Credit Suisse hosted an afternoon of panels to discuss the emerging Blockchain and cryptocurrency industry. Panelists included CEOs of Blockchain startups, cryptocurrency investment professional, VC investors, CS employees heading up Blockchain strategies and representatives from other companies involved in Blockchain initiatives. We provide high-level views and takeaways.
The investment infrastructure is emerging: While investing in cryptocurrencies remains complicated for institutional investors, private investment firms are increasingly putting resources toward finding ways to provide exposure to the industry, while new funds are emerging that are entirely dedicated to the space. Regulation remains a key obstacle as – without a clear legal framework – existing service providers are generally unwilling to offer the liquidity, leverage and custody services needed to attract larger investment. Over the next ~5 years, it is expected that ICOs will shift from the largely unregulated “utility tokens” of today to SEC-regulated “security tokens”, which currently represent less than 1% of the cryptocurrency market cap. This, along with a firmer regulatory framework, could catalyze more broad-based investment in the space.
Cryptos promise disruption, but losers and timeline unclear: Broadly speaking, Blockchain technology has the potential to disrupt many models, particularly those built around processing transactions (all types of asset transactions) and gathering and selling data. Yet when asked, panelists did not have high-conviction views on specific companies or industries soon to be disrupted. One VC panelist viewed cryptos as a long-term hedge on internet stocks. Another said that while credit card networks are ripe for disruption from crypto models, he had no view on when or exactly how this would happen. One panelist cautioned not all products work better in a decentralized model and hence not every centralized system will be disrupted. Another made the case that mass consumer adoption of crypto businesses will follow two trends, consumer dissatisfaction with centralized models and the shift in demographics. As centralized data storage models experience catastrophic breaches and the “digital native” population grows larger, this last point rings true to us.
Interesting Blockchain Observations:
- Bitcoin’s combined computing power is greater than that of the combined FAANG stocks. This means the technology has quietly led to the creation of a massive decentralized network that no individual enterprise would ever have the capital to build on its own.
- Etherium has represented the best technology investment of all time.
- Blockchain can provide massive system redundancy for enterprises. Enabling more efficient systems upgrade and eliminating central points of failure.
- Private vs. public blockchains remains a key area of debate.
- Governments may build private blockchains, which then essentially become thepublic blockchain for that country (i.e. China). Initial Coin Offerings (ICOs)
- Weaknesses in ICO applications include complications in writing code for smart contracts that isn’t hackable.
- ICOs will convert the internet into the world’s largest stock market.
- Consumer adoption of ICO products will happen over time as consumers see value in alternative non-censurable decentralized products. Demographic shift will also ease the way for cryptocurrencies as acceptable forms of digital assets/currencies.
- ICOs still have not provided any reliable, sustainable business models with recurring revenue streams.
- Some ICOs clearly are scams, but some have very reputable founders and compelling models that make technical sense.
- Most ICOs are “utility tokens” with little regulation. Over time it is expected that ICOs will start offering “security tokens”. Security tokens represent an asset and are regulated as securities by the SEC. This requires more cost to complete the ICO but will attract more investors given the relative regulatory surety. This will make ICO companies look much more like publicly traded companies, with regular disclosure requirements.
- Bitcoin and cryptocurrency as an asset class
- Bitcoin should be viewed as digital gold. Gold was just as volatile in the early days.
- If Bitcoin attains 5% of gold’s market value, it implies $25k-$30k price.
- The venture capital perspective is to take 10-yr horizon on an asset class that has enormous disruptive potential and enables business models that can’t exist otherwise.
- In the early 90s, investors struggled to transfer existing software/hardware valuation models to emerging internet companies. Blockchain companies represent a similar paradigm shift.
- There is $200t worth of investable assets in the world. If crypto gains 1% of this share it represents a $2t market relative the current $250b market.
- Commentary that Bitcoin is a fraud is to be expected from incumbents in industries that the technology threatens.
- Weak points in investment architecture include lack of reliable, scalable exchanges, low liquidity, lack of leverage, and lack of custody models that meet the requirement of institutional investors. For investors, tax and regulatory implications are unclear, as well as unique events like currency forks.
- Selling pressure in the space is low because cryptos are hard to short, large holders have long-term horizon, the US will likely not ban them and they have disruptive potential.
- No evidence Bitcoin trading is being used much for the purchase of goods/services. After speculating, next most likely use cases include remittances and B2B payments.