Anyone who believes that “sharing societies” will not significantly impact equities markets would be amiss. As farfetched as it may sound today, we are headed towards a future civilization where owning stock is deemed unpalatable and unnecessary while trading tokens for goods and services is valued and strongly favored.

I would also argue that flawed market structure is helping fuel the migration from traditional equities to crypto. The small cap IPO is long dead. With companies IPO-ing so late in their lifecycle, today’s most coveted emerging growth companies appreciate in the hands of venture capitalists instead of in the retirement portfolios of ordinary Americans. Even despite all of the recent legislative pushes to help small emerging growth companies go public, there isn’t enough liquidity or demand to support a viable public market for most small cap stocks. Already, during the second quarter of 2018, ICOs raised a staggering 45% of the amount raised by traditional IPOs and 31% of the amount of venture capital raised. The longer conventional equity markets remain fractured, the more likely it is that investors will look to token offerings as liquid growth alternatives.

Digital Asset Strategies Summit: Many experts believe that the institutional growth of crypto will be driven by increased regulatory certainty and custodial solutions. You have stated that other factors are at play. Can you discuss what you believe will fuel the institutional acceptance and proliferation of the cryptocurrency marketplace?

Dara Albright: Based on recent reports as well as atypical trading patterns, it is clear that institutions have begun dipping their big toe into cryptocurrency waters. Maybe even an entire foot.

Both Coinbase and Circle have recently reported an upsurge in interest from institutional clients. Circle affirmed that it experienced a 30% increase in new institutional clients in May, and it has also doubled its minimum order size due to the increased activity emanating from large-scale buyers.

Hedge fund billionaire Steven Cohen recently invested in a hedge fund targeted at crypto assets and blockchain-based companies – supporting recent comments from an employee at Morgan Stanley that cryptocurrency trading will be a “shot of adrenaline” for hedge funds. It was also just announced that the world’s largest money manager, BlackRock is setting up a working group to “study” cryptocurrencies and blockchain.

There are also reports of ample institutional money sitting on the sidelines, waiting for the right conditions. Many industry experts believe that those “right conditions” constitute regulatory clarity, institutional grade data and enterprise ready infrastructure.
I respectfully disagree.

I need only one word to describe the catalyst that will ignite a surge of institutional demand: ARBITRAGE.
Regulatory uncertainty and lack of infrastructure never precluded institutions – including BlackRock – from entering the digital/online lending space. That is because institutional investors were readily able to leverage both technology and capital in order to minimize their losses and amplify returns. Likewise, once institutions discover effective arbitrage strategies for crypto, they will flood the market.

Such strategies are imminent. In fact, I’ve been talking to crypto enthusiasts and traders who have been creating and testing very innovative and complex hedging strategies for crypto. As these strategies become rampant, institutional demand for crypto will proliferate – ultimately transforming the cryptocurrency landscape and expediting its growth.

Digital Asset Strategies Summit: What role will crypto play in retirement planning?

Dara Albright: As crypto continues to accumulate mainstream acceptance, as the industry’s ecosystem matures and especially as crypto hedging strategies become more formulated and accepted, it is inevitable that new asset allocation models will emerge with crypto playing an expanding role in modern investment portfolios – particularly in retail retirement accounts.

But, while these shifts in asset allocation models will play an important part in fueling the growth of digital assets, it is crypto’s underlying technology that will ultimately uproot the entire retirement planning industry, enabling the digital asset universe to skyrocket. The watershed moment will arrive once distributed ledger technology meets the self-directed IRA industry.

Distributed ledger technology provides the self-directed IRA industry with the capability to automate tax-deferred micro alternative asset investing. In doing so, retail investors will finally be able to seamlessly and inexpensively spread their retirement dollars across a wide array of alternative asset classes including crypto. This hi-tech self-directed IRA has the power to unlock $14 trillion of capital trapped in traditional retail retirement accounts that curtail diversification and limit returns.

This is an absolute game-changer – not only for crypto but for financial services at large.

Digital Asset Strategies Summit: Thanks Dara. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Dara Albright – Cryptocurrencies will ultimately displace equities2018-08-23T17:52:24-07:00

Bart Stephens Interview: ICOs, Custody and more

2018-08-09T11:59:27-07:00

Bart Stephens | Blockchain Capital

The forthcoming explosion of security tokens

Bart Stephens is the Co-Founder & Managing Partner at Blockchain Capital, the most established VC firm in the Blockchain sector, the first VC firm to raise a venture fund through an ICO and the most active VC investor in the sector, with 75 portfolio companies across four funds. We recently spoke with Bart, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us his thoughts regarding the strong intellectual interest in blockchain and crypto assets by financial institutions.

Bart StephensDigital Asset Strategies Summit: Your VC firm issued the first digital tradeable blockchain-based financial product to investors as well as the first SEC compliant ICO. Is this the future of venture capital and private equity investing?

Bart Stephens: One of the unexpected innovations blockchain technology has enabled has been an explosion in global crowd-sourcing for tech projects. This has primarily been done on the Ethereum blockchain in a transaction called an ICO. These ICOs have primarily funded blockchain technology projects by issuing utility tokens and other crypto assets. However, we foresee that there will be an explosion of a new category of tokens that represent more traditional securities called security tokens. Blockchain Capital invented the world’s first security token called the BCAP which is essentially a blockchain-based and tradeable venture fund with each token representing a limited partnership interest in the fund. These tokens are liquid and trade on the secondary market similar to the way a closed end fund trades on the New York Stock Exchange. Our BCAP ICO was also done in a regulatory compliant manner via a Reg D 506(c) and Reg S offering that complied with AML/KYC rules in addition to investor suitability. Though the BCAP was the first security offering and first compliant ICO, we expect many more to follow in the coming years.

Digital Asset Strategies Summit: Do you see all future ICOs being issued in compliance with the SEC?

Bart Stephens: The SEC has been surprisingly thoughtful and balanced in its approach to both blockchain technology and crypto assets. For example, the SEC has explicitly stated that neither Bitcoin or Ethereum are considered securities due to the decentralization of their current network. The SEC has also given the industry preliminary guidance on whether an ICO will be considered a security based on a settled supreme court case law known as the Howie Test. The SEC is looking at these token offerings on a case-by-case basis. The challenge the SEC faces is to support innovation here in the US but also protect investors and financial incumbents.

Digital Asset Strategies Summit: Your colleague at Blockchain Capital recently stated that “Every major bank is trying to do something in the space.” What specifically have institutions been doing to penetrate the cryptocurrency space?

Bart Stephens: Banks and financial incumbents are caught in a classic “innovators dilemma” with respect to blockchain technology and crypto assets. Financial institutions, generally speaking, are highly regulated and risk-averse. The emerging blockchain technology industry is fast-moving, controversial and often clouded in regulatory uncertainty. It makes for a challenging operating environment for financial institutions to address this global phenomenon. It’s part of why it’s so exciting to finance start-ups in this ecosystem. There are massive opportunities for small and nimble companies to address large global markets that financial incumbents are ill-equipped to address. With all that being said, the growth of these markets is now too fast to ignore if you are a Fidelity, Goldman Sachs, or even Jamie Dimon’s JP Morgan. There’s also a generational issue at play here, where millennials are inherently more comfortable with mobile and digital platforms and crypto assets. So, if you’re a large financial institution looking to meet the needs of your millennial customers who are asking for these products and services, your choice is to enter the market or lose those customers to your competitors. Expect more financial incumbents to launch services such as trading, custody and lending of crypto assets this year and next year.

Digital Asset Strategies Summit: Have you witnessed an increase in the number of crypto companies looking to raise venture capital specifically to build platforms and tools for institutional clientele?

Bart Stephens: In the last several years, I have spoken with dozens of hedge funds, family offices and traditional institutional investors. I can tell you first hand that there is a strong intellectual interest in blockchain and crypto assets. However, a lot of the infrastructure and “form factors” that institutional investors are used to with more traditional assets is still being built – namely custody and prime brokerage services. The lack of these services has kept institutional capital from entering the crypto asset market – but this is rapidly changing. Companies such as Coinbase, Bitgo, itBit, Circle and others are all entering the institutional market which we believe will increase adoption and fund flows into the crypto asset market in 2019.

Digital Asset Strategies Summit: A recent rumor had been circulating that Facebook is interested in acquiring Coinbase, one of your portfolio companies. What kind of an impact would a Facebook/Coinbase marriage have on the crypto industry and financial services industry at large?

Bart Stephens: I can’t comment specifically on Coinbase acquisition rumors – as an investor in the company, it would be inappropriate. I can say that two years ago, I could have foreseen a company like Charles Schwab or E-Trade acquiring Coinbase. Now I think it is more likely that Coinbase could acquire either Charles Schwab or E-Trade, or more likely add stock brokerage services to compete with those financial incumbents head-to-head. As a fun fact, Charles Schwab is a world-class company based in San Francisco that is 47 years old. Coinbase added more accounts in the last two years than Charles Schwab has in its 47-year history. The growth rate we are seeing in the operating companies in the crypto ecosystem are faster than Internet 1.0, social media companies and sharing economy companies.

Digital Asset Strategies Summit: Thanks Bart. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Bart Stephens Interview: ICOs, Custody and more2018-08-09T11:59:27-07:00

Lex Sokolin – Hopefully 2019 will be about creating interesting and easy-to-use applications for real people

2018-09-19T20:25:22-07:00

Lex Sokolin | Autonomous Research

Cryptocurrency and blockchain predictions

Lex Sokolin is a Partner and Global Director of Fintech Strategy at Autonomous Research. Lex is a futurist and entrepreneur focused on the next generation of financial services. He was named one of Linkedin’s “Top FIntech Voices of 2017”. We recently sat down with Lex, who will be chairing our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared his thoughts on new developments he thinks may happen in the world of crypto and blockchain.

Lex SokolinDigital Asset Strategies Summit: At what point does digital lending and crypto converge?

Lex Sokolin: In my view, Crypto and Fintech are closely related, but different themes. The latter is about using technology to democratize access to existing financial product. Think about using desktop or mobile-first interfaces as front-office or middle-office solutions. So companies like Roboadvisors, Neobanks, or Digital Lenders are all great at democratizing solutions, creating access to products at a much lower cost, with a lower distribution overhead, thereby allowing many more people to access high-quality financial products from institutions.

Crypto, on the other hand, is about decentralizing the manufacturing of financial product. You can certainly layer other Fintech solutions on top of that – so as to have a Roboadvisor or Digital Lender that uses blockchain underneath it. But the core innovation of decentralized global computing or digital assets is something completely new.

I believe it will take quite some time, likely 3 to 5 years, for regular people to get fully comfortable with financial products that have been manufactured in a decentralized fashion. We saw a comparable gap in the case of BitTorrent and the modern streaming services. Media sharing led the invention of technology that in large part now also powers how music and media are downloaded at scale by everyone.

Digital Asset Strategies Summit: How does crypto make financial services companies more customer centric?

Lex Sokolin: To understand crypto, you have to understand the communities that drive different projects. The builders and the users literally hang out together and build together. This behavior was seen before in open source communities, but did not need to apply to financial services companies with traditional value chains. Looking at Crypto today, financial services companies can learn a lot about customer growth, user-led marketing, rewards that people care about, and social platforms which determine which projects succeed or fail. Such decentralized networks exhibit growth that certainly rivals that of any finance company in history.

Digital Asset Strategies Summit: Will regulations ultimately obsolete ICOs or will they enhance them?

Lex Sokolin: At the surface level, there are two things to say about regulations. First, shining a light on good and bad practices, and creating implications for poor types of behavior is an absolute positive. While global regulations differ, coherent frameworks are starting to emerge from the patchwork. These will help quality projects move forward and they will also help drive adoption by normalizing the asset class. Driving out the bad actors by starving them of oxygen — the easy scams and hacks available now — is also a good thing. The second point is that regulations are very likely to reflect our existing worlds as opposed to future ones. That can be a danger to innovation and experimentation, which different societies prefer at different amounts. Hopefully, that can be decided through cultural and social negotiation and not by decree.

The broader point about regulation is that, at least to a meaningful extent, crypto governance has to happen in the software itself. Code will execute as it is written. Therefore, until lawyers, regulators and common practitioners have a strong grasp of computer science, human judgement-based approaches to litigating issues within these networks may come off as foolish.

Digital Asset Strategies Summit: If 2018 can be summed up as the year of developing the crypto infrastructure, what do you predict will define 2019?

Lex Sokolin: If the infrastructure does get built in a significant way during the rest of this year, then I hope 2019 will be about creating interesting and easy-to-use applications for real people. A few hardware projects are also in-flight, which may land mobile phones that are block chain-native into the hands of consumers. Interesting mass-appeal crypto projects could come from unexpected places. For example, it could be the next augmented reality Pokémon GO game that brings digital collectables into teenager hearts. Or maybe a local community in a developing country will start using an application that allows for credit to be used between the un-banked. Or, perhaps certain medical data can be jointly shared by hospitals and governments around the globe to help treat critically-ill patients, saving lives using the technology. While it is hard to predict an accurate outcome, I’m excited about the direction of travel within the application layer.

Digital Asset Strategies Summit: You have stated that there is no distinction between the web enabled world and the crypto enabled world. Can you explain?

Lex Sokolin: To answer this, you almost have to get to philosophical grounds. Should people believe in Progress? Is such a concept naive and idealistic, neglecting the lived experience of millions of people in the world today? Is it revisionist history, justifying everything that’s happened before with broad strokes? I think, if we put aside socially constructed issues like culture and politics, we can find some version of Progress in technology. This is also a very Millennial perspective. Technology has been getting better and better every year in my lifetime. And certainly some have drawn that arrow of history to the first time people made fire.

So I believe that crypto is the next step of a technological toolkit. That means anything that is currently on the web will in the future incorporate blockchain-based elements (in the same way that technology today incorporates electricity, or radio waves, etc.). If you are an entrepreneur today, there is no reason not to use at least a small portion of what the crypto world has to offer within your business idea and see what happens. It’s an exciting time!

Digital Asset Strategies Summit: Thanks Lex. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Lex Sokolin – Hopefully 2019 will be about creating interesting and easy-to-use applications for real people2018-09-19T20:25:22-07:00

Tyrone Ross – If you don’t own the private keys, you don’t own the coins

2018-09-19T20:23:09-07:00

Tyrone Ross Jr. | NobleBridge Wealth

Safety and security issues of investing in cryptocurrencies

Tyrone Ross is a Managing Partner at NobleBridge Wealth Partners, a financial advisory firm. Tyrone has more than a decade of experience, working at firms including Morgan Stanley and Merrill Lynch, in the financial services industry. We recently sat down with Tyrone, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us his thoughts regarding the safety/security issues of investing in cryptocurrencies.

Tyrone RossDigital Asset Strategies Summit: Can you discuss the importance of holding your coins in a personal digital wallet as opposed to on an exchange?

Tyrone Ross: If you leave your coins on an exchange you are extremely vulnerable to getting hacked and having your coins stolen. There is a term in crypto that says, “if you don’t own the private keys, you don’t own the coins.” A personal wallet gives you complete control over your coins privacy, security and utility. This is also core to the mission of crypto which is for everyone to function as their own bank.

Digital Asset Strategies Summit: Can you explain the difference between cold storage and hot storage?

Tyrone Ross: To keep it simple the difference between cold and hot storage is simply whether coins are stored online or offline. Cold storage is the most secure as they are offline and hot storage means they are still online and connected to the internet. This is why everyone who holds cryptocurrency is encouraged to store their coins in a hardware wallet which is the most secure form of cold storage. With that said for those not savvy enough to know the ins and outs of the technology, Coinbase holds 99% of their customers in cold storage.

Digital Asset Strategies Summit: Can you discuss how Coinbase becoming a licensed broker and Circle obtaining a federal banking license will impact the market for digital assets?

Tyrone Ross: As someone who recommends both Coinbase and Circle to clients I was very happy to see this news from both companies. There are a few things that are keeping crypto from gaining mass adoption including regulation and custody. As these companies continue to develop and become more like traditional brokers and banks it will lead the way for large institutions to enter the space. It also will allow them to go beyond just brokering the sale of coins, but to provide holistic financial solutions to clients. Personally, I am very impressed with Circle and their full suite of services including the Circle Pay app.

Digital Asset Strategies Summit: Fidelity has recently posted job openings hinting at their intention to get into digital currency offerings. How would Fidelity’s entrance into the space impact the landscape?

Tyrone Ross: As of right now clients are able to see their Coinbase account through the Fidelity portal and have the ability to buy and sell as well. As one of the larger legacy institutions with an established brand it will go a long way towards giving crypto credibility. If consumers and other institutions see that Fidelity is entering the space they will follow suit and begin to build out their platforms as well. Ultimately this means more money going into the space so that the very smart engineers and developers have the tools to build the architecture to make the retail investor comfortable with embracing crypto as an asset class.

Digital Asset Strategies Summit: Can you discuss some of the misconceptions advisors have about crypto?

Tyrone Ross: Well where to begin with this?! First of all many advisors and the investment community in general believes that bitcoin is bad, but blockchain is good. I think it’s important to understand that they are inherently inseparable. To embrace blockchain is to embrace bitcoin and vice versa. The second thing you always hear is bitcoin is used for all types of nefarious activity. There has been this stigma since the whole Silk Road fiasco that bitcoin is used to launder money and pay for criminal activity. If you were to do any of these things you probably shouldn’t use an open blockchain to do it! My guess is they would use cash if they were opting to remain anonymous. You also hear a lot about tax implications and rightfully so. Do the exchanges provide tax reporting? Are the coins securities? Are they commodities? The SEC has started to give some clarity around whether bitcoin or ether are securities (they aren’t) and Coinbase has started to provide tax reporting statements and tax calculators for customers. There are also CPA’s that work specifically with cryptocurrency, so advisors should expand their center of influence to include accountants who have an expertise in this area.

Digital Asset Strategies Summit: Thanks Tyrone. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Tyrone Ross – If you don’t own the private keys, you don’t own the coins2018-09-19T20:23:09-07:00

Timothy Peterson – Any cryptocurrency’s value is determined by four factors

2018-09-19T20:26:56-07:00

Timothy Peterson | Can Island Alternative Advisors

The 4 factors which determine cryptocurrency’s value

Timothy Peterson is the Founder of and Portfolio Manager for Cane Island Alternative Advisors, which manages global macro investment strategy. He’s an emerging expert on cryptocurrency investment and valuation. We recently sat down with Timothy, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us his forecast for bitcoin.

Timothy PetersonDigital Asset Strategies Summit: Can you discuss how Metcalfe’s law explains 90+% of price moves of all cryptos?

Timothy Peterson: Metcalfe’s law explains 70-90% of long-term price moves for bitcoin, ethereum, and several others depending on the period examined. It also explains price movements of other peer-to-peer digital assets such as Facebook, Tencent, Paypal, Twitter, and Square. Short term prices are driven by many factors, including “noise”. For periods longer than 60 days, number of users (sometimes called MAUs) are the single greatest determinant of price. For bitcoin in particular, we used 60-day periods since 2011, and exclude periods where documented price manipulation occurred (2013-14 and 2017).

Digital Asset Strategies Summit: Can you explain the various methodologies you use to forecast the price of bitcoin?

Timothy Peterson: Any cryptocurrency’s value is determined by four factors: the number of coins available, the number of wallets or addresses, transaction activity, and a decay factor that represents diminishing marginal returns. It is not driven by things like electrical consumption, google searches, or correlation with other asset classes. Metcalfe believed that growth in users was met with an opposing force which he termed “affinity” and he correctly surmised that affinity declines over time. We have all experienced declining affinity in the form of spam email or annoying Facebook posts. For bitcoin, we have ten years of data with which to forecast user growth. Ascertaining Metcalfe’s affinity value involves some mathematical gymnastics, but it is essentially a logistic decay function.

Digital Asset Strategies Summit: What do you consider the 3 necessary items necessary for bitcoin to survive/thrive?

Timothy Peterson: First, there needs to be a true custody solution for cryptocurrencies. Custody is all about procedures that guarantee the safekeeping of assets. No institutional investor will dive into cryptocurrency until there is a custody solution, and that means far more than just cybersecurity. Custody will also permit true shorting of the currency, which will mitigate some of the volatility.

Second, exchanges need to be regulated with the same degree of oversight as developed economy commodity and equity exchanges. Exchanges today are rife with conflict of interest, inadequate client protections, and weak or nonexistent cybersecurity, disaster recovery, and business continuity plans.

Third, the future of bitcoin does not lie in millions of people buying pizza or cars with bitcoin. Bitcoin’s true value, even today, is as a neutral currency that serves as a place to park capital away from geopolitical risk and monetary system risk. Secondly, it serves as an intermediary currency between the 180+ sovereign currencies and 1000+ cryptocurrencies. It serves as a “digital dollar” between retail investors in much the same way as Ripple does for banks.

Digital Asset Strategies Summit: In April you have stated that you believe “bitcoin, and most other cryptocurrencies, will reach equilibrium value later this year. After that, it should resume a relatively steady upward trend as it has in past years, perhaps earning as much as 60% per year for the next couple of years.” Is this still your forecast?

Timothy Peterson: Yes, we stand by that forecast. That forecast is based on the long-term sustainable growth rate in users, diminishing marginal returns, the rate at which bitcoins are mined, and the rate at which bitcoins are irretrievably lost. Our forecasts come with large variations, so even if we say bitcoin’s value should be $4,000 by December 2018, the range is anywhere from $1,500 to $7,500. Bitcoin’s price is manipulated constantly, so it could be higher, but that is not supported by fundamentals.

Digital Asset Strategies Summit: Thanks Timothy. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

Timothy Peterson – Any cryptocurrency’s value is determined by four factors2018-09-19T20:26:56-07:00

James McDonald – Bitcoin will NOT be the leading cryptocurrency in the long-term

2018-09-19T20:18:50-07:00

James McDonald | Vishnu Wealth Management

In the long-term, Bitcoin will NOT be the leading cryptocurrency

James McDonald is the Chief Investment Officer at Vishnu Wealth Management, a growth focused Registered Investment Advisor based in Los Angeles, CA. A 22-year veteran of the investment industry, James was named one of America’s top 10 advisors by ETF.COM in 2012. We recently sat down with James, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us how to manage volatility in the crypto space from an investment perspective as well as the importance of regulation on dampening volatility.

James McDonaldDigital Asset Strategies Summit: How can the extreme volatility of the cryptocurrency market be managed?

James McDonald: Active management currency strategies provide risk-adjusted returns that exceed market benchmarks. Three active management strategies we employ are long-short, statistical arbitrage, and volatility arbitrage strategies. Long-short: In our opinion, there has never been as many disruptive forces at work in a tradable market which impact asset prices as there are today in the cryptocurrency space. Vishnu’s long/short managed account strategy is deployed to capitalize on them. The strategy seeks opportunities where it can exploit weak cryptocurrencies to yield uncorrelated returns with below market volatility. The Long/Short algorithm is calibrated to achieve zero correlation and by allocating capital dynamically. Statistical Arbitrage: Vishnu’s Statistical Arbitrage models identify cointegration relationships exhibited amongst the spreads between the ten most liquid cryptocurrency pairs. Short term departures from this relationship present profit opportunities, which are executed with Vishnu’s effective risk management program. The result is a long/short strategy yielding aggressive performance with moderate volatility. Volatility Arbitrage: As the unfolding of recent political/economic events have illustrated, directional strategies can share factor exposures common across asset classes that can cause a well-diversified portfolio to adversely correlate with factor shocks. It’s precisely such times of market stress that long-volatility strategies yield value to a portfolio. Vishnu’s volatility modeling of the Bitcoin-USD index continues to enhance our cryptocurrency volatility strategies.

Digital Asset Strategies Summit: Do the threats of increased regulation make crypto more or less volatile?

James McDonald: A thriving, liquid and growing financial market demands trust from its participants. No factor toward the long-term growth of the cryptocurrency space is more important than trust. And perhaps no other component of the crypto space has more potential to increase trust than enforceable regulations which protect investors and companies from bad actors. In the short-term, threats of increased regulation may increase the volatility of crypto prices; but in the long-term the establishment and enforcement of regulations that ensure investor protection will reduce the volatility of the crypto market by drawing in more players and engendering a more trusted space for business to transact. This growth will result in more stability and less volatility.

Digital Asset Strategies Summit: Will bitcoin remain the leading cryptocurrency?

James McDonald: For the short-term (e.g. 1-3 years), most likely it will. In the long-term, no. Other currencies will establish themselves as having greater utility, adoption, and potential.

Digital Asset Strategies Summit: Do you see more investors gravitating towards wanting actively managed crypto portfolios?

James McDonald: Absolutely. As the market attracts more established Broker/Dealers, Advisors, and Fund Companies their clients will be introduced to and interested in both actively and passively managed crypto portfolios.

Digital Asset Strategies Summit: What are some of the common misconceptions about bitcoin?

James McDonald: The biggest misperception is that the opportunity to profitably invest in bitcoin has passed. Other misconceptions about bitcoin are that it is a fraudulent scheme, overhyped bubble, and a product without a market.

Digital Asset Strategies Summit: Thanks James. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.

James McDonald – Bitcoin will NOT be the leading cryptocurrency in the long-term2018-09-19T20:18:50-07:00
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