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The total amount of value that can be potentially absorbed is $9tn over a 10 to 15-year window. The total value of global equities, excluding emerging markets, is $40tn in value over the span of 20–25 years. Since the creation of the internet in 1990 until today, the total return of the S&P500 IT sector has grown by 18.5x. However, these returns only account for the growth of either already established companies that embraced the internet or those startups which reached IPO status. The reason why this point is relevant is that blockchain enables early investing (i.e. at venture level). Therefore, the astronomical venture capital and private equity returns of the internet era should also be included. This addition could raise potential returns to as high as 25 to 30x.
The single biggest risk is that the adoption of blockchain technology fails to reach “critical mass.” There are many challenges that could stymie this adoption, that currently remain unresolved. The policy reactions have ranged from the banning of cryptos in China to the complete adoption in Japan. Additionally, there are other risks that one should also be conscious of. For instance, there are competing technologies such as DLT that could eat away some of the returns estimated above, and “critical mass” of adoption could take years to materialize.
Regulation remains largely uncertain. Entities such as the SEC and the CFTC have been slow to provide clarity in how they are approaching the many thorny regulatory issues surrounding this asset class (e.g. custodianship, money laundering, etc.…). Regulation globally has so far focused on ICOs to protect retail investors from (the sometimes fraudulent) capital raises. This paints a complex backdrop for policy makers to navigate. It is therefore very challenging to know how regulation will evolve, and even more difficult to forecast how it will impact each asset differently (i.e. Bitcoin vs. Ethereum).
The market structure is still fragile. All major crypto exchanges still have outages during “high” volume events. Value is driven by speculation, since structural demand from consumers hasn’t formed yet, causing valuations to move violently with news and sentiment shifts. Additionally, market liquidity is fragmented across various venues making trading at scale a non-trivial matter.
A Diversified Approach is Warranted
Blockchain is a young technology, and without clear demand drivers having formed, it is difficult to know who the winners will be. For instance, Bitcoin is an old technology for blockchain standards, and there are numerous competitors with better tech (e.g. Dash or Bitcoin Cash) trying to dethrone the king of cryptocurrencies. Additionally, there are is a large variety of new projects coming online, some of which could be the next Googles or Facebooks, and may even overtake Bitcoin’s current value.
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For investors, the top 20 cryptos have changed substantially over the past 2 years, therefore a diversified approach is warranted. This large dynamism in the composition of the top crypto assets tells a story of a rapidly evolving industry. As a result, an adaptive and diversified approach is key to harvesting high risk-adjusted returns, since ex-ante it is difficult to know which cryptos will be the winners. It’s worth noting that the top 5 crypto assets have been consistent and composed of Bitcoin, Ethereum, Litecoin, and Ripple over the same period. Additionally, these assets account for the bulk of market capitalization growth of the blockchain industry over the last two years and including them in a crypto portfolio may be warranted.
With this in mind, we have created the DigiCor90 and the DigiCorEW Funds, which track a market cap weighted and equal weighted index respectively. The Funds are designed to provide a liquid and diversified access to the very unique opportunity that digital assets currently present. However, the safekeeping of digital assets can be very challenging at scale. This is DigiCor’s number one concern, as hacking is a very real risk. One of the many steps we take to minimize this risk is to deposit all Fund holdings with a qualified custodian in cold storage vaults. Additionally, all funds are closely monitored by an independent administrator, qualified custodian, the DigiCor team and are subject to yearly independent audits. Our goal is to bring the same sound equity passive investing model to digital assets. In so doing, we follow the SEC’s regulatory requirements for mutual fund management (e.g. follow custodianship rules, etc…).
In a world where sources of differentiated returns are hard to find, and forward-looking performance of the classical asset classes muted, investing in crypto assets is an interesting value proposition. Blockchain technology is revolutionary and is poised to disrupt many of industries across the globe, particularly those that solve complex logistical problems (e.g. broker/dealers). In most cases, blockchain is investable via tokens or coins, which enables venture venture-like returns in a liquid format at a global scale. A feat, which has never been possible before.
The overall investment thesis for blockchain is one of sustained growth and warrants a diversified approach. The value capture has room to run, and even at current valuation levels of around $200bn, it still has substantial space to grow. Additionally, the remaining drivers are still forming and once they take hold, could potentially unlock substantially more value than the absorption driver. However, there are complex risks stemming from investing in crypto assets. For instance, similarly to the early Internet era, it is difficult to know ex-ante which projects will be the winners. Therefore, a diversified approach is warranted to harvest returns from the growth of the industry rather than a single technology. This is why, at DigiCor, we have created the DigiCor90 and the DigiCorEW Funds. These two funds track a market cap weighted and equal weighted index respectively.