London: A recent study by E&Y in to the progress of ICOs from 2017 found over 30% of ICOs have lost almost all their value, while the vast majority of them are currently trading below their listing price. Only 25% of the companies that E&Y followed have a working product and just 10 of the cryptos accounted for 90% of the gains. This has led to lower trading volumes and it is being increasingly difficult for new ICOs to raise capital in the last couple of months.

What is surprising is the amount of interest from institutions building the Crypto infrastructure and launching new funds.

Nasdaq has been following Bitcoin bear market—will it continue to do so?

Source: Bloomberg

There has been a close correlation between how Nasdaq performed in 1994 and 2003, and Bitcoin from October 2018 to August 2018. Some commentators are asking: will Bitcoin prices now start to rise as Nasdaq did? Given the fact that many of the ICOs have been funded by companies issuing tokens in exchange for Bitcoin or Ether, if either Bitcoin or Ether now starts to rise, there will be a multiplier effect, helping to increase the overall market capitalisation of Crypto assets. This systematic risk and reliance on Bitcoin and Ether will reduce over time as we see different types of Crypto assets being launched, such as Stablecoins, digital loyalty tokens being added to exchanges, and security tokens.

Bitcoin price has come under pressure from the different versions ofBitcoin which have been created. The promise of a limited supply—21 million Bitcoins—has been undermined by a number of “hardforks” versions of Bitcoin.

1 Aug 2017—Bitcoin Cash

24 Oct 2017—Bitcoin Gold

24 Nov 2017—Bitcoin Diamond

12 Dec 2017—UnitedBitcoin

12 Dec 2017—Bitcoin X

12 Dec 2017—Super Bitcoin

28 Feb 2018—Bitcoin Private

There have also been understandable concerns surrounding the way the Bitcoin blockchain operates and the sheer amount of electricity power it consumes.

Evidence shows that the price of Ethereum has been under pressure, as companies that have been funded using Ethereum, have been selling Ethereum to pay for development and general running costs of their businesses.

Source: Santiment

Ethereum has been a victim of its own success, as the majority of ICOs has been launched using the ERC20 contract on the Ethereum blockchain. As these ICOs develop and start to become operational, users in many cases will need to be paying to use the Ethereum blockchain, so will this demand ought to help support the price of Ether. Alternatively, can the Ethereum blockchain be scaled to be able to support hundreds of different companies using this blockchain at the same time? Given the challenges the Ethereum blockchain faced and dramatic increase in the cost of carrying out transactions last year due to CryptoKittys, the jury is still out as to whether the Ethereum blockchain can cope.

Retail involvement reduces as institutions embrace cryptos

While the overall capitalisation of Crypto assets has fallen from over $800 billion to $230 billion, there has been a steady flow of announcements from multinational companies filing patents—Mastercard, Facebook, Google, Amazon—around blockchain technology. This institutional interest has been reinforced by stock exchanges in New York, London, Malta, Gibraltar, Boston, Switzerland and Singapore, which all indicate they are looking at launching regulated security exchanges, and so enabling the listing and then trading of security tokens. This is important for mutual funds and pension managers to be able to invest in Crypto assets in any significant manner, as they need to trade assets listed on recognised exchanges.

While it is well known that the UK is one of the leading FinTech countries, it is interesting to see the number of exchanges which are intending to launch in the UK. It is highly likely that we will see consolidation in the number of exchanges, as global banks look at buying Crypto exchanges as they fight to be part of the ecosystem.

Source:CountMarket Cap

Custody services are another key part of the infrastructure that institutional managers will require in order to trade Crypto assets.This may explain why Coinbase,Fidelity and Goldman’s have recently confirmed that they will be offering custody services.

Coinbase, I hear you say, what is it? Coinbase runs an exchange, which in 2017 generated $1 billion in revenue and despite the falls in Crypto prices,is expected to increase turnover to $1.3billion in 2018. It was valued in August 2017 at $1.6 billion and has recently sold another $300 million of equity to legendary tech savvy investors likeWellington Management, Andreessen Horowitz, Polychain, valuing Coinbase now at $8billion.

This has not been missed by alternative fund managers, who are setting up hedge and VC funds to get access to Crypto assets.

Source:CryptoFund research

Where is the evidence thatinstitutions are involved?

The following gives an indication of institutional interest and investment in blockchain.

Source: Morgan Stanley
Source: Techwireasia, ibtimes, forbes, coindesk

The investment in blockchain is not just limited to financial services.

Source: Businesswire, medium, Walmart, coindesk

The outlook

 The initial interest in Crypto assets was focused on raising capital, predominately for tech startups, many of whom wanted to fund ventures to develop the promise that Blockchain technology and a new decentralised world offered. Unfortunately with nearly $20billion being raised against a back drop of minimal regulation, a number of charlatans were drawn to the promise of making a “quick buck” and thus many of the 4,500 ICOs we have seen to date are destined to fail. However, Crypto assets have spurred interest in this New Asset class and blockchain technology as a whole, and there is increasing tangible evidence that real money is being spent on blockchain projects.They are also being used to replace loyalty schemes as marketers fight to attract and keep our attention.

Meanwhile, Crypto assets are now evolving to be used to offer fractional ownership in real assets bonds,private and quoted assets, property and even commodities e.g. gold bars, that JP Morgan are tokenising .

So, there is plenty of evidence of institutional interest in Blockchain and Crypto assets, and hopefully we will continue to see regulators being openminded. A good example isthe UK’s FCA sandbox initiative, which is the envy of other jurisdictions and now is being copied in certain countries. BUT blockchain technology is not a new paradigm, nor are crypto assets the answer to all our problems, although they do offer some very interesting new tools to reduce costs of doing business, greater transparency and security in our rapidly digitizing world.

 

Acknowledgement to Morgan Stanley Update: Bitcoin, Cryptocurrencies and Blockchain October 2018

Jonny Fry, CEO TeamBlockchain Ltd

Replies to “Where is the evidence of institutional interest in Blockchain and Crypto assets?”

  1. Really interesting review and I agree that the utility of DLT/Blockchain technology for specific use cases is going to be a game changer, but the question I have is around the amount of energy needed to do the hashing and whether this is at all scalable or sustainable in the longer term? Does anyone have any views on this?

  2. Hi Jonny.

    I’d argue that Blockchain has created a new paradigm.

    This is not difficult to demonstrate. It allows the creation of public infrastructure that needs no perimeter and so can cross all boundaries, connect all and challenge silos. It allows the creation of robust tokens without a (vulnerable) central authority that can do the same – and can be spent only once. This enables almost frictionless fractionalisation and mobilisation of assets – potentially trillions of dollars worth.

    We could not do these things before – and the implications are foundational. They change the ground rules, which now need to catch up.

    I’d also argue that the sandboxes, while a great thing that are rightly being copied around the world, are not the important innovation. The creation of an innovation unit in the FCA, from which they’ve flowed, is. Because it goes deeper. (But then I would ;-)). Prior to 2012 when I first suggested it, and challenged the government and regulator to create it, no one thought that this was something a regulator should or would concern themselves with. The whole idea was laughable!

    In my view there’s a long way to go yet too. Sandboxes will fail without consistent championing and support for innovation. What I had in mind back then went well beyond what’s been achieved so far. Which is why we are seeing the likes of Lichtenstein, Malta and Singapore are picking up the ball!

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