For citizens and investors across the globe, 2020 was a year of uncertainty or worse — and better forgotten. But for owners or purveyors of cryptocurrencies and related digital tokens, 2020 marked a year of solid gains, measured in simple returns, in stature of the asset class and in investor acceptance.
Bitcoin, the best known and largest of the digital currencies, more than tripled in value through the year, and at the minimum proved its worth as an asset that can zig when markets zag, potentially acting as a ballast for an investor’s portfolio.
The idea of “tokenizing” assets gained so much currency that mainstream accounting and financial advisers, such as those at Deloitte and EY, issued studies all but heralding a future of digitized assets that is rapidly approaching.
“From art to buildings, the way we invest in assets could be about to fundamentally change with the arrival of tokenization,” intoned Deloitte in a recent report. “The act of tokenizing assets threatens to disrupt many industries, in particular the financial industry, and those who are not prepared risk being left behind.”
Accounting giant EY, in a 2020 report, added, “Non-fungible tokens representing real-world assets like art or real estate are gaining increasing momentum.”
The system and security behind cryptocurrencies and tokenized assets is the indecipherable (to most people, anyway) “blockchain technology.” Suffice it to say, a blockchain is a system in which an online, secure record of the approved owner of a digital coin or token is kept and stored in multiple databases, sometimes called “distributed ledger technology.” Only the approved owner knows the password or other keys to sell the token or spend the coin.
As blockchain technology and the related coins and tokens gain commercial, consumer and financial industry acceptance, more investors will find the secure opportunities to own, say, 1 percent of a Picasso painting in tokenized form, or 2 percent of a renovated downtown warehouse in Cleveland. Spotting a market, Deloitte, EY, KMPG and PwC have created units to advise big business on the use of cryptocurrencies, especially tokens.
So, what in 2020 caused cryptocurrencies and tokenized assets to seize center stage, and stolid scrutinizers of commerce, such as the Big Four accounting and consulting firms, to offer crypto-centric advisory services? And more important, can investors profit from the greater acceptance of cryptocurrencies and tokenized assets?
2020 INFLECTION POINTS
Many crypto denizens cite three landmark events during 2020 that signaled the day of digitized currencies and assets has arrived:
- In October, online payment service PayPal Holdings disclosed a new service to enable customers to buy, hold and sell cryptocurrencies, such as bitcoin, directly from PayPal accounts. Moreover, PayPal divulged plans to allow cryptocurrency to fund purchases at 26 million PayPal-affiliated merchants worldwide. So, with the bold PayPal stroke, it looked like crypto naifs could invest in digital currencies and happily shop with bitcoin. “It’s a game changer,” says Jeremy Epstein, an executive with Chicago-based Crypto Futura Fund. “PayPal has 327 million users, so it puts an end forever to the objection of ‘Well, you can’t really buy anything with crypto.’ Now, you can buy pretty much everything.”
- J.P. Morgan Chase & Co., whose CEO Jamie Dimon called bitcoin a “fraud” in 2017, published an in-depth study in October 2020 comparing bitcoin to gold. Earlier in the year, JPMorgan also agreed to provide banking services to crypto pioneer and digital-currency exchange Coinbase. JPMorgan needs no introduction, so the volte-face underlined how the virtual world had become real in only three years.
- Less publicized, but certainly talked about in key financial circles, was the completion of a $300 million B fundraising round by crypto-services firm Bakkt in early 2020, led by such name-brand outfits as Microsoft’s M12 venture capital fund, Boston Consulting Group, PayU (a fintech firm that is part of the Naspers empire), and Pantera Capital Management. Bakkt has plenty of credentials, as it is majority owned by Intercontinental Exchange, the operator of the New York Stock Exchange and about a dozen other leading securities markets. Bakkt offers smartphone apps that make trading bitcoin or conducting digital transactions easy and, it claims, secure.
The above list is hardly complete but suggestive. In 2020, many globally recognized financial brands jumped onto the blockchain bandwagon, adding credibility and impetus to a technology already gaining acceptance from consumers and financiers.
INVESTING IN THE DIGITAL
Even granting that crypto has matured and become investable hardly simplifies the task of speculating in the virtual world. Investing in free markets has no guarantees; there are plenty of excellent companies listed on the Big Board, but which ones will perform? Will equities as an asset class even do well in 2021? But here are, perhaps, some avenues into virtual investing, for those willing to make the drive:
As ever, the exchange-traded fund (ETF) is the individual investor’s friend, offering liquidity and diversity. For those favoring blockchain technology, the Amplify Transformational Data Sharing ETF (BLOK) trades on the NYSE Arca. The ETF had a great run in 2020, gaining more than 50 percent, and even offers a 1.5 percent dividend. BLOK manages nearly $200 million in assets, at least 80 percent of which are invested in publicly traded companies that are involved in blockchain technologies. The actively managed ETF has a position in 57 different public companies, giving investors diversity, transparency and liquidity.
Some might challenge the assertion that BLOK is really a “blockchain fund,” as its largest holdings are generally in fintech outfits that are pursuing blockchain exposure, such as Square Inc. (SQ) and PayPal (PYPL), or digital-related businesses such as Silvergate Bank, which provides financial services to blockchain outfits. Still, this ETF may be a top choice for investors seeking transparent, diversified exposure to the blockchain scene.
Crypto denizens recommend bitcoin, and some experts advise caution if buying any other digital currency.
“If you’re going to take your first step into crypto investing, you’re better off starting with some of the larger ones, like bitcoin and Ethereum,” says Brian Estes, managing partner and CIO of Off the Chain Capital.
Many digital coins will fizzle, leading to industry consolidation and more than a few worthless cryptocurrencies, predicts Estes.
Others caution bitcoin’s lead and position in the cryptocurrency space may be insurmountable.
“Bitcoin is the only cryptocurrency with a high probability of succeeding globally as a form of money. Other forms of cryptocurrencies are so far behind bitcoin in terms of adoption that they aren’t even relevant,” advises Jeff Dorman, CIO at Los Angeles–based Arca, a digital-asset investment company. In July 2020, Arca announced the launch of the Arca U.S. Treasury Fund, an SEC-registered closed-end fund that invests in short-term U.S. securities. In a digital wrinkle, the fund offers shares to investors as digital securities, dubbed “ArCoin.”
GLOBAL DIGITAL HOLDINGS
The intrepid might take a stake in the New York City–based Galaxy Digital Holdings (GLXY), which is traded on the Toronto Exchange, and billed as a “financial services and investment management company dedicated to the digital assets and blockchain technology industry.” The company invests in crypto, trades coins and assets, and operates as an investment banker.
Galaxy Digital closed a $50 million “private investment in public equity” (PIPE) financing in November 2020, with a roster of institutional investors that included Slate Path Capital, a $1.75 billion New York hedge fund heavy into the digital world. If institutional money is smart money, then Galaxy Digital is odds on.
Galaxy shares more than tripled in 2020, and founder, chairman and CEO Michael Novogratz said his company will likely move into operating profitability in 2021. “Yes, listen, I will be disappointed if we don’t do that [operate profitably] next year, and then some, right?” he told conference callers this past November.
Novogratz is fairly well known in financial circles and has sat on the Federal Reserve Bank of New York’s investment advisory committee on financial markets, but also had a checkered career at Fortress Investment Group, a publicly held hedge fund sold to Tokyo-based SoftBank Group Corp. in 2017 at well below its 2007 IPO price.
Institutional investors are betting Novogratz will do better after his reincarnation in the crypto space.
For those just a bit leery of digital currencies, such as bitcoin or Ethereum, that are backed by nothing (not even a banana-republic central bank), there is the “stable coin.”
“The value of stable coins is frequently linked to an underlying asset. The usual objective of such projects is to minimize the price volatility typical of currently available tokens,” noted EY, in a recent report on tokenization.
The underlying asset might be a precious metal, or even the U.S. dollar. A company named Gemini “pegged” its coin, the Dai, to the value of the U.S. dollar at “a 1-to-1 equivalence,” wrote EY.
Tether (USDT) is the largest purveyor of stable coins and is also linked to the U.S. dollar.
Of course, the U.S. dollar or gold can decline in value, like any other asset. But usually something solid is backing a stable coin, such as a precious metal or the fiat currency of a major nation. And if one believes gold is due for a rally, then a stable gold-backed coin is one way to play.
RISKS IN THE CRYPTO SPACE
Some of the risks in cryptocurrencies and tokenized assets are rather banal, such as an investor losing crypto passwords or keys. Such a loss means the investor can no longer access her or his coins or tokens. Ever.
Experts suggest using old-fashioned paper and pencil to store passwords and keys, and in multiple very secure locations, such as a sealed envelope in a bank deposit box, a trusted lawyer’s office, or a serious safe. Storing passwords and keys on your home devices can entail some risks, as your PC (or smartphone) can be hacked, destroyed, lost or suffer hardware meltdowns.
And there is always the problem of simple fraud, not in the token system, but on the part of people who control a physical asset. With ownership of a work of art scattered across the world, commissioning a reproduction and selling the original might be more than possible. Or gold, for example, can be plated lead.
Another possibility for fraud is an ersatz website purporting to sell cryptocurrencies or tokenized assets, often designed to look authentic or to mimic a well-known brand or name. An investor sends in real money for what turn out to be fake digitized coins or assets.
Finally, in mainland China accusations are rampant of cryptocurrency exchanges being manipulated, sometimes by exchange operators themselves, who send digital-coin values soaring or plummeting.
Indeed, “centralized cryptocurrency exchanges can be hacked,” advises the Crypto Futura Fund’s Epstein.
In the crypto space, it seems, some investors are left with virtually nothing.
The world of cryptocurrencies and tokenized assets is one of the more interesting investment plays to come along in a generation or two.
On a cautionary note, so was the internet in the early 1990s; then came the dot-com boom from 1995 to 2000, when it busted. After 2004, however, the internet came to meet and even exceed most expectations — but a lot of investors lost a lot of money betting on the wrong horses along the way. Remember eToys.com, anyone?
But those who bet early on Alphabet Inc.’s Google or Amazon.com Inc. have a rather rosy view of web fortunes.
At present, the code to a sure path to crypto profits remains, well, cryptic. Investors are advised to learn the space, seek counsel, devote only a portion of their portfolios, and then diversify even within the crypto space.
Despite the risks, the likely prospect is cryptocurrencies and tokenized assets have a huge future. Investors may want to search for real profits in the virtual world.
Benjamin Cole (email@example.com) is a freelance writer based in Thailand.