Bitcoin just the tip of blockchain iceberg

The price of bitcoin has been a hot topic for the financial press, and indeed mainstream media as a whole, over the past few months. Headlines were written when the virtual currency broke through the $10,000 barrier late last year, again when it reached its record highs just shy of $20,000, while some sounded the death knell when its value subsequently fell by almost a half.

Indeed, all the media’s coverage of cryptocurrencies is this noise about the price of bitcoin, says Ryan Radolff, co-founder and principal of CoinShares, a crypto asset manager. “Bitcoin appears to be floating in digital space in a raw state of speculation, greed and mania.”

The CoinShares platform comprises two exchange traded bitcoin notes, two exchange traded ether notes – these ETPs now comprise more than $350M of assets less than four months post launch – and two funds, all of which it claims were first of their kind products in their respective categories. Further launches are in the pipeline.

Although the term “mania” can be fairly applied to explosion in the value of the virtual currency,  “this is not a tulip bubble”, he insists, referring to the rapid rise and dramatic fall in the price of tulip bulbs in the 17^th century. “Rather, it is an 18^th century railroad bubble, or a 1999 dotcom bubble. We will see the Rockefellers with their railroads funning across the US, we will see the Googles and the Amazons emerge. Today this is about the emergence of the blockchain, and bitcoin is just the first iteration of that.”

But all the focus on the price of bitcoin, and other crypto currencies such as Ethereum and Ripple, is missing the point, he asserts. “It no longer matters if you believe in bitcoin or not. It is a newsflash, it doesn’t matter.”

But sitting behind this bitcoin bubble is the emergence of a crypto economy which is set to transform the global economy, believes Mr Radolff, reeling off an impressive list of statistics to demonstrate just how established this already is.

“Today there are $24bn of transactional volume occurring in the bitcoin network every week. There are 1600 crypto currencies, 40 with over a billion dollars in market cap. There are 183 exchanges that exist, and 27m users and they are growing by 600,000 people a day. There are 13.3m Coinbase accounts while the largest crypto exchange in the world, Binance, equals the daily volume of the entire London Stock Exchange.”

And all of this activity is going on without a single bank being involved, he explains. Rather this crypto economy appears to be decoupling from the “legacy” financial system, and evolving into its own ecosystem

“If this was 1999 and you had a dotcom company listing on the NASDAQ you would have HSBC, Citi, Barclays and the rest lined up around the block to service that company. But today these companies are raising huge amounts of money but there isn’t a single bank calling them.”

Mr Radolff believes there are huge opportunities for companies able to capture and service this market in a regulated, compliant way.

“We need regulation in this space, we need consumer protection laws, and we will get all that, but we are not there yet.”

Differing approaches

In many countries, politicians have also expressed concerns about the cryptocurrency craze, and have warned about the dangers of initial coin offerings (ICOs), where rather than a start-up company issuing debt or raising equity capital, they sell tokens. Some, such as China and Korea, have banned ICOs, but Switzerland is heading in the other direction, and has ambitions to become “the crypto-nation”, according to economics minister Johann Schneider-Ammann. Of the 10 biggest proposed ICOs, four have used the country as a base, according to PwC, although the Swiss are looking into just how they should approach regulation in this area.

“We think there is huge potential - but the market is not as disciplined as we want,” Jörg Gasser, state secretary at the Swiss finance ministry, told the Financial Times recently. “We want it [the ICO market] to prosper but without compromising standards or the integrity of our financial markets.”

Money to be made

If the banks are proving slow out of the blocks when it comes to the crypto economy, the same cannot be said for the hedge fund industry.

“Investor interest in funds offering exposure to blockchain technologies and crypto currencies has surged in recent months as these innovations continue to move towards the mainstream and generate compelling opportunities for investors, portfolio managers, traders and other market participants,” says Ken Heinz, president of Hedge Fund Research.

In December, HFR announced the launch of two new indices, the Blockchain Composite Index and the Cyrptocurrency Index, designed to capture the performance of hedge funds investing in this space.

Although this is a small group of funds at present, numbering around 20 or so and with relatively small assets under management, Mr Heinz expects these numbers to grow in the near future.

“There is a lot of talk about funds that are planning to launch. We wanted to have the indices in place to see how this thing progresses.”