On November 28th in New York the 1st edition of Consensus:Invest was held. Unlike the developer-oriented Consensus conference, Consensus:Invest targeted investment professionals with the promise of talking about cryptocurrencies “using their terminology”. Funnily enough, the day of the conference coincided with the day Bitcoin crossed the $10,000 mark for the 1st time.
The conference was crowded (~1300 attendees) but what was interesting was that, compared to other industry conferences, it seemed that not many people knew each other yet. It was like witnessing an industry-in-the-making, with spontaneous Telegram groups popping up, very accessible speakers, lots of chats between random people and tons of new connections. And the excitement was definitely palpable among the attendees.
Making sense of Bitcoin as an asset of its own
Spencer Bogart explained Bitcoin using a funny animalistic analogy: the Platypus. It’s the oddest animal on the planet, an improbable mix of a duck, a beaver and an otter. Just like the platypus is bad at being a duck, bad at being a beaver and bad at being an otter, but it is very good at being a platypus, Bitcoin is a terrible currency, a terrible platform, and a terrible commodity, but it is very good at being Bitcoin. Rather than digital cash or digital gold, Spencer argued that 5 years from now, we might be describing Bitcoin rather as a native digital programmable asset.
Chris Burniske defined cryptoassets as an asset class native to information networks. While equities have to suck profits out of information networks to justify their valuation, cryptoassets bundle the user, the shareholder, the management, and the creators all into 1 asset. As the utility of the asset grows, so does the value. He also presented data to prove the uniqueness of the asset class by showing the non-correlation between bitcoin and the other capital markets.
Chris had also compiled some very counterintuitive figures. He was notably arguing that fiat was more speculative than crypto when one looks at their respective Trading-to-transacting ratio (~2% for bitcoin vs ~10% for global fiat). He also made the case that Bitcoin had the same risk-reward profile as oil and a daily volatility less than that of Twitter.
At one point, cryptoassets were compared to equities in the 17th century. Tuur Demester and Spencer Bogart also brought forward an interesting analogy by comparing the value distribution of cryptoassets with the TLD (Top-level domain) market with Bitcoin being the “.com” and the altcoins being the others TLDs (.net, .org, .io…).
In the last 50 days, Bitcoin has averaged well over a billion dollars of trades globally ($10 billion dollars for the entire asset class), not taking OTC trading into account.
B2C2 founder Max Boonen had insightful comments explaining that as the market was retail-driven (at least so far), there was an under-investment in tech (poor feature sets, unreliability…) because “retail doesn’t care”. This needs to change if professional investors are to enter the market.
He also made the case for separating the trade from the settlement, because the trade needs to happen as fast as possible, which is incompatible with the settlement in cryptocurrencies that will always happen on-chain. He concluded that buying cryptocurrencies can be safe but “to trade cryptocurrencies today you still have to trust third parties much more than you are used to in traditional finance”.
Arthur Hayes from BitMex, a professional trader, had very interesting (and funny) comments about trading cryptocurrencies. He started by pointing out the challenge of trading today: you have to be organized to be watching 24x7 if you don’t want to be exposed to a big gap risk.
He went on to explain that today’s derivative markets are mostly retail-based, and thus wrongly priced, making them a candy store for experienced traders — it is easy to make money with only basic trading strategies. This is why a lot of them quit their day job… or trade crypto on the side while at work :)
Finally, when asked about decentralized exchanges, he sees developers focusing on the wrong things: “Liquidity is key, traders will favor centralized exchanges over decentralized exchanges any day if liquidity is better on centralized exchanges”.
While credit is not well regarded by the crypto community, Adam White from GDAX told the crowd that there was “a strong demand for credit in the space”. And it’s not only for leverage but also to let investors hedge their investments. To address this very topic, in a very PR-reading talk style, Tim McCourt from the CME Group announced the details of the long awaited Bitcoin Futures [NDLR: launching on Dec. 18th].
Also, the CME group unveiled the BRR (Bitcoin Reference Rate) and the BRTI (Bitcoin Real Time Index). A much needed initiative since Bitcoin has no official, agreed upon trading price as of today (the spread across exchanges can sometimes be huge), it is absolutely needed if professional investors are to enter the space.
Even though cryptocurrency traders had criticism regarding the product announced (no weekends, the BRR/BRTI being based on exchanges that might suffer from price manipulation attacks…), they were all pleased to see this type of product coming to the crypto space.
Cryptoassets custody was a much discussed topic both on- and off-stage. Even though Coinbase recently launched its cryptoassets custody service while other players like Ledger are developing solutions for professionals, most panelists argued that there is a need for more cryptoasset custodians on the market. Too much concentration in custodians is not good, and the high valuation of cryptoassets will be a stress test for custodians who might not all be able to handle the pressure of high valuations when it comes to security.
Another problem noted when comparing the cryptocurrency space to traditional finance was the absence of insurance on custody. Finally, it was interesting to hear that the business of custodian might very well evolve with Proof-of-Stake as they will now be custodians of naturally yielding assets.
2018 predictions and bubble discussions
Obviously, most of the panelists did not like the bubble analogy, arguing that we were more witnessing the initial excitement around the adoption of a new disruptive technology.
There were a few interesting predictions made for 2018:
- Hard forks will become the norm to launch a new coin because it enables you to start your coin with a massive air-drop of value. This will create a big challenge for Bitcoin because “Forks are like dilution: each fork takes a group of people with it, so you get fragmentation of the investor base and the ecosystem”, said Raoul Pal. For the moment, the number of forks is limited so that dilution is getting absorbed by a stampede of money moving into Bitcoin, but it won’t stay that way.
- Investment bankers will be stepping in to provide liquidity and capital in the market. On that aspect Ari Paul from BlockTower capital argued that “anchor LPs” have historically been West Coast VCs, followed by High Net Worth Individuals and now Family Offices. He sees endowments entering the market in the next 3/6 months but career risk is still prevalent.
- 2018 will bring a different kind of investor than we’ve had in the past, with the ability to short.
- Regulations will kick in.
We won’t relay all the prices prediction that were made, but if you need one, here’s the one from Joshua Brown: “How much did Mike [Novogratz] say? $40,000? I’d say $41,000 then!” :)
“If something refuses to die, it demands your attention” — Joshua Brown on why he started paying attention to Bitcoin.
“Crypto is about relearning all the mistakes we’ve made in financial history” — Spencer Bogart
“Saying I like blockchain not bitcoin is like saying I like email but the not the @ sign” — Brian Kelly
“90 % of ICO slam dunk investments have tiny liquidity so couldn’t have made substantial money. Treat ICO returns with a pinch of salt.” — Alex Sunnaborg