Crypto market news has been mixed over the last few weeks. On the positive side, billionaire PayPal founder Peter Thiel doubled down on bitcoin in a recent CNBC appearance.
He stated that bitcoin would be the “online equivalent of gold,” and that bitcoin was a “hedge of sorts against the whole world falling apart.”
However, crypto markets continue to wrestle with regulatory concerns.
And it looks increasingly likely that the SEC will classify some coins/tokens as securities.
It also appears the agency will likely force cryptocurrency exchanges to register with it and come under its jurisdiction.
To be clear, these are not bad things. More regulation and legitimacy in crypto markets will bring multiple benefits. For one thing, it would open the market up to the big boys (institutional investors, wealth managers, etc.).
Most financial firms are currently unable to invest in crypto assets due to their charters, which only allow investment in registered securities.
If regulation is done well, it will also clear the cloud of doubt currently surrounding markets.
Japan’s government continues to lead the way in terms of progressive policy regarding crypto. At a recent financial summit, Bank of Japan governor Haruhiko Kuroda said, “Cryptocurrencies can be a plus for the financial system.”
Kuroda is likely referring to the fact that since so many Japanese people own cryptocurrency, there is a substantial “wealth effect” that boosts the economy. More on that here.
This is one of the primary reasons I believe that governments will have a difficult time cracking down on crypto. It is one of the few bright spots bringing innovation and profit to the financial system.
Japan is early in recognizing the financial benefits of crypto. I believe other governments will follow suit once they see the economic expansion associated with such an innovation boom. Hopefully crypto will spread the same way marijuana legalization is spreading across the world. But this may take a while.
Regardless, in our divided political system, few players lack the political capital to squash a burgeoning crypto market. There would be justified outrage at any attempt to ban or block access to crypto, and I believe such action is extremely unlikely in the U.S.
On top of this, no politician wants to be seen as hampering innovation. At this point, everyone recognizes the incredible potential of blockchain and cryptocurrency technology. Coins and tokens are where these blockchain innovations originate from.
That said, it’s a brand-new market that threatens the existing system, so it’s hard to say exactly how this will play out.
Of course, I believe the risk/reward is still very much in crypto’s favor. Our long-term investment philosophy hasn’t changed.
As the current financial system continues to spiral out of control due to skyrocketing debt and liabilities, crypto is very likely to take center stage. It will feed off the old system’s inevitable debt crises.
However, government intervention remains a risk we’re keeping a close eye on.
Our Strategy
We will continue to focus on crypto assets, which I believe are relatively safe from regulatory risk.
I’ve been thinking about this regulatory risk issue since the beginning, and the importance of it has only increased.
Part of the reason I picked all of our portfolio coins is due to their low regulatory risk profiles. With the exception of OmiseGO, none of our coins had a big ICO (which can draw scrutiny from regulators).
For the most part, our portfolio coins have been around since before the recent ICO craze started.
In OmiseGO’s case, I believe it has an extremely well-designed and compliant model. Ethereum founder Vitalik Buterin recently posted on Twitter that he believes OmiseGO is “more legally defensible” and is his “favorite token model.” OmiseGO has also been proactively meeting with Thai regulators.
The types of coins I currently believe to be “more risky” in this environment are…
- ICOs that lacked proper disclosures
- S.-based cryptos whose ICOs were open to everyone
- Coins that distribute revenue, such as Kucoin Shares (KCS)
- Coins that represent ownership (equity)
- Privacy coins, such as Monero.
This doesn’t mean we’ll never invest in these types of projects. I simply mean that in this unclear regulatory environment, we should wait for more clarity.
I do not consider our proof-of-stake (“dividend”) coins to be at risk. They all have well-designed systems that should be regulatory compliant and allow them to avoid being classified as securities. Their systems are designed to reward participation in transaction processing and governance of the cryptocurrency.
Bitcoin has been around for nine years now, and its mining and transaction processing systems are commonly accepted as legal around the world. All our portfolio coins follow similar models, rewarding participation in a decentralized, interactive cryptocurrency project.
Cryptocurrencies like bitcoin are likely to be classified as commodities. This is preferable to being classified as a security (which some tokens almost certainly qualify as, even though they’re not classified as such today).
Here’s a helpful excerpt from a recent CNBC article featuring Wall Street analyst Tom Lee:
| “Increasingly, I think investors are comfortable that bitcoin is likely to be viewed as a commodity,” Lee said Tuesday on CNBC’s Fast Money. “Whether regulations change around security tokens and registration, bitcoin sits in its own sphere.” |
I believe Lee is correct, and this makes our portfolio low-risk in terms of regulatory risk. We don’t have any recommendations that pay out a percentage of revenue, such as Kucoin, an exchange coin that splits transaction fees with holders. We don’t have any that convey ownership of a company.
These kinds of coins/tokens are more likely to be classified as a security. So while they’re interesting opportunities, for now we’re steering clear.
ICOs Going Legit
As a reminder, ICOs are not going away. They’re going legit.
Over the coming months, we’ll start to see more deals that are SEC-approved. Issuers will be taking advantage of regulations that were originally created for equity crowdfunding.
Many of these new deals will take place on investment portals that we’ve known for years, such as Republic, MicroVentures and StartEngine.
We’re watching for good deals and talking with our contacts in the industry. We’ll let you know as soon as we spot a worthy one.
As a reminder, some of these deals will fill up fast. For now, they’re capped at either $1 million or $50 million. (Conducting the larger type of deal costs more.)
However, with all the interest surrounding cryptocurrencies and ICOs, I expect those limits will be raised, especially in the smaller $1 million tier. That will likely be raised to $5 million in the near future.
We’ll also be watching for quality “airdrops.” An airdrop is a coin/token giveaway meant to boost early adoption and spread awareness. Bitcoin gained many of its early adopters via airdrops/faucets.
Since the slowdown in ICOs, airdrops have become more popular. Many coins now do a private fundraise from large accredited investors (who are exempt from some security regulations), then follow that with a large airdrop to create buzz in the crypto community and attract new users.
If you’re interested in checking out some upcoming airdrops, Airdropalert.com is a good place to start. (Note: I recommend using a completely separate new email account for airdrops. This is because spammers often target known crypto lists such as airdrops.)
Good investing,
Adam