FINTECH ARTICLES OF THE WEEK 11/12/17
The wild ride in bitcoin and ICOs continues, as the story woven by this week’s links shows. I’ve attempted to select articles that balance the hype with realism and healthy skepticism.
That sounds a bit dramatic to me—I have faith that centralized financial institutions and governments will find ways to use decentralized technologies to their benefit, both internally and commercially, especially given that decentralized currencies seem more like speculative assets now rather than tools of commerce. In the end, however, I just don’t like the title as it relates to reporter Laura Shin’s apt warning: “Blockchain-based cryptocurrencies, however, threaten to disrupt this foundation by decentralizing the operation of the financial system outside sovereign states’ control. This ties well into the goals of revisionist states, who have long sought to de-dollarize the world economy.”
As Chicago’s CME Group, the world’s largest derivatives exchange, moves to offer bitcoin futures, the opinion that bitcoin is a new asset class, not a cryptocurrency, is gaining more adherents. To understand the tension between an asset class and a form of exchange better, read this post on the CME Group’s website, which starts like this:
“An inherent tension exists between the two major purposes of money. Currencies that are perceived as great stores of value, such as gold and bitcoin, make for poor mediums of exchange. By contrast, currencies that are effective mediums of exchange, such as fiat currencies used the world over, can make for dubious stores of value. Where a currency falls on the store of value versus medium of exchange spectrum influences its usefulness as a unit of account and a standard of deferred payment.”
And concludes as follows:
- A natural tension exists between stores of value and mediums of exchange.
- Gold and bitcoin have been great, if erratic, stores of value.
- Gold and bitcoin appreciate because of the slow growth of mining supply.
- Fiat currencies are more practical as mediums of exchange because they lose value which encourages holders to exchange them for goods and services.
- Strong stores of value encourage hoarding, deflation and financial instability. They also make for poor units of account and methods of deferred payment.
The long argument in between is worth the time to digest whether you agree or not.
Sober enthusiasm for blockchain while ICOs create a crypto bubble “Most speakers at the event noted that we are in a crypto bubble referencing the gold rush mentality embracing the Initial Coin Offering (ICO) market,” reports Miko Matsumura of Pantera Capital on the ICO Governance Foundation conference. Most of what I read agrees, and the United States Securities and Exchange Commission does not seem to be amused, either.
As Chuck Mackie writes, “you should be skeptical because just like any new technology it’s easy to get swayed by the “wow” factor and a naive belief that this new technology will solve all of your problems. We all know that this is simply not the case and it is wise to take your time, keep your guard up, and take small, incremental steps in adding any new technology.”
After the CME Group’s initial announcement, bitcoin prices increased, then fell, and then went “bananas” again with a change in plans in bitcoin’s technology. Traders love the volatility.
“ICOs are a massive source of funding for startups in the cryptocurrency ecosystem,” writes VC Tom Tunguz. “They enable startups to raise potentially hundreds of millions of dollars. This new funding mechanism is a fascinating one, and one that raises a few parallels to the IPOs of the dot com era.”
I’d say he’s cautiously optimistic, clear-headed in his analysis, and certain that the mechanism is limited to the crypto marketplace: “First, startups raising these ICOs tend to be pre-revenue. Second, retail investors are buying substantial fractions of these offerings. Third, the volatility of these offerings is enormous. . . . If this trend continues and questions like regulation are answered, ICOs may be a novel and important mechanism for cryptocurrency based startups to raise capital.”
VC Fred Wilson is appalled at the clearly bogus nature of some offerings and provides these characteristics of a legitimate project:
- A relationship between the amount of money being raised and the complexity of the project.
- A very clear use case that requires the decentralization approach brought by blockchain technology.
- A reasonable valuation based on the size of the opportunity being pursued.
- A credible team.
- The technology has been built, at least to a point where it is demonstrable.
And a hat top from John Lothian, where many of this issue’s links originated. If you don’t get his daily capital markets news digest, you should. He, too, express crypto-skepticism: “There will be plenty of people who will want to trade the CME Group’s or the CBOE’s bitcoin futures. They will love the vol. But this mania is not for everyone. I am willing to be in the late majority of the lifecycle of innovation of bitcoin.”