By Gaurav S. Iyer, IFC Published : June 29, 2018
This was a bloody week for cryptocurrencies. Everything was covered in red, from Ethereum (ETH) on down to the Basic Attention Token (BAT).
Some investors claim it was inevitable. Others say that price manipulation is to blame.
We think the answers are more complicated than either side has to offer, because our research reveals deep contradictions between the price of cryptos and the underlying development of blockchain projects.
For instance, a leading venture capital (VC) firm launched a $300.0-million crypto investment fund, yet liquidity continues to dry up in crypto markets.
Another example is the U.S. Securities and Exchange Commission’s (SEC) confirmation about Ethereum not being a security. That should have sent ETH prices soaring, yet bulls are stuck defending the $400.00 level.
These contradictions are not permanent. They must resolve sometime. We think that when they do, they will break toward the upside, which is why we’re reluctant to alter many of our positions.
With this in mind, here are some of the industry’s recent developments.
Bithumb Retrieves $14.0 Million in Stolen Funds
According to a recent update, Bithumb—the prominent Korean exchange hit by a cyber attack in June—worked with law enforcement officials to retrieve $14.0 million in stolen funds. (Source: “Accident Damages Amount and Compensation,” Bithumb, June 28, 2018.)
This leaves only $17.0 million in the hands of hackers. And although I doubt that’s comforting to victims of the attack, I think it shows progress in how the industry responds to crypto thefts.
With one hand, Bithumb offered to compensate users on a dollar-for-dollar basis. And with the other, it scooped back as much of the stolen money as possible. This is basically the same response as to actual bank robberies.
Think about it: If money is stolen out of your bank account, the government will cover your losses (up to an extent, usually $100,000 per account) and law enforcement officials will start hunting the perpetrators. Over time, the police grow familiar with criminal activities, rendering them less and less effective.
That process is currently taking place in cryptocurrencies, except that exchanges are insuring deposits, not governments.
What’s more, law enforcement officials are taking this seriously. They’ve started to consider the loss of cryptos as genuine theft.
a16z Launches $300.0-Million Crypto Investment Fund
Three years ago The New Yorker featured a venture capitalist named Marc Andreessen. Nearly 20 years before that, Andreessen was on the cover of Time magazine.
Why? Because he’s a walking gold mine. Everything his venture capital firm (Andreessen Horowitz, otherwise known as a16z) touches turns into a hot property, including such monster earners like Facebook, Inc. (NASDAQ:FB), Airbnb, BuzzFeed, Inc., Coinbase, and Lyft. (Source: “Andreessen Horowitz – Portfolio,” a16z, last accessed June 28, 2018.)
They are the tastemakers of Silicon Valley.
And now, Andreessen’s firm is launching a $300.0-million crypto investment fund even while cryptos are spiraling into an abyss. This is one of the contradictions I was talking about. Clearly, these professional VCs see an opportunity in cryptos. Why doesn’t everyone else?
In any case, we can learn a lot from this fund.
Here are some of the core principles, as outlined by the fund’s managing partner, Chris Dixon:
- Long-Term Strategy: “We’ve been investing in crypto assets for 5+ years. We’ve never sold any of those investments, and don’t plan to any time soon.”
- Dollar-Cost Averaging: This simply means the fund will buy consistently over time, regardless of current market conditions. “If there is another ‘crypto winter,’ we’ll keep investing aggressively,” writes Dixon.
- Diversification Across Geographies and Growth Stages: “Crypto is a global phenomenon, with great projects all around the world, and we’ll invest accordingly.”
- Invest Only in Useful Cryptos: Some cryptos are built on hype while others will eventually be used to complete some end goal. This fund will only invest in the latter. “We want services powered by crypto protocols to be used by hundreds of millions and eventually billions of people. Crypto tokens are the native asset class of digital networks, but their value is driven by the underlying, practical uses cases.”
(Source: “Introducing a16z crypto,” a16zcrypto, last accessed June 28, 2018.)
Finally! Over the last year, I’ve felt completely alone in my views. How many times have I insisted that tokens with practical applications—such as BAT, GNT, or XRP—are the ones likely to skyrocket?
It feels good to have those views corroborated by Andreessen Horowitz.
SEC Reopens the Possibility of Crypto ETFs
According to documents published on June 26, the SEC is “seeking comment” on Bitcoin exchange-traded funds (ETFs) requested by—surprise, surprise—VanEck SolidX Bitcoin Trust. This is their third attempt to create a Bitcoin ETF. (Source: “The SEC Is Seeking Comment on Yet Another Bitcoin ETF,” CoinDesk, June 27, 2018.)
Luckily, the ground has shifted in their favor. Regulators and Big Business have softened their stances on cryptos since last time, meaning that comments from industry experts and lawyers might be more favorable than ever before.
What’s more, a positive ruling on ETFs could catapult crypto prices into the stratosphere.
You see, institutional investors typically stay away from cryptos because there’s more risk than they can afford. But ETFs help mitigate those risks by putting the institutions at arm’s length. So the approval of one ETF would open the floodgates. It would be a bonanza.
“A properly constructed physically-backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin,” VanEck’s CEO told CoinDesk. (Source: Ibid.)
This could be a very big deal. After all, the introduction of Bitcoin futures is what caused the last rally in December 2017. So it stands to reason that the introduction of Bitcoin ETFs could reignite that enthusiasm.
It’s easy to be a crypto bear right now. Fear is dominating almost every trade. It seems borderline insane to be bullish given the steep fall in asset prices. But smart investing is almost always about moving against the crowd.
The smart money knows that. Why else are the clever folks at Andreessen Horowitz moving toward cryptocurrencies? Everyone else is running for the hills, yet some of the most successful investors in the world are staying put.
Either they know something you don’t, or they are using the most underrated investing trick in the book: it’s called perseverance.