The case for crypto maximalism
By: Nik Jacob
Tags: Bitcoin, Thesis, Cryptocurrency

The Bull Case

The Fund observes a few leading indicators that point to a long-term bull market despite the short-term pullback in 2018 which led to the current bear market. These indicators include an influx of capital through new fund inception, significant M&A activity, advances in core bitcoin and ethereum scaling, and the rate of progress by founders and developers which supersede the broader market cycle.

Emergence of new funds

In addition to the $3–5B assets under management (“AUM”) managed by cryptocurrency hedge funds, significant funds continue to be raised from experienced fund managers seeking greater exposure or attempting to corner a niche of promise within the market.

Arrington Capital (denominated in Ripple “XRP”) with $50M in commitments.

Billionaire Michael Novogratz, formerly of Fortress Investments, recently announced the launch of his $500M Galaxy Fund, with $150M of personal assets and $350M from LPs.

The $100M Ethereum Foundation continues to invest in groups that enhance scalability, usefulness and security within the Ethereum network.

Rockefeller Foundation’s investment arm, “VenRock”, recently announced a partnership with CoinFund to gain exposure to cryptocurrency startups. Previous investments include Apple and Intel.

George Soros, infamous for successfully shorting the British Pound (Sterling) in 1992, is exploring investment in digital assets through his $26B family investment firm, Soros Fund Management.

VC and M&A activity

Coinbase raised $100m (cash raise, not ICO) at a valuation of $1.6B, and hired the head of Corporate Development from LinkedIn, indicating a slew of intended acquisitions.

Coinbase announced the inception of a venture fund to invest seed capital in early stage blockchain companies.

Ledger (hardware wallets) raised $75M to scale operations.

Circle (partially owned by Goldman Sachs) acquired Poloniex for nearly $400m.

Japanese online broker Monex plans to acquire Coincheck for “several billion yen” (undisclosed amount).

Store of Value hypothesis

A prominent fund, Multicoin Capital, posited the Store of Value (“SoV”) hypothesis, which claims that the path to achieve trillion dollar cryptocurrency market caps is to address key gaps that would enable cryptocurrency to be an adequate store of value in line with the historical understanding of money, economics, and scarcity.

In accordance with the SoV hypothesis, the token must have the following traits:

Self sovereign: no one can take the SoV away from its owner.

Censorship resistant: Limited prevention of owner spending SoV.

Scarce: A fixed, or at a minimum, highly predictable, un-gameable money supply that cannot be manipulated without broad-based social consensus.

Secure: People must feel confident that they will not lose their money, either due to practical reasons (e.g. lose the key) or technical ones (e.g. broken smart contract).

The above can be accomplished through existing coins (Bitcoin being the most prominent example, among other major coins), utility coins, and stablecoins. The following elements of utility may be considered:

Governance

Privacy

Transaction throughput

Confirmation time (latency)

Flexibility and programmability

Formal verification

Ability to adhere to existing regulations

Price stability

The Fund maintains a thesis that stablecoins pegged to commodities or fiat currencies familiar to financial firms will signal institutional capital inflow to provide digital asset exposure and a safe harbor in the case of volatility and bear markets.

Socially positive causes

To combat the negative use case for cryptocurrencies as instruments for money laundering, tax evasion, and illegal activity, significant charitable activity signals positive utility to combat the negative image. Recently, two notable charitable vehicles were created to donate significant wealth to social causes:

An undisclosed bitcoin millionaire pledged to donate a significant portion of his bitcoin wealth to crowdsourced causes through the newly created $85M Pineapple fund.

The founders of Ripple donated $29M to fund every cause on Donorschoose.org to sponsor classroom needs.

Regulatory hurdles

The following developments will curb uncertainty around regulatory status of trading digital assets, as well signal additional institutional capital by enabling access and exposure through traditional and regulated channels.

Coinbase is in talks with the SEC to register as a licensed brokerage. Although classification of cryptocurrencies is unclear, SEC registration would legitimize the portal by which millions of users acquire, sell, and transact cryptocurrencies.

The SEC may consider a change that allows exchanges to list Bitcoin ETFs.

Regulatory inquiries into cryptocurrency funds address key compliance issues such as custody, and filter out bad actors in the process to protect investors. Such moves are healthy for the industry and its participants in the longer term.

Bank integration

As many US banks block purchases of cryptocurrencies through credit cards (not to be mistaken with bans on purchases), other banks globally are enabling customer purchases of digital assets. In 2018, the European Revised Payment Services Directive (“PSD2”) activates. The directive mandates that banks have to share customer data with third parties through APIs, which could include access to cryptocurrency services. Thus, the combination of online banking, fintech services and open APIs point to a blurring of boundaries between traditional and alternative finance. Norway’s online bank, Skandiabanken, will offer bank customers the ability to directly link their bank accounts to cryptocurrency holdings. Bank Frick, a Lichtenstein entity, will allow clients to directly purchase a basket of cryptocurrencies. Falcon Group, a Swiss private bank, recently announced a partnership with Bitcoin Suisse AG (bitcoin broker) to enable cryptocurrency purchases for its clients. Abra, a popular online banking platform, offers trading of more than 20 cryptocurrencies and 50 fiat currencies on its infrastructure. These moves blur the line between traditional finance assets and digital assets, as institutions offer platforms to bridge access to cryptocurrencies.

Sovereign adoption

Although sovereign nations utilize digital currency in a manner not aligned to the decentralized vision of the founder, major nations have taken interest in the prospect of a national currency. China recently signalled a move to establish a digital currency, and Venezuela recently issued an ICO for the Petro dollar (pegged to oil) to combat hyperinflation. Although blockchain adoption on closed chains (enterprise, sovereignty) does not directly impact the cryptocurrency market, the moves indicate an increased awareness and appetite towards adoption of the underlying blockchain technology.

Future Trends

Consensys, created by Joe Lubin (Ethereum co-founder), issued a set of predictions in 2018 for cryptocurrencies. Below are a few highlights: