Credit Suisse Evaluates Blockchain and Cryptocurrencies As Investments; Makes ‘Bull’ Case

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.

 

Blockchain: A History Of Digital Ledgers At Their Zenith

 

Ledgers, the foundation of accounting, have been around since the creation of the world’s first coin.

Their medium has been clay, wooden tally sticks, stone, papyrus, and paper. Once computers became normalized, paper records were digitized, often by manual data entry.

These early digital ledgers mimicked the cataloging and accounting of the paper-based world, and it could be said that digitization has been applied more to the logistics of paper documents rather than their creation. Paper-based institutions remain the backbone of our society: money, seals, written signatures, bills, certificates and the use of double-entry bookkeeping.

Computing power and breakthroughs in cryptography, along with the discovery and use of some new and interesting algorithms, have allowed the creation of distributed ledgers.

In its simplest form, a distributed ledger is a database held and updated independently by each participant (or node) in a large network. The distribution is unique: records are not communicated to various nodes by a central authority but are instead independently constructed and held by every node. That is, every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to make certain the majority agree with the conclusions.

Once there is this consensus, the distributed ledger has been updated, and all nodes maintain their own identical copy of the ledger. This architecture allows for a new dexterity as a system of record that goes beyond being a simple database.

Distributed Ledgers are a dynamic form of media and have properties and capabilities that go far beyond static paper-based ledgers. The gist of these new kinds of relationships is that the cost of trust (heretofore provided by notaries, lawyers, banks, regulatory compliance officers, governments, etc…) is avoided by the architecture and qualities of distributed ledgers.

The invention of distributed ledgers represents a revolution in how information is gathered and communicated. It applies to both static data (a registry), and dynamic data (transactions). Distributed ledgers allow users to move beyond the simple custodianship of a database and divert energy to how we use, manipulate and extract value from databases — less about maintaining a database, more about managing a system of record.

Statistics Say You Should Get A Crypto Girlfriend and HODL!

In recent months, it’s been quite amazing to watch the good, the bad, and more recently, the ugly on bitcoin and various other Altcoins.

Here’s the thing: who exactly is riding these waves? When did they get in? More importantly – are they still avid market participants and are they making any money?

According to James Altucher, the “face of bitcoin,” something like 70% of Bitcoin is owned by men under 35. In our own research, we found in general, that statistic balloons when it comes to the entire crypto market. We found about 94% are male, with 82% under 35. Why does this make a difference?

Well, they say women are smarter than men (I’m male myself FYI) so it seems like the smart money, in this case, are doing other things with their money. But in reality, the real statistic to note is that if you take a general average, say 75% men, and throw in that they’re under 35 years of age…..well now we have quite the stat to mull over.

Let’s break that down.

All of these participants account for the majority of coin speculation. And coin speculation right now is the only thing coins exist for – trading. So we’re looking at young males virtually everywhere buying and selling cryptos in the hopes of making a small fortune.

Has it happened to them? Sure, maybe. But, considering we scoured NY and the web for a few moneymakers, we found 6 of 200 people in that statistic group we surveyed who actually made money and continue to do so. All 200 continue to trade, yes, but 6 are continuously ‘in the money’. That is 3%. Three. Most of you have heard the saying “5 percent of the population owns 90+ percent of the nation’s wealth. Well, that statistic gives you a window into why.

In this case, that statistic may be held tighter. Three percent(3%) in our test seems to own the bulk of the wealth in this crypto game. Considering they were male and under 35, that statistic is even wilder.

So, generally speaking, if you’re a young guy, the consensus is you should be trading cryptos. It may work out for you. Just remember those facts the next time you dream about buying that exotic car off of the digital coin fortune you intend on making. Your odds may be better with a career…..or better yet even a girlfriend with one. Lol!