In the article The Trade Of The Decade: Betting On Bitcoin, we have argued that investing in Bitcoin is a winning strategy. The recent macroeconomic conditions further support the argument for investing in digital assets relative to fiat currencies. The unprecedented global liquidity increase across all major currencies starting with the US dollar raises the question of the long term viability of fiat currencies. In an attempt to stem off the economic risks of the coronavirus pandemic and the subsequent global recession, all major central banks and governments have engaged in a coordinated effort to print money and buy assets. The sheer volume of the 2020 liquidity infusion has never been seen before. In comparison, the Federal Reserve expanded its balance sheet by about $1.3 trillion in six months in 2008, which corresponded to an increase from 6% of US GDP to 15% at the peak. However, this time around the Fed increased its balance sheet by almost $3 trillion in only three months, which equates to an increase from 18% of US GDP to 33%. Central Banks have even ventured into new ways of stimulus buying corporate credit and equities, assets that have traditionally been left to market forces. The Fed took a page out of the European Central Bank’s book and announced that it would buy both investment grade and junk bond ETFs. Afterward, the Fed decided to create its own index of bonds which gives the central bank power to purchase more bonds that are outside of the ETF market — some of which are not even American companies. Here are the top constituents of this index:
Therefore alternative assets that are both unlevered and of limited supply such as gold and bitcoin appreciated dramatically and will likely continue to appreciate. In April last year, we predicted that Gold Will Outperform Both Equities and Bonds and indeed, gold has appreciated spectacularly reaching $2080 and is likely to continue to appreciate.
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Bitcoin, however, despite our prediction and the macroeconomic backdrop has not appreciated as expected and has maintained a correlation to equities.
To understand what is going on and further explore the future of digital assets, I had a conversation with Mike Kessler, the CEO of Tokenise. Mike has more than 20 years of experience in investment banking, hedge funds, compliance, private equity, and stock exchange solutions using blockchain technology and can provide a holistic analysis of digital assets.
Stefanova: Mike, why do you think bitcoin is not appreciating as much as expected?
Kessler: Bitcoin has appreciated by 24% since March 2020. Yet in my view, Bitcoin has not reached its potential price. One of the major difficulties in crypto is the lack of liquidity. A relatively small group of holders can manipulate the price of bitcoin and create huge volatility. Second, the lack of mature, safe, and transparent infrastructure to trade bitcoin for both retail and institutional investors is lacking, deterring many from entering the market. Finally, the lack of a clear and consistent regulatory approach adds additional confusion.
Stefanova: Historically, we have compared the disruptive innovation from cryptocurrencies and digital assets to the other disruptive technologies. What analogies can we draw and what lessons can we glimpse from other disruptive technologies?
Kessler: I see similarities between the rise of cryptocurrencies and the evolution of the smartphone, from a fairly mundane mobile phone to a device more powerful than the technology that first put a man on the moon. A whole new set of business models and unimaginable services appeared as a result. Similarly, cryptocurrencies created a new way of storing data on a distributed ledger which has the potential to democratize access to assets previously only available to the economic elite.
Stefanova: Where are we in the development of digital assets?
Kessler: The market for digital assets is maturing. Technology innovation and creative business models are not enough. We also need the right regulatory framework. The ICO market is only now attracting the attention of the regulators who are putting in place laws to ensure investors are protected. Before that, there was no regulation and early-adaptors raised hundreds of millions of dollars with just a crazy idea in their head. 95% of those never came to fruition.
I believe that the future development of digital assets is being able to offer regulated securities offerings through a regulated platform. Some major players, serious credentials, and capital are entering the market. For example, Fidelity has amassed over $13 billion AUM in digital asset custody adding legitimacy and security to space. Goldman Sachs
GS , the Wall Street firm that is known for making bold innovation moves, showed once again its commitment to the digital asset space by appointing Matthew McDermott, a banking veteran, as the new head of digital assets. More big players are likely to follow demonstrating that digital assets are not a fad but a transformative business model that has the potential to disrupt the industry.
Stefanova: In what ways do you believe digital assets can disrupt traditional finance?
Kessler: I think the future of digital assets is huge, raising capital and investing in financial securities is being transformed by the tokenization of assets. All traditional assets including equity shares, bonds, funds, gold, real estate making these assets more easily accessible and affordable to a wider set of investors.
Even more appealing is the ability to tokenize/digitize less common securities including fractional ownership of physical assets (e.g. buildings, aircraft, wine, etc..) or tradable rights to income through royalties (e.g. music royalties, intellectual property, mining rights, subscriptions, etc…).
As an example, Barcelona FC through people like Lionel Messi (who alone has 159m followers on social media). If Barcelona FC was to create a new company and put certain earnings into it and wanted to raise $500m and give out say 20% of future profits to all those people that bought a piece of the 20%, it would generate a pool of millions of people that might go onto invest in other securities listed on an exchange. As Barcelona FC’s public perception, as well as earnings, rose and fell, so would the value of the token on the exchange. The investors would still receive their 20% and would be able to actively trade their Barcelona FC Token on a secondary market whilst still receiving a right to income.
If you then start looking at this aspect alone the potential market size is huge. Consider the number of musicians, actors, bloggers, influencers, YouTubers, sports personalities, e-gamers, etc. Not to mention the number of business personalities that could be securitized. The billions of people that support a ‘celebrity character’ around the world could one day have the ability to own a little slice of their future income.
What if you had spotted Lewis Hamilton when he was on the go-karting circuits, or Rihanna when she was barely known. What if you had invested in Game of Thrones when it was just a TV pilot. All these possibilities and countless more are potentials to create securitization vehicles.
The security token market has all the benefits of blockchain technology while maintaining the protection of regulated financial services markets. This enables companies to raise capital and give people access to their securities through a trusted platform.
Further advantages can include:
· The reduction of intermediaries
· Lower costs than traditional listings on stock exchanges
· Ability to trade multiple asset classes as there are increased assets available to suit both issuer and investor needs
· Reduced friction and ease of use due to technology
· Publicly traded and therefore can lead to increased exposure
Stefanova: How does Tokenise fit within that vision?
Kessler: At Tokenise, a regulated entity, addresses problems in traditional finance marketplaces, including everything market access to speed of settlement. We champion the small to medium sector and give them access to the capital markets at a fraction of the price of a traditional listing, whilst still adhering to the same strict standards. We are financially inclusive and allow anyone to invest any amount of money, not only someone who has millions of dollars.
Our vision is to be a global stock exchange whereby we are inclusive of all investors. We desire to give people the ability to trade securities that are far more applicable than the previously available ones and at a fraction of the cost. For those that are listing on our exchange, we are sector and industry agnostic, and we can support listings from companies all over the world. So if someone wants to list on our exchange we can help them through the entire process along with our member corporate advisers.
Stefanova: What differentiates you from the competition?
Kessler: We can list a multitude of security types including:
· Royalties, a perpetual right to income generated by the underlying asset through profits or revenue
· Fractional ownership, direct ownership of a fraction of a physical asset, e.g. real estate, an oil tanker or a racehorse
· Private equity, investment in private companies
· Bonds, fixed income securities that represent a loan
· Commodities, raw materials, or primary agricultural products, oil, metals, hemp, etc.
· Equity, beneficial ownership in a company
· Funds, capital used to collectively purchase securities
We are also working with the regulators to enable retail investors to participate in our exchange, as well as devising tools to assist issuers to give access to a more streamlined-efficient listing process including the ability to build a prospectus. We fully understand the regulatory framework and we expect to go global with regulated entities and partners from around the world. We have on our board the ex-director of the London Stock Exchange and Head of the AIM market, as well as access to big data and social media experts.