State of the Crypto Union: Where we are now, and where we go from here
2017 was a watershed year for cryptocurrency investing. Investors who put money into ICOs saw returns of up to 50,000 percent. If you invested in every token sale last year — scams included — you’d be up a staggering 1,320 percent. Where does this put us nearly halfway into 2018?
In the first three months of the year, we saw Bitcoin and Ethereum nosedive. While the “experts” have prognosticated expansively about the “Bitcoin bubble” or the crypto crash, frankly the explanation to me feels more straightforward and obvious; It’s one I’ve myself opined on in several interviews on the street, CNN and a few other lowly publications — a lone rational contrarian to the maelstrom of opinion. A lot of people, particularly in the US, made a lot of money in 2017 by trading, and those people had to pay taxes on their trades. Combine this with an array of tax code changes both here and abroad (in the U.S., for example, the rules around 1031 exchanges were clarified NOT to pertain to blockchain assets) and reduced personal, cap gains, and corporate tax rates, plus changes in offshore holdings. The market behaved in what to me was a perfectly rational manner. In November and December, just as your uncles and aunts were hearing about cryptocurrencies for the first time from your annoying cousin with the new Lambo and deciding to buy, the largest holders of this new asset class were waiting for the end of the tax year to take advantage of a significant 10–20% savings in rates. The result? A short-term spike in price based on steady and slightly increasing demand and limited supply. This irrationality continued, causing chaos and ripple-on effects until the middle of April, when the price bounced from ~$5k for Bitcoin back to ~$10k where it is today — the same price as before, in a perfect parabolic.
Regulatory uncertainty also caused some of the crypto markets’ decline; as most of 2013–2017 was essentially a free-for-all. International & U.S. regulators have begun to clarify their stance on cryptocurrencies and ICOs. This has led to a leveling off of utility token offerings and the rise of security token offerings, which will be a key trend to watch in 2018. My firm, ARK, is particularly focused on this new asset class.
Emerging regulatory clarity has initiated a maturation in the cryptocurrency ecosystem. And with this regulatory guidance has come institutional capital, knocking at the door waiting to enter, with only a few things hold it back. Rules around custody for U.S.-registered entities are slightly difficult and a dearth of compliant platforms and systems are the only things holding the “Herd” from rushing in (watch Mike Novogratz, it’s pretty good). In Q2, this puts us right at the forefront of an unprecedented amount of institutional money pouring into crypto.
Just a year and a half ago, a man and a woman in a basement could draft and post a white paper with the word “cryptocurrency” and some gibberish around “the future of data” and raise millions, sometimes hundreds of millions, but those days are now over. Professional investors, veteran entrepreneurs, and mature governance and metrics are beginning to emerge. Today, entrepreneurs need to think critically about how their business interacts with the blockchain, and how their token fits into their overall business model. At ARK Fund, we constantly ask the question: Why blockchain, why now? The bar has been raised, and that’s a good thing.
Today, there are approximately 400–600 extremely high-net-worth crypto investors, and about ~5,000 more who have built some significant crypto wealth. When compared to the mainstream investment community, access to capital for blockchain projects is fairly limited. One of our goals at ARK is to harness this zeitgeist and build the infrastructure, tools and enablers to create and engage the next 100,000 investors and bring millions of participants into the blockchain ecosystem.
The influx of creativity, entrepreneurs and capital will benefit not only Bitcoin and Ethereum, but other protocols like EOS, Native, BlockV, Hashgraph and MZ, as well as security protocols like MetaCert and Dapps like Guardian Circle.
Other projects like Trading Gene, Blockchain Terminal and SALT facilitate the growth of institutional investors to enter this new asset class while remaining compliant within respective regulatory frameworks.
One of our recent investment and advisory clients, Blockchain Terminal, provides a framework that adheres to the strict compliance requirements through its ComplianceGuard technology, allowing investors to view information on cryptocurrencies in a compliance-vetted environment. As an open system, it also features an ecosystem for app developers to create tools for crypto and traditional assets that meet the most current regulatory requirements.
SALT Lending is an exciting project that essentially provides traditional lending secured by non-traditional (crypto) collateral. With SALT’s platform, crypto asset holders can leverage their holdings as collateral for cash loans, and investors can lend against a high-growth asset class through a fully collateralized debt vehicle.
Ultimately, this rise of institutional investment in crypto represents huge potential for blockchain projects like Blockchain Terminal and SALT that mature with the market.
As 2018 marches on, crypto as an asset class will reach unprecedented heights as the blockchain industry collectively welcomes thoughtful regulation and institutional investment. As we usher in “Crypto 2.0” (or Crypto 5.0 for those of us old-timers), we’ll see new funding help research, develop, and deploy blockchain-based solutions in medicine, security, privacy, identity and much more.