Fundnel Spotlight 15 June 2020

Fundnel Spotlight — Blockchain and Cryptocurrency: Investing Fad or Immutable Infrastructure?

 

We explore what lies ahead in blockchain and cryptocurrency, and how investors can navigate its ever-evolving landscape.

Blockchain technology and digital assets are constantly evolving, and we are well on our way to see it reach its peak. With the proliferating introduction of different use cases for widespread adoption by businesses and consumers alike, it’s imperative we understand what lies ahead in this space. We explored these issues and more in our recent Blockchain & Cryptocurrency virtual panel discussion.

We kicked the event off with a keynote segment led by Dr. Xinshu Dong, Co-founder of RockX, who provided some insight into his work and how RockX strives for the mainstream adoption of digital assets. Watch his presentation below.

Benjamin Twoon, co-founder and COO at Fundnel, held an insightful virtual discussion with industry experts to discuss the outlook of blockchain technology and how we might see the digital assets space evolve.

The panellists are as follows:

Watch the recap above and check out some highlights from the conversation below.


1. Cryptocurrency as an Asset Class

Benjamin: Let’s start out with a big, and sometimes divisive, question that many people seem to have different answers to: is cryptocurrency considered an asset class? Why or why not?

Kenrick: It isn’t an asset class; the technology itself doesn’t make it so. It is more of a morphing of existing asset classes into a new asset form — equity being issued in a token form is still equity. Cryptocurrency is what its name suggests. It is still considered a currency.

2. Introducing Blockchain and Cryptocurrency into Investment Portfolios

Benjamin: When talking to our investors, the sentiment on the ground seems to show a keenness to integrate blockchain and crypto into their investment portfolios. In fact, Bitcoin's risk-adjusted returns, for August 2018 - August 2019, using the Sortino Ratio, were superior to S&P 500 and gold. How can investors reap returns from these assets? How similar or different should their approach be, versus more “traditional” forms of assets?

Kenrick: It’s important to draw a longer term time horizon when dealing with a nascent form of currency. Drawing a parallel to the internet and the early forms of digitising content, we are now digitising currency and it has to go through boom and bust cycles and find its product-market fit. Bitcoin is currently the 35th largest currency in the world and still has potential to grow. It has many properties; it’s liquid, divisible, easily stored and transferable. A buy-and-hold strategy is therefore advised. At LuneX, we look for opportunities to invest in the startups building this ecosystem (as opposed to the currencies themselves).

3. The Security and Safety of Digital Assets

Benjamin: A secure and safe infrastructure has to be put in place to give investors peace of mind, and confidence in investing on a platform like MAX or RockX. What are your thoughts around the wave of hacks in 2019 and how does your platform guard against the risk of such malicious attacks?

Zhuling: There are three main types of hacking risks

  • Risk of your assets with you being hacked. In this scenario, the rights of ownership of the assets lie with you, but it also comes with obligations that you’re solely responsible for the security of the assets. If you forget your password, the assets can’t be retrieved. Over 1 million Bitcoins are “lost” due to early miners losing their password! On this note, aelf is working on a wallet that can store multiple passwords and complicated keys.
  • Risk of your assets being hacked while in custody of a third party, such as an exchange or custodian. This is the biggest risk within the whole ecosystem.
  • Risk of protocol being hacked. To prevent 51% hacks, any protocol needs to go through a very careful bootstrapping process.

Alex: As an online platform exposed to the Internet, we are prone to hacks. How can we mitigate this? We try not to have a single point of failure, which is typically the hot wallet. Multi-signature wallets are much more secure in this aspect, because multiple parties have to sign on a transaction for it to be initiated. Threshold signatures allow you to break a single point of failure into multiple roles; you have to jointly calculate the public group key to sign the transaction off.

Benjamin: What are some ways to manage the volatility that comes with investing in cryptocurrency and/or ICOs/STOs? What steps can investors take to mitigate and reduce the risks involved?

Kenrick: You have to be comfortable with volatility — investing in cryptocurrency is not for the faint of heart! Your net worth can fluctuate dramatically overnight, but this volatility also presents opportunity.

  • Diversification across a number of different funds: Bitcoin as a market beta, surrounded by other assets with higher beta.
  • Simple options strategy: Even with a very wide band of confidence, you can sell covered costs and yield significant profits if you manage your assets relatively conservatively.
  • Invest in startups: As a VC, we focus on infrastructure that is needed, regardless of which one wins. Can we invest in companies that are able to pivot or power different parts of the ecosystem? Invest in companies that are agnostic and not tied to one particular protocol.

Zhuling: Different tokens have different value propositions. Which one do you really believe in?

  • Tech coin: A globally distributed network, e.g. Bitcoin, Ethereum
  • Community coin: A currency that is built on purpose. If the Internet groups people based on their beliefs, and the community enhances it, there might be a coin that emerges in this way to become a real currency.
  • Business token: A blockchain application that is trying to solve a business problem and create some value out of it.
It’s also important to note that the intentions and outcomes of traders and investors are vastly different, especially in the long term horizon.

Questions from the audience

Are cryptocurrencies stored in hard wallets safer than exchanges? Should we hold multiple wallets to hedge against risk?

Dr Xinshu: It’s always good not to put all the eggs in the same basket. Hard wallets are safe from remote attacks due to it being a physical token. The risk then lies with us; as users, we may lose our wallets or forget our passwords. Understandably, there is also concern about security with centralised solutions. Increasingly, with large crypto exchanges, the risk has been reduced, especially when they allocate funding to recover cyber security hacks. The key is to diversify the storage of your crypto assets!

Will central banks issue their own cryptocurrencies in the future?

Alex: I foresee that in China’s future. With crypto, there is a high level of user convenience as compared to how it is now. The funds in your Alipay wallet are still locked and can’t be transferred to Wechat Pay, for example. It makes sense for crypto in this case, to go outside the borders of China, for manners of commerce, loans, and so on. Take the recent $2 trillion stimulus spending in the US payments. The payout was largely hindered due to logistical hiccups and individuals not having bank accounts. With crypto, each of us has an account with the central bank, making for a more efficient way to execute monetary policy.  

Zhuling: Digital currency in China is only used across commercial banks to replace issuance of new currencies, therefore reducing the cost of printing fiat and giving way to much faster transaction clearance rates in banks. At the moment, regular people don’t have access to this and it therefore isn’t a huge disruption on the infrastructure side as far as retail customers are concerned. But there is a possibility of offshore digital Yuan surrounding the same blockchain, serving as an effort for internationalisation of R&D in a much more efficient manner.


This dialogue is part of the Fundnel Spotlight series, where we share insights into the growth and investment potential of deeptech sectors.

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