Will bitcoin become the next gold?

Cryptocurrency for trading: Speculation or disruption?

A recent article in the Economist has triggered a new round of questions about cryptocurrency in general and bitcoin very specifically. This comes on the heels of the EY Global Blockchain Summit where more detailed parsing out of the specifics around decentralized finance, or DeFi, brings greater clarity to the scope of the disruption bearing down on legacy capital markets and government policy objectives.

A prevailing view at TBR is that cryptocurrency trading values are simply too volatile at this time to compel large enterprises to agree to trade in those currencies. Quarterly discussions of the impact of foreign exchange rate fluctuations on the year-to-year results suggest a very limited appetite for conducting commerce in widely varying cryptocurrencies. As such, TBR believes that at least in the early developments fiat currencies will prevail.

Cryptocurrency for wealth stores: Speculation or disruption?

The Economist article posited another point of view worthy of consideration, and that is for cryptocurrency to be a wealth storage. Citing Nobel Prize-winning economist and game theorist Thomas Schelling, the article posits that the center of gravity forming around cryptocurrency means bitcoin could become a global wealth store against economic turbulence in much the same way the movement between stocks and precious metals have been used as a safe harbor hedge.

Gold, it is argued, has value because enough people tacitly agree that gold bars do, indeed, have value and therefore it is a wealth store as a hedge against inflation. This wealth store comes, essentially, from the group consensus that it is so.

Today bitcoin has natural value as a wealth store due to its scarcity and fame. In this way it is a natural hedge against inflation. The article further cites J.P. Morgan’s tracking of the uptick in exchange-traded funds (ETFs) investing in gold that took place as the recent bitcoin price roiling saw it drop from $58,000 a coin to $33,000 a coin in a matter of weeks.

Few people transact commerce by shipping and receiving gold bars, and few people transact business in bitcoin. Gold has maintained relevance as an investment vehicle due to the group consensus of its value as represented by gold bars. Oftentimes the gold bars are not even in the physical possession of their owners. There is something tangible there in the form of the bar itself. But that tangible, physical asset really feels like the only distinction in the analogy.

TBR can envision capital markets with various grade ratings for different cryptocurrencies. It is known that certain banks and major credit card brands ponder creating their own coins. We can envision buying networks growing that coalesce around specific social objectives likewise forming as the group consensus mechanism around enterprises working to reduce greenhouse gas emissions or to seek social justice spring up with the digitally born as they enter their earning years.

In this scenario the flow of wealth from bitcoin into gold or vice versa could be viewed as the overarching predictive indicator of the rate, pace and citizen comfort level with our pivot into a full- fledged digital economy. Ransomware attacks spike and money flows to gold, for example. New high-growth digital businesses proliferate with more crypto trading provisions and more money flocks back into bitcoin as a wealth store.

It’s definitely a concept for the outside edge of the Three Horizons model and likely on very few people’s radar, but the article posits a very compelling argument for bitcoin as a wealth store more so than as a trading currency about to revolutionize commercial payments as we know it.

So what do you think? Will bitcoin become the next gold?

ICO as a ‘medicine show’: EY finds abysmal performance in wild west of initial coin offerings

Last December, EY Global Blockchain Leader Paul Brody recognized the breakout market for initial coin offerings (ICOs) and launched a longitudinal study, centered on class of 2017 companies that is fueled by this new way of raising money for software startups. One year later, as detailed in EY’s report published today, market valuations for the top 10 ICOs were off 55% — abysmal performance by any standard. Buried in the bad news for almost all the companies, one can find a few bits of success, particularly with companies providing blockchain infrastructure. The incredibly poor performance around incubation makes a strong case, to use a “Deadwood” metaphor, that snake oil salesmen made up most of those 2017ers. As this year comes to a close, around one-quarter of the initial ICO-backed companies have a product in the market, further evidence the breakout included a number of outright frauds. In addition, of the 25 companies that had products, seven devalued the use of utility tokens by allowing payment in fiat currency, facing up to enterprises’ persistent reluctance to conduct business transactions in anything but hard currencies. Curiously, paying in tokens, according to Brody in a discussion with TBR prior to today’s announcement, came across as only the second-biggest obstacle to commercial adoption, with the first being the desire for transaction privacy — a desire pure public blockchains cannot satisfy. In EY’s previous report on ICOs, issued last December, the firm anticipated the third-greatest objection, concerns over full regulatory compliance, an insight that tracks closely with EY’s tax and audit credentials.

Today’s report includes a few nuggets revealing the depth of EY’s study:

  • “Companies that have made meaningful progress toward working products only increased by 13% in 2018. 71% have no offering in the market at all. Typically, within one year of a traditional venture-backed software startup, you would expect to see a significantly higher percentage of the companies with a functional early stage product.”
  • “Seven out of 25 reviewed projects accept other currencies, rendering utility tokens less valuable. Some projects have altogether dropped their utility tokens to focus on functionality. To become a means of payment, utility tokens have to be stable. If it remains stable, the token is of little interest to speculative investors.”
  • “Globally, sources of funding will likely shift away from retail investors toward entities that can understand and manage the downside risks, such as venture capital and digital asset-focused investment funds.”

Will next year be better? The blockchain infrastructure companies will likely be surpassed by a second wave of ICO-funded companies, with most of these taking an asset-backed approach to token issuance, essentially creating a product that is enterprise-ready at a time when buyers are not convinced of the benefits of placing all their assets on the public blockchain domain. This then raises the question: Do new wave ICO-funded companies need to rip pages from Ethereum’s playbook or simply play within its orbit? Ethereum is not a one-size-fits-all solution, but it certainly provides a solid foundation for many to learn from, especially around its “smart” contact functionality. Further advancing along some of the must-do steps EY pointed out in its December 2017 report, this second wave will more adequately address the need for clear justifications for blockchains and tokens; an ICO process more closely aligned to the initial public offering (IPO) process; enhanced security; and something close to legal compliance, or the regulators will simply begin enforcement substantial enforcement. In short, privacy trumps transactability.

The regulatory aspect piques my interest, in part because of the know-your-customer (KYC) aspects of post-ICO-linked financial transactions and recent efforts of EY, among others, to better incorporate emerging technologies into anti-money-laundering and KYC operations.

In this wild west, with its unregulated moral hazard, where does EY fit in?

My initial thoughts had the consultancy as the “Deadwood” preacher, known to all and trusted, but neither the law nor the bank. My colleagues convinced me EY will be more like the General Store, providing certified, trustworthy services and goods, helping clients mine for gold without shortcuts and faulty equipment that bring down the whole operation. Now imagine artificial-intelligence-enhanced, blockchain-powered resupply brought into Deadwood.