Cryptoassets will revolutionize financial services in the long run

The recent price decline — a rare collision of factors — has proved that people overestimate the potential for technology short term and underestimate it long term

In 2018, the value of cryptoassets such as bitcoin and Ethereum has fallen US$700 billion from a high of more than US$800 billion. “No end in sight for crypto sell-off as bitcoin approaches $4,000” read one recent headline. “It’s Getting Nasty,” read another. Indeed, the selloff has been intense and worrisome to many speculators who bought into the market in the past 18 months and now find themselves deeply underwater.

This recent price decline is the result of a perfect storm, a rare collision of several factors.

First, the prices were unsustainable. In early 2018, cryptoasset investors had overly optimistic expectations of adoption and utility. When projects failed to deliver, there was little to support their lofty valuations. We have seen this story before: people tend to overestimate the potential for technology short term and underestimate it long term.

Second, exchange-traded funds (ETFs), which would have given more retail and institutional investors access to cryptoassets, failed to materialize as expected.

Third, many companies that raised funds in the underlying cryptocurrencies themselves converted to fiat currencies for cash to fund their operations, adding to the selling pressure.

A dispute in the lesser known “bitcoin cash” community also heightened the spectre of volatility and uncertainty. As did the poor performance of many cryptoasset investment funds, which has sparked demands among investors for redemptions of whatever was left. Finally, as we approach yearend, investors are looking to harvest tax-losses.

But this is not a time for animal spirits to go into hibernation. This is a venture market, and like all venture markets, it requires a long-term outlook.

The fundamentals for the industry are sound. Many compelling projects are launching soon; top talent continues to move from Wall Street and Big Tech to crypto ventures; and developers around the world continue to improve the code, build applications and dream up exciting new projects.

Ethereum, a made-in-Canada project, has 200,000 developers building in its native computing language, Solidity. Large companies such as Fidelity and VanEck are investing more in cryptocurrency projects than ever before. And beyond bitcoin, big enterprises such as Delta Airlines and FedEx are looking to blockchain to transform many aspects of their businesses. Facebook now has a number of blockchain job postings.

Some perspective is helpful, too: only two years ago, the cryptoasset market had a combined value of US$13 billion. Had it been a public company, it would barely have cracked the S&P 500 index, based on its market capitalization. Today’s market is worth US$100 billion.

Furthermore, cryptoassets are one facet of the financial services revolution — and their price is only one indicator of innovation. Asset classes with notional values of trillions of dollars — stocks, bonds, collectibles and currencies, to name a few — could be transformed from analog to digital and, in the process, force companies, governments, investors and citizens to confront a brave new world. Canada is already a hotbed for blockchain innovation. We can harness this technology to reinvent the financial services industry for the better.

This is a venture market, and like all venture markets, it requires a long-term outlook

This new asset class includes some familiar elements: cryptocurrencies such as bitcoin — blockchain’s first killer app — and platform tokens such as Ethereum. But there are other asset types to watch:

Utility tokens are programmable blockchain assets with utility in an application. For example, Golem aims to aggregate the power of the world’s smartphones into a decentralized supercomputer that anyone can use in exchange for Golem tokens.

Cryptocollectibles allow for the tracking and trading of both tangible (diamonds, fine art) and intangible (virtual pets, such as Cryptokitties) goods.

Security tokens are native digital bonds, equities and other securities that trade peer to peer. The Canadian Securities Exchange intends to get into this market. Canadian startup Polymath has made progress in this area, as has Toronto-based Xtreme Blockchain Labs, which is repurposing its crowdfunding platform, CrowdMatrix, as a securities token foundry.

Natural asset tokens represent such tangible goods as gold, oil or carbon in peer-to-peer markets with real-time settlement. For example, the Royal Mint partnered with the Chicago Mercantile exchange to create Royal Mint Gold, a token backed by gold bullion in the Royal Mint’s vaults. The entire commodities market is up for grabs, as is mass-market carbon trading, real estate and other hard assets.

Digital fiat money is cryptocurrency issued and governed by central banks. A year ago, Venezuela announced its launch of the “Petro,” a cryptocurrency backed by the country’s oil reserves but not widely used. Implemented properly, these cryptocurrencies could make markets more efficient, transparent and inclusive and central bank policy more responsive to crises and shocks.

Stablecoins are native digital assets pegged to dollar reserves. While they make moving and storing value frictionless, they still require a trusted backer holding funds on deposit, not unlike a traditional bank. Still, they have gained popularity and must be taken seriously.

This Cambrian explosion of cryptoassets may precipitate one of the greatest reorganizations of wealth and transformations of the global economy

This new asset class includes some familiar elements: cryptocurrencies such as bitcoin — blockchain’s first killer app — and platform tokens such as Ethereum. But there are other asset types to watch:

Utility tokens are programmable blockchain assets with utility in an application. For example, Golem aims to aggregate the power of the world’s smartphones into a decentralized supercomputer that anyone can use in exchange for Golem tokens.

Cryptocollectibles allow for the tracking and trading of both tangible (diamonds, fine art) and intangible (virtual pets, such as Cryptokitties) goods.

Security tokens are native digital bonds, equities and other securities that trade peer to peer. The Canadian Securities Exchange intends to get into this market. Canadian startup Polymath has made progress in this area, as has Toronto-based Xtreme Blockchain Labs, which is repurposing its crowdfunding platform, CrowdMatrix, as a securities token foundry.

Natural asset tokens represent such tangible goods as gold, oil or carbon in peer-to-peer markets with real-time settlement. For example, the Royal Mint partnered with the Chicago Mercantile exchange to create Royal Mint Gold, a token backed by gold bullion in the Royal Mint’s vaults. The entire commodities market is up for grabs, as is mass-market carbon trading, real estate and other hard assets.

Digital fiat money is cryptocurrency issued and governed by central banks. A year ago, Venezuela announced its launch of the “Petro,” a cryptocurrency backed by the country’s oil reserves but not widely used. Implemented properly, these cryptocurrencies could make markets more efficient, transparent and inclusive and central bank policy more responsive to crises and shocks.

Stablecoins are native digital assets pegged to dollar reserves. While they make moving and storing value frictionless, they still require a trusted backer holding funds on deposit, not unlike a traditional bank. Still, they have gained popularity and must be taken seriously.

This Cambrian explosion of cryptoassets may precipitate one of the greatest reorganizations of wealth and transformations of the global economy

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