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Year of the Cryptocoin

Just where is the cryptocurrency story going?

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2018 Year of the Cryptocoin: Is it a boom, a bubble, or a bust-up waiting to happen? Our roundtable talks it over.

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''I believe in the power of crowdfunding, even if it is a donation with no recourse. Why should entrepreneurship be in the hands of so few? Truthfully, it should be in the hands of society.'' - Jamie Lee

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''Initial Coin Offerings are a lot cheaper, and they do not dilute shareholding.'' - Darren Chua

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''We believe that a diversity of products are going to serve the crypto space.'' - Dustin Lau

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''The current limiting factor for mass adoption is the transaction speed of the blockchain. Both the Bitcoin and Ethereum networks will see upgrades by 10 to 100 times in 2018.'' - Kenneth Tan

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''Before anyone invests in an ICO, they should at least know what blockchain is, before looking at the price or returns. The disconnect is when aunties and uncles start touching this.'' - Anson Zeall

IF YOU'VE heard of SpankChain, chances are you are an avid follower of cryptocurrency trends or a keen patron of the adult industry. SpankChain - a blockchain-based service built to provide adult entertainers with the infrastructure to create and run their own streaming or content distribution sites - is part of the latest craze of adult ventures launching their own initial coin offerings (ICOs). And many of them aren't doing half bad. SpankChain's token, Spank, was trading at some US$0.40 on Friday, nearly 10 times its price since the company's ICO in December.

Cryptocurrency (crypto for short) is clearly all the vogue now - myriads of companies have started to launch ICOs, through which they issue their own digital tokens that can be bought by backers using crypto. Such tokens entitle backers to monetary or non-monetary rewards. For the unacquainted, crypto is digital money (such as Ethereum) that is used as a means of exchange, and can be transferred between peers without a middleman, such as a bank. It is decentralised: controlled not by a central government but by users and an algorithm. Transactions are recorded on a digital ledger, called a blockchain. Yet, even as crypto investing and ICOs gain traction, there remain die-hard sceptics. The Business Times gathered six individuals to debate all things crypto. Whoever you agree with, 2018 is going to be the Year of the Crypto.

ROUNDTABLE PARTICIPANTS

  • Anson Zeall, chairman of the Association of Cryptocurrency Enterprises and Startups, Singapore (Access)
  • Darren Chua, co-founder of fintech investment and consulting company, Fairway Resources
  • Doubting Thomas, an anonymous male who works in finance and a general sceptic of crypto
  • Dustin Lau, chief experience officer at Kommerce, a platform that uses blockchain to conduct trade finance in Africa
  • Jamie Lee, co-founder of Viola.AI, a Lunch Actually dating platform built on the Ethereum blockchain
  • Kenneth Tan, co-founder of crypto crowdfunding platform, FundYourselfNow

Q: Is 2018 the year of the cryptocurrency? Will we see cryptocoins for everything?

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Market voices on:

Kenneth: Yes, 2018 is definitely the year where everything goes crypto. Because it's much easier today to create coins: we are seeing all sort of coins, ranging from serious ones such as Bitcoin Cash, which is a fork of Bitcoin, to funny ones such as Useless Ethereum Token (UET). Recently, someone bought a digital cat based on the Ethereum blockchain (CryptoKitties) for over US$100,000.

DT: I'm neutral on this. I suspect a huge part of crypto's rise in 2017 is due to cheap liquidity in the market and investors' obsession with the search for yield. If the global economy continues to strengthen and the major central banks proceed on their tightening path, the squeeze in liquidity and availability of other safer investments which provide good-enough returns will cause the crypto craze to die down a little.

I liken crypto investing to venture capital (VC) investing. When equity returns are decent, investors have less incentive to take on riskier bets, since they would already have met their required returns. This is also the reason why VC and private equity valuations have become stretched. The opposite will be true if the major central banks hold back on their monetary policy tightening.

Kenneth: That's a valid viewpoint. Due to the zero per cent interest rate, there has been a lot of hot money since the last financial crisis. That's how the equity and property markets got so hot - all the cheap money was put into the system. That said, I doubt any asset class comes close to crypto. Bitcoin gave a 13x return last year. Equity gave at least 20 per cent returns last year, but even its good performance didn't stop Bitcoin from exploding. The returns on the other asset classes need to go up by a lot for the crypto market to cool down.

Darren: Actually, the crypto trend started in mid-2017. We are already seeing cryptocoins for a plethora of products and services. In recent months, I have been to Fintech Week (in Hong Kong), Fintech Festival 2017 (Singapore) and BlockShow 2017 (Singapore). While just walking briskly through the event halls, I could see over 100 Initial Coin Offerings (ICOs) and fintech firms pitching their coins and ideas. The firms' energy and passion, and their ideas, are mindblowing. I see 2018 being the year that ICOs will move more into the mainstream.

Anson: As representing the head of Access (the Association of Cryptocurrency Enterprises and Startups, Singapore), we do not speculate on price, hence we don't know if it's a craze or not. All we know is that our members are putting in huge efforts in the innovation space with blockchain technology.

Jamie: The industry seems to be growing exponentially and spreading to many new industries and generating many new innovations and ideas. It does feel very similar to dot-com's early days, but I'm not sure if 2018 will be the peak or just the middle of the crypto story or trend.

Initial Coin Offerings (ICOs): Innovation or scam?

Anson: Before anyone invests in an ICO, they should at least know what blockchain is, before looking at the price or returns. The disconnect is when aunties and uncles start touching this. More education is needed. Access is working with NTUC to hold classes on the basics of crypto.

Ken: From the entrepreneur's point of view, ICOs are an innovation tool. It is a process that for the first time, allows companies to reach out to a global pool of investors at a very low cost.

This is relative to bank loans, peer-to-peer lending and selling equity to VCs - all of which are quite expensive means of raising funds.

Darren: Compared to IPOs (Initial Public Offerings), ICOs are a more nimble way to raise money. The time and amount of preparation needed for an ICO is much less than that for an IPO, which is a long-drawn process that can take 1.5 years and cost a lot of money. ICOs are a lot cheaper, and they do not dilute shareholding. You will need a business plan, a whitepaper that is hopefully supported by lawyers, and some marketing.

Kenneth: Think of ICOs as a sort of prepaid service. You get customers early to fund your project, and they get a product or service in return. As a company, you are therefore actually getting customers, not just fundraisers. ICOs, as an innovation, will drive entrepreneurship.

Jamie: Yes, think of ICOs as akin to Kickstarter. I'm a huge Kickstarter fan, having supported 170 projects, only two of which have failed. In the ICO space, the failure rate is going to be higher than two out of 170. But even when projects fail, I have taken the money and done something to improve the ecosystem. I believe in the power of crowdfunding, even if it is a donation with no recourse. Why should entrepreneurship be in the hands of so few? Truthfully, it should be in the hands of society.

DT: Honestly, I don't see the point of ICOs. Investors of ICOs need to understand that the fundamentals of the company currently have a low correlation with the price of the company's ICO. For the correlation to be high, companies that issue ICOs need to ensure that the services or goods delivered by them are paid for only by the company's own tokens. That, in my view, is not going to happen any time soon. Unless the company has a very compelling product, I wouldn't go through the hassle of purchasing the company's tokens just to pay for their item.

Kenneth: In fact, we are already doing that every day. We buy WeChat credits to give as hong baos. We buy virtual gifts to give to live-streamers. Virtual currency is just an extension of e-money. Companies can also, to some extent, dictate consumer behaviour.

If it is beneficial for the company to issue and use their own tokens, and they have a good product, I don't see why they can't dictate to customers to use their tokens.

DT: Also, with crypto prices being so volatile, how are the companies going to price their service or product? If they price it at one token now, and that value fluctuates so much throughout the day, how are they going to do their accounting?

Kenneth: Service prices are usually denominated in the US dollar equivalent, so even if token prices fluctuate, this is a non-issue.

How can we tell the good ICO projects from the bad?

Anson: The ICO space usually comprises very small, innovative companies. The good tokens are not only investment vehicles, but tools to make things. To determine if a project is worth investing in, look at the founders and see if they can execute. Ultimately, the question to ask is: Are they solving a problem?

Darren: The Big Boys - listed companies among them - are now also looking at ICOs as an alternative way of fundraising, though some just out of the "fear of missing out" (FOMO). How can we differentiate FOMO from the really innovative companies? Look at the founders, assets business plan and whitepaper. If it's a large corporation, look at who are leading the project. At the end of the day, we still need a responsible issuer.

Kenneth: I can say what not to invest in: ICOs that promise 100x returns, with founders whose profiles cannot be verified on LinkedIn, or who are all from that one same country. A good question to ask is: Are the founders being too greedy? Returns are ultimately tied to how greedy your founders are.

Will Bitcoin replace a large fraction of fiat money? Will the demand for Bitcoin one day have the same velocity as that for money?

DT: No. It is not a stable store of value at the moment and there are no underlying fundamentals.

Kenneth: Naysayers will say that the true value of Bitcoin is zero. Let's just say that when enough people believe in something, it becomes real. Bitcoin's price could go to zero or actually become real. It's hard to tell.

Anson: Just like how they say retail will be killed by e-commerce, the cycle will take time. I think it's more important that the community in the crypto space finds opportunities to make the current society more equal and efficient in all aspects - that's more important than discussing if Bitcoin will replace conventional money. However, at this point, it's not possible.

Jamie: It's my humble view that Bitcoin seems to have a "direction problem". This, along with a significant difficulty in scaling it, needs to be overcome decisively before Bitcoin can be a viable challenge to conventional money. Kenneth: Whether Bitcoin will replace a large fraction of conventional money will largely depend on government policies. In countries where the currency is tightly controlled and the banking system is well developed, there is a huge hurdle to overcome before Bitcoin or other crypto will replace conventional money. Nearby countries such as Indonesia, Vietnam and China have banned Bitcoin as a form of payments for services.

However, in other places like Japan, where they are more open to new technologies, Bitcoin is widely accepted and is growly rapidly, with Japan accounting for 50 per cent of the global Bitcoin trade volume daily. In developing countries such as Zimbabwe, where the banking system is weak and currencies are undergoing hyperinflation, we are seeing a large number of people adopting Bitcoin instead of their national currencies.

Dustin: Bitcoin is but one cryptocurrency. It is still too early to tell to what extent Bitcoin can replace conventional money, but it's far more likely that there will be a variety of cryptocurrencies, each with different attributes and serving different purposes. For example, in traditional markets, we have a variety of products such as debit cards, credit cards, traveller's cheques, bearer bonds, Paypal, GrabPay, Nets, gift vouchers etc. We believe that a diversity of products are going to serve the crypto space. In fact, in the future, it is unlikely that we will make a distinction between traditional and blockchain offerings.

Darren: I think Bitcoin - cryptocurrencies for that matter - wouldn't replace fiat currencies, at least in the near- to mid-term. Again, Bitcoin is not the only cryptocurrency. As of Dec 20, 2017, Bitcoin took up only 47.6 per cent of the overall value of the cryptocurrency market.

I think in due course, cryptocurrencies will function as a fairly widely accepted alternative form of currency, but we need the wallet infrastructure to improve and the banking system to accept these as well. There are hoarders of Bitcoin - most miners and traders I know are hoarding their coins. Bitcoin has a limit of 21 million coins. At the rate its price is rising, it wouldn't be a surprise for it to break US$100,000 per coin. People used to say it's crazy when Bitcoin went past US$100, then US$1,000 then US$10,000. I would liken Bitcoin to diamonds, and perhaps Ethereum to gold or silver.

Blockchain: What are some examples where it is making a material difference in people's lives?

Dustin: There are many compelling stories of real-world uses of blockchain, such as how refugee camps are using blockchain and biometric sensors to distribute food stipends, prevent child trafficking, tackle slavery in supply chains, and help small-hold farmers get paid a fair price for their goods.

DT: While I do not believe in crypto, I believe in blockchain. The technology is useful and as computing power increases and record-keeping becomes cheaper, this technology will become even more viable. With blockchain, there will no longer be a need for a third party to verify the authenticity of transactions and records such as a notary signature or trading records among banks. It's important to note that even though cryptocurrencies leverage on blockchain, the increased attention given to and the adoption of blockchain should not necessarily translate to an increase in the use of cryptocurrencies.

Anson: A lot of blockchain's use cases are very futuristic. From financial inclusion to commodities, blockchain is about decentralisation and giving power and opportunity back to the people.

Jamie: Blockchain is in the innovation stage now. If not for the excitement, there wouldn't be so many coming up with new ideas. The most interesting cases I've seen are in power and electricity.

Crypto

'Crypto experts': Do they exist and are they dangerous?

DT: How can anyone call themselves an expert in a space that cannot be explained by fundamentals and in which behaviour is irrational? These self-proclaimed experts could have earned their bucks just because they were lucky to ride the wave and made some money from investing early. But are past experiences indicative of what's gonna happen in future?

Anson: There is no expert and there shouldn't be. I'm still a student in this space. Beware of those self-proclaimed experts, many of whom have suddenly all popped out in the last year. Some are even organising seminars on how to invest in cryptocurrencies and ICOs.

Darren: These "experts" are charging S$3,888 for a crash course on how to spot cryptocurrencies. And Fomo has led to these seminars being very well-received. But half the time, people who attend the seminars don't even know what they are buying. It's very easy to prey on them, because the returns look so good and cryptocurrencies make sensational news. My advice is, if someone says he's an expert, keep a distance from him.

Kenneth: These seminars are a risk to the ecosystem. Regulators should come in and prevent scams. If the trainer has made so much money from crypto investing, why run a course? Is he running a ponzi scheme?

Anson:That said, we should also be careful that regulators don't treat cryptocurrencies as accredited investor-only products. The masses will be missing out.

Jamie: Get-rich workshops have always been around. They have been held for many different asset classes, such as shares and property, and run by trainers who claim to be experts. Crypto is just the latest fad.

Kenneth: In my opinion, crypto started to really take off last year. At the beginning of 2017, the crypto market cap was US$15 billion with only a handful of well-known coins. At the end of 2017, there were over 1,500 coins, with a combined market cap of US$600 billion. A good way to tell whether a person is a "crypto expert" is to see how much he knows about cryptocurrencies in general and if he can explain the tech and fundamentals behind it. The ones you should avoid are those that just show you charts and tell you to buy because the price is increasing fast.

Jamie: There is a correlation with the price of key cryptocurrencies and the interest level in the industry. In the wilderness years where prices were declining and stuck at the lower levels, many people in the industries actually left or moved to other things. Cryptocurrencies took off last year partly due to the ICO explosion which revealed to businesses and the public a new usage for blockchain beyond just payments for goods and services. In my view, the ones who truly stuck it out in the early and wilderness years and continued to contribute consistently to its developments will make credible experts.

What factors will affect the performance of crypto in 2018?

Jamie: The performance and sustainability of many of the projects and ICOs, and whether the utility of the key coins continues to live up to expectations, will affect crypto's performance. If expectations are not met, a correction is inevitable. If enough key projects and metrics are hit or delivered, then the growth will continue. Just like any other market, crypto will see ups and downs. It's only market behaviour. But even after the dot-com crash, a more mature dot-com emerged from it. We are witnessing the same dynamism today.

Kenneth: In the short term, crypto prices are driven by speculative interest in the coins. With the recent opening of the CME Group Bitcoin Futures market, institutional investors are now able to invest in Bitcoin as an asset class, which should be positive for the overall crypto market. 2018 is also the year where we are likely to see many decentralised applications running on the Ethereum blockchain come into the real world. Many companies that completed their ICO in 2016 and 2017 are already in the final stages of testing their product and launching it to the world. This covers nearly all industries such as payments and banking, gaming and energy. The current limiting factor for mass adoption is the transaction speed of the blockchain. Both the Bitcoin and Ethereum networks will see upgrades that aim to increase speeds by 10 to 100 times in 2018.

Darren: Definitely, the biggest factor lies in government and regulatory oversight. We have seen the repeated warnings and cautions from the Monetary Authority of Singapore. We have seen the ban on ICOs in China. A large number of central banks as well as Wall Street bigwigs have sounded the alarm. At the same time, we have seen Bitcoin futures take off on the Chicago Board Options Exchange and CME. Therefore, as a big-picture gauge, it will be a tussle between government and central bank regulations versus commercial efforts to bring cryptocurrencies into the mainstream.

 

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