Month: March 2021

Last evening, I read about how wealthy investors – and even their advisors – now wanted cryptocurrency to be part of their portfolios, but that investment advisor platforms by and large don’t offer access to it.

A small, but increasing number of advisors like Gerber want to incorporate digital assets into their practices — 9.4% of advisors are allocating part of client portfolios to crypto in 2021, up from 6.3% last year

Problem is, there’s hardly any infrastructure to help financial planners give advice on digital assets, rather than just invest in a crypto product.

– Rising demand, little support: Inside advisors’ crypto headache

Rising demand, little support: Inside advisors’ crypto headache

Major hurdles stand in the way of wide adoption: regulation, security and cost.

The article then goes on to profile two new entrants to the investment advisor (RIA) landscape that are starting to offer crypto access:

24-advisor RIA Gerber Kawasaki Wealth and Investment Management, will be adding Bitcoin to the portfolios of clients who request it through Gemini, the crypto exchange and custodian started by the Winklevoss twins…

Onramp Invest… is building its first product rendition for FAs and recently secured a $500,000 round of funding

When I read this article, Fidelity Investments was the only large platform that offered this:

Fidelity Digital Assets, which launched in 2018, now has approximately 100 clients, according to Terrence Dempsey, head of product at the unit. That includes hedge funds, family offices, RIAs and broker-dealers, he says.

This morning, I woke to news that overnight, Morgan Stanley became the first big bank to offer access to crypto to its investor clients – although indirectly, via Bitcoin funds:

The investment bank, a giant in wealth management with $4 trillion in client assets, told its financial advisors Wednesday in an internal memo that it is launching access to three funds that enable ownership of bitcoin

– Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds

Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds

The move, a significant step for the acceptance of bitcoin as an asset class, was made by Morgan Stanley after clients demanded exposure to the cryptocurrency.

This still comes with limits: ~ It’s only open to those clients who have USD 2 million+ with the firm ~ And crypto is limited to 2.5% of their total net worth

But to conclude, in any case, it’s a big step forward, given that

Goldman Sachs, JPMorgan Chase and Bank of America’s wealth management divisions do not currently allow their advisors to offer direct bitcoin investments.

PS: Mainstream ownership of crypto is now going to be inevitable. It’ll be interesting to see how long the appeal of Bitcoin as a hedge against other asset classes is going to remain – this lack of correlation was the primary reason financial advisors had wanted their clients to invest in crypto.

Today we revisit a Forbes article from late 2018 revisiting the state of some of 2017’s frenzy of initial coin offerings, or ICOs.

Where Did The Money Go? Inside the Big Crypto ICOs of 2017

In the last two years, nearly $20 billion has been raised through initial coin offerings. Here’s how some of the biggest have fared.

ICOs were designed as a way for crypto projects to raise money from the public in return for a share in the equity or in the profits of the company or – most commonly – simply get the project’s token early & profit of the supposed spike in value once the project launched.

And as the article says,

Unlike initial public offerings, or IPOs, they required no lawyers, bankers or regulatory approval and were more akin to Kickstarter-style crowdfunding, except funds were raised in cryptocurrency, typically bitcoin or ethereum.

As you might have guessed, dozens – hundreds, maybe – or projects raised money via ICOs. There were ads online, on hoardings, in magazines. Some ideas were quite wild:

Even in 2018, the majority of projects from less than a year ago were not doing well:

Of the 141 largest ICOs in 2017, 86% are trading below their listing price, and 30% have lost almost all their value, according to EY

But their founders were

Others shrewdly converted their crypto into fiat currency near the peak of the crypto bull market, locking in huge gains. Three of the 10 projects currently hold more in crypto and cash than what they originally raised

To conclude, I looked at the current price of the token OMG or OmiseGo, one of the first ‘billion dollar ICOs’. Billion dollar = what the total token pool value was, not how much was actually raised. OmiseGo was supposed to provider interoperability between reward programs and private currencies the world over. Now:

The ICO frenzy of 2017 and early 2018 doesn’t get any attention now, especially given the new bull run in the price of crypto, and mainstream interest. But it was wild. We may never know how many billions were raised and – mostly – pocketed.

The hedge fund manager Ray Dalio has long been skeptical about bitcoin. But in February, he wrote this note on his fund’s website.Some excerpts:

I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment.

And

Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held.

Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need.

In my opinion, most importantly, Dalio recognises that the biggest threat to Bitcoin is not an attack on the chain itself, but in governments restricting access to it in the first place:

I suspect that Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed…

for good logical reasons governments wanted control over money and they protected their abilities to have the only monies and credit within their borders.

and finally:

When I a) put myself in the shoes of government officials, b) see their actions, and c) hear what they say, it is hard for me to imagine that they would allow Bitcoin (or gold) to be an obviously better choice than the money and credit that they are producing.

This is in line with what we are seeing in China, India, Nigeria with regard to banning cryptocurrency.

The Wall Street Journal reported yesterday that the messaging app Telegram is having to issue debt to issue investors (ie take a loan). This is because a surge in its popularity means its running costs have gone up.

Now Telegram had already raised money – nearly USD 2 billion, in fact – from investors a couple of years ago by issuing them equity in the form of crypto tokens, typically called security tokens.

The general consensus was that it would raise even more money by a more public sale of tokens, which was hotly anticipated. (Security token offerings, or STOs, had started becoming rather popular in 2019.)

But The SEC came down hard on Telegram. In this case, during the lawsuit, it emerged that

Telegram had funded more than 90% of its operating costs using the investors’ cash.

The subsequent ruling made Telegram shut down the token offering and its whole TON blockchain programme, refund its customers’ money and pay a USD 18.5 million fine. That ruling put an end to the whole fledgling security tokens industry because the court forbade Telegram from raising money even from non-US entities

the court found that Telegram likely lacked the practical ability to prevent a foreign initial purchaser from reselling Grams [to US persons]. and

TON Blockchain would grant anonymity to Gram holders and also allowed third parties to build their own wallets

– Court confirms Telegram injunction covers non-US purchasers

Back to today. Not only did the courts deny people globally from participating and profiting from Telegram’s rise, Telegram itself needs to raise capital:

To repay its creditors, Telegram is selling five-year bonds that pay roughly 7% or 8% a year, the people briefed on the company’s plans said, with a sweetener that those who buy the bonds would have a preferred allocation at a 10% discount to the listing price if Telegram goes public.

So two things have happened here:

• ~ Telegram leadership has to take time off from actually building their product to raise (debt) capital
• ~ Once again, investors like you and me, whether US persons or not, have no easy way to participate even in this bond issuance, which is at attractive rates even by Indian standards. And lose out on the possibility of preferred allocation for eventual public listing

Instead, access is limited to select people like the actor Jared Leto, the Telegram founder’s friend:

Asked whether he had invested in Telegram’s bond offering, or would invest in an eventual initial public offering, Mr. Leto responded: “What’s the first rule of fight club?”

There are many arguments in favour of the SEC and courts for shutting down Telegram’s token issuance – a strong case that they violated private placement exemptions.

But what is undeniable is that

• ~ Telegram needs to raise cash it would otherwise have had
• ~ That investors missed out on buying early into the Telegram ecosystem then, and
• ~ That they’re all but certain to miss out on the bond issuance today

As bitcoin and cryptocurrency get more and more mainstream coverage, the narrative about its energy consumption is becoming stronger.

which also points out that

Critics say electric-car firm Tesla’s decision to invest heavily in Bitcoin undermines its environmental image.

Counter arguments are interesting, and once again make us question what money actually means. This very interesting Twitter thread from Jan 2021 argues in detail that bitcoin is vastly more efficient than other financial systems.

The quick summary of his points:

• ~ The energy required to mine bitcoin is captured in its price, just like anything else “Money, which is the representation of the work required to generate goods and services, can also be viewed as stored energy.”
• ~ Most bitcoin mining is produced with renewable energy (he cites an estimate of ~78%), since the marginal cost of such energy is often the cheapest
• ~ If bitcoin is an ‘energy battery’ like in the first point, then mining is a great way to store renewable energy that cannot immediately be consumed (e.g. extra windy days)
• ~ If anything, since the efficiency improvements in the hardware used to mine bitcoin are slowing, it is inevitable that the price has to rise
• ~ And finally, “Claiming that one usage of energy is more or less wasteful than another” is hypocritical – is watching ‘keeping up with the kardashians’ a waste of energy?

Aker of Norway is a conglomerate across fishing, construction and engineering – the group is 180 years old. Recently, the group got into the crypto space in an interesting way.

Aker set up Seetee, a new company within the group, with an initial capital of 500 million kroner, or about USD 58 million. Seetee will build and invest in bitcoin and blockchain tech.

UPDATE 1-Norway’s Aker ASA sets up bitcoin unit

Norway’s Aker ASA is establishing a new unit dedicated to investing in bitcoin and blockchain technology, the industrial holding company said on Monday.

The part that got the most press is that the company will place its entire liquid assets in bitcoin. As their website says right at the top,

Bitcoin is our treasury asset. Our first purchase was 1,170 BTC and our strategy is to hodl.

– Seetee

And most interesting to me was a wonderfully detailed letter from Seetee (and therefore Aker) to its shareholders. Twenty-three pages long, it describes their view of Bitcoin/cryptocurrency, macroeconomics, energy and finance.

Here is the link [PDF], and I recommend it highly to everyone looking for a sweeping but well-reasoned big-picture vision of bitcoin and cryptocurrency.

On Thursday, a humble JPG file created art history when it sold for USD 69 million, the third-highest price for an artwork by a living artist.

Beeple sold an NFT for $69 million

“I do view this as the next chapter of art history.”

This was a tokenized version of the image, a non-fungible token, usually abbreviated to NFT. Non-fungible tokens or NFTs was one of the first posts on this group, where I’d described them as

For me, the best way to understand the concept of NFTs is in terms of the Mona Lisa. We’ve all seen a picture of it. We’ve seen mockups, mashups, memes, animations and all kinds of variations of it. We can hang a print of it in our living room the exact dimensions as the original.

But there’s only one ‘real’ painting, and we all take the Louvre’s word that it’s the authentic one. In the case of something that is a non-fungible token, it’s the public blockchain that sets in stone the authenticity of one instance of it.

In the case of Nyan Cat, the animated ‘cat-with-pop-tart-body-zooming-leaving-a-rainbow-trail’ [that sold for over half a million dollars], I have a GIF of it in my camera roll, but only one person owns the ‘real’, ‘authentic’ Nyan Cat animation because there is only a single file ‘issued’ by the artist. And that authenticity can be verified by anyone.

Another notable thing is that the auction took place on a platform run by the auction house Christie’s, which is itself over 250 years old.

You can see the wallet address of the token in the screenshot.

PS: the artist, Mike Winkelmann aka Beeple, reacted suitably. Perhaps that tweet will be an NFT soon too.

Today: a story that exemplifies the mainstream attention bitcoin and cryptocurrency is now receiving

Here’s how it goes:

• ~ Founders of an asset management company start buying bitcoin
• ~ Clients notice, want to get into it as well ~ This gets to a point where they have to satisfy auditors and regulators
• ~ So they end up “building execution and custody tools from scratch and kicking off an entirely new line of revenue”
• ~ That gets spun into a whole new company

That company, New York Digital Investment Group (NYDIG) has now raised, independently, $100 million and manages custody of over 10,000 bitcoin for just its parent company – the asset manager. Its overall custody holdings are much larger.

This is in keeping with a trend we have explored in some recent posts – corporations and institutions increasingly parking their reserves in cryptocurrency. Turns out one company built a business around it & spun it off – three years ago!

The investment manager Mark Mobius of Mobius Capital Partners, in an interview with Bloomberg TV, made an interesting point yesterday:

“The real problem is in the tech sector… particularly those companies that have no earnings and that have been pushed up dramatically. And believe it or not, one of the things I fear is the decline in the bitcoin price. I think the relationship between bitcoin prices and the tech market is very close, so watch that indicator. I think bitcoin prices go down, the tech stocks are going to be hit very badly.”

Proponents of bitcoin as a value creator have pointed to its relatively low correlation with other asset classes as a big plus. However, Mobius makes the point that that isn’t necessarily true – tech stocks that have been responsible for a large part of the recent rise in the US stock markets are now correlated with bitcoin’s price.

I think part of it is the recent interest, some months old now, of marquee companies like Tesla buying bitcoin. We saw yesterday how that corporate buying of bitcoin has actually slightly reduced public availability of bitcoin on exchanges.

On this group we’ve seen a whole raft of corporations buy large amounts of bitcoin: Tesla and Square are well known but there are dozens of financial institutions too. As a result, the number of bitcoins in circulation is actually decreasing each month over the last year:

“institutions are buying up more bitcoin per month than the ones that are being mined, and there just isn’t enough for everybody.”

[the] pattern suggests that the ever-decreasing supply of bitcoin available to buy and sell might lead to a price surge as more institutional investors embrace the largest cryptocurrency as an investment.

– More Institutional Investors Jumping Into Bitcoin Leaves Less to Go Around, Data Shows

The article also notes a few factors:

• ~ One, that institutions will only buy from exchanges that are ‘clean’ ie who perform enough due diligence on customers that the crypto is unlikely to be from theft or ransom or money laundering. That puts pressure on such exchanges.
• ~ Two, that ‘retail’ investors – people like you and me – now have more avenues than ever to buy and sell bitcoin via Square, Paypal, Robinhood and a number of such apps. That increases the demand for ‘in circulation’ bitcoin
• ~ Finally, that unlike fiat currency, no one can just print bitcoin. There’s a pre-set rate at which new coins are – and will be – mined. That puts even more pressure from the supply side!