I have been thinking a lot about cryptocurrencies, ICO and blockchain these few weeks. It’s a bit hard not to when the prices of bitcoins, ether and the top few cryptocurrencies have taken the market on a really wild ride. It’s also a bit hard not to do so after I received 2 different requests for help to launch ICO for 2 startups in 2 wildly different industries.
But first, my thoughts about the crazy price fluctuations of the more popular cryptocurrencies.
Mrs Watanabe is also into bitcoins!I was first introduced to the world of cryptocurrencies by the co-founders of TenX more than 2 years ago when they first arrived in Singapore. The way they explained it to me, cryptocurrencies represent one of the fastest, cheapest and safest way to move money around. And with the wallet they are building, users will be able to use their cryptocurrencies in the real world at any credit-card accepting stores. The cryptocurrencies in their TenX wallets will only be converted to fiat (real-world) currencies when they make a purchase with their TenX wallets. From that point on, I was hooked. Eventually, I ended up being an early investor of TenX and have stayed on as their advisor since that first meeting. In these past 2 years, the learning curve for me, a non-crypto luddite, has been steep. But the lessons learnt from observing the TenX team working has convinced me that cryptocurrency is REAL. It’s not all hype. And it’s definitely not a fraud as some bankers would like us to believe.
The true value of cryptocurrencies is really in the ease of using it to move money around. I can now send a cryptocurrency across national (and fiat currency) borders to anyone without incurring FX costs or worrying about whether the person receiving my cryptocurrency can actually use it where he/she is living. In that sense, cryptocurrency is very similar to normal fiat currencies that we are familiar with. I have SGD which I can use in Singapore. Or I can change it to another currency if I need to use my SGD, say, in Japan. One of the most important value of the SGD is that it allows some kind of value to be transferred from me to another person (or company). The rate of exchange of SGD against some other currencies really depend on the demand for SGD versus a particular currency. The demand generally results from how much SGD is being used to purchase for foreign goods and services versus how much foreigners need to get their hands on SGD to purchase Singapore goods and services. If the demand for such exchanges are down (like during an economic recession worldwide, or Singapore’s goods and services are no longer attractive), SGD value goes down.
So, it’s kind of mind-boggling for me to see the wild price fluctuations of bitcoins, ethers, XRPs and a whole bunch of cryptocurrencies. Sure, thanks to the crazy run-up of their prices, the total market capitalisation of all the cryptocurrencies are now around USD500–700 billion. I personally think this number is totally meaningless. More important for me is how much is these cryptocurrencies actually being USED as a method of money transfer, as payments? If they are just sitting around in the exchanges, wallets or some digital vaults, their utilities are not being optimised.
The true value of cryptocurrencies really arises from their usage. Trading in them is just one of the usage. Moving them around as a way to pay or be paid, is a, IMHO, much more useful usage. If there are not that many cryptocurrencies in circulation, it just means the real demand to use them is not really that high yet. The demand is only to own them as way to generate returns on your investments. I believe in time, more use cases will be found for cryptocurrencies. But for now, we are still at the early days of cryptocurrencies. Massive and wide-spread adoption is still a couple of years away at least. Until then, the current valuation is not just speculative, it is totally insane. And if Mrs. Watanabe is also buying bitcoins, you should be afraid. Be very afraid.
But maybe there is already a good use case!?That brings me to my second musing. Being involved with TenX from the beginning has forced me to bone up on cryptocurrency, blockchain and everything crypto. Then, in the beginning of 2017, the founders came to me with something which is even more radical, “How about we do an ICO?” I looked back at them blankly and went, “Huh?”
Needless to say, they taught me aplenty and I have to researched a whole lot more on my own to catch up on Initial Coin Offering or ICO. Personally, I don’t really like the terminology as it brings to mind IPO or Initial Public Offering which is when companies issue shares to the public. IPO is a regulated process for companies to raise funds from the public. In return for the public handing over their money, companies issues shares in their companies to the public. I also don’t really like the “Coin” in ICO as there is this notion you are somehow issuing a currency, which needless to say, freaks out a lot of central bankers and financial regulators. I prefer to call them Initial Token Offering. But, that’s just me the lawyer speaking. Anyhow, we will just refer to them as ICO for this post.
A token offered by a company during an ICO, in plain English, is like a computer game credit or a token you use in a game park. You can also draw parallels to loyalty rewards points you get from airlines, hotels, credit cards or even the credits you chalk up from using ride-sharing, home-sharing or food delivery apps which you can exchange for more of their services and products. These ICO tokens generally give you access to a product or service which the company has launched or is planning to launch in due course according to the plans they have published in their “White Paper” (more about white paper later). The tokens do not confer in its holder any equities in or any other claims on the company. Nor does it represent a form of debt the company owes to the token holder. The token, in other words, is no more than just an advance right to use the product or service the company will at some point offer. To make it more attractive at the ICO to buy these tokens, they are usually offered with a discount on the eventual pricing of the launched product or service. And to make sure buyers of tokens will actually use the tokens rather than just hold on to them for purely speculative reasons, token holders are given a small incentive (like 0.1% of every transaction they make with their tokens) when they actually used the token to buy or sell something.
Two other characteristics make them slightly different from, say a token for a game arcade or credits from using a ride-sharing app:
There is usually a reward (in the form of more tokens) which will be distributed to token holders based on a certain percentage of the total tokens used in the system for a particular period of time. E.g. the reward given out by TenX to its token holders is 0.5% of the entire payment volume on the TenX system on a monthly basis.
The tokens are usually denominated against an established cryptocurrency, like ether or bitcoin, and comply with the more established protocols so that they are easily traded on cryptocurrency exchanges. Thus giving them a secondary market for the tokens. And for some of the tokens that have been issued, their secondary value has gone up quite a bit together with bitcoins and ether.
There are people who have compared White Papers to prospectus published by companies doing IPOs. Again, I don’t really think it is a like-for-like comparison as a prospectus for an IPO is subject to a lot more regulatory oversight and restrictions. The statements made in a prospectus also carry with them certain legal responsibilities. The White Paper carries with it a lot less legal responsibilities. It merely lays out the company’s product or services, the team behind it, their advisors, the market size, how the tokens will be used, how much of the money paid for the tokens at the ICO will be used to fund the development of the product, etc. More often than not, there will be plenty of disclaimers and waivers in the White Paper to warn readers that they are not making any warranties or representations of any kind. Nor does it confer any rights in the companies, etc., etc. In other words, they are saying, WE ARE NOT GUARANTEEING ANYTHING HERE! Just giving you a chance for an advance booking of our products or services.
If that’s the case, why are startup teams still so keen on ICO? And why are there still so many people lining up to buy tokens at the next hot ICO? For me, thanks to my involvement as an advisor for TenX’s ICO (I am listed as an advisor on the last page —
https://www.tenx.tech/whitepaper/tenx_whitepaper_final.pdf), I have been given a front row seat to watch the drama unfold in the ICO world.
Interestingly for me, over the last few weeks, I have been getting calls to advise on other ICOs. One of the more recent ones has been most interesting as the startup is in the hardware manufacturing and distribution business. There have been plenty of ICOs last year, but there were only a couple of hardware-related ICO. And they were for hardware used for mining cryptocurrency or some business related to the crypto-world. But this particular startup team that approached me for help has nothing to do with the crypto world. My initial thoughts are that there is really nothing stopping us from tokenising the usage of the hardware. So, let’s say, 10 tokens will allow the holder to use the hardware for a fixed period of time. We issue the tokens now, you buy them and when the hardware hits the market, you can use your tokens to pay for a fixed time usage of the hardware. Your token does not entitle you to any ownership of the hardware (it’s quite expensive, so we don’t think people would really want to pay for the hardware upfront and a time-share model is better).
Which brings me to my earlier point that maybe this is the use case we have been looking for. With more than USD600 billion of cryptocurrencies held in millions of crypto-wallets or with cryptocurrencies exchanges, that’s a whole lot of venture capital that can be deployed to fund a whole lot of innovative startups. In the case of TenX, they managed to raise USD80 million during their ICO. Buyers of the PAY tokens can only pay for them with other cryptocurrencies like bitcoins and ether. There are already a few cryptocurrencies that are offering “ICO-in-a-Box” for startups and “ICO pre-sale” for their exchange users. So, rather than just have your cryptocurrencies sitting in a digital vault and praying that they don’t go on a roller-coaster ride any time soon, cryptocurrencies holders now have a new avenue to continue their investments forays by simply turning in their cryptocurrencies in exchange for a new utility token for some product or services. They will not only buy into a new product or service, they will be buying into the growth of a new startup by getting an incentive reward if more people use the new product or service. ICO is in a way radically changing the way startups get funded these days. ICO is also a great way for more investors to get on the startup investing game.
Looking at the many ICOs successfully completed in 2017, we can be sure there will be plenty of exciting new apps, online services, games, contents and even hardware (if the hardware startup manages to pull off their ICO) that can be exchanged with new tokens in 2018 and beyond.
Yes, there will be scams aplenty too. There have been plenty of research showing that only a very small percentage of tokens issued via ICOs in 2017 are actually in use. Most of the startups still do not have a product despite raising tens of millions of dollars from their ICOs. But that is really part and parcel of being an early adopter. It is risky. But if you are already holding onto some cryptocurrencies, you probably have a pretty healthy risk appetite.
When (not if) it all blows up, what’s left?
Billionaire investor Warren Buffett said on CNBC on Jan 10, 2018,
“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending…” (
https://www.cnbc.com/2018/01/10/buffett-says-cyrptocurrencies-will-almost-certainly-end-badly.html)
The man is right. Like I said at the beginning of my post, I think the current valuation of cryptocurrencies is insane. ICO aside and as funding source for a handful of crypto-wallets (e.g. TenX), there is simply not enough use cases out there. No use cases, no real demand. So, it’s just all hype. Take away the hype, then we will see the true value of a cryptocurrency.
The Managing Director of Monetary Authority of Singapore, Ravi Menon, made a very interesting comment recently,
“I do hope when the fever has gone away, when the crash has happened, it will not undermine the much deeper, and more meaningful technology associated with digital currencies and blockchain,” (
https://www.channelnewsasia.com/news/singapore/mas-chief-ravi-menon-hopes-cryptocurrency-tech-will-survive-9861844)
Now, Ravi is no crypto-evangelist. Nor is he your typical conservative central banker that tries to ban every new innovation in fintech. This is a man who has single-handedly put Singapore on the global fintech map. He is also a well-respected central banker who has just been named Central Banker of the Year for the Asia Pacific region by The Banker magazine
https://www.channelnewsasia.com/news/singapore/mas-managing-director-ravi-menon-named-asia-pacific-central-9834302. This is as good a prediction on the direction that cryptocurrencies prices will go in the near future. But more interestingly, it is a great stamp of approval for the underlying technologies of cryptocurrencies and blockchain. In fact, the MAS, under Mr. Menon’s leadership, has gone so far to conduct their own blockchain research and published a white paper on it
http://www.mas.gov.sg/~/media/ProjectUbin/Project%20Ubin%20%20SGD%20on%20Distributed%20Ledger.pdf.
So, it has been a crazy few months for those of us watching the roller coaster rides of bitcoins, ether, XRP and a whole bunch of publicly traded cryptocurrencies. And all the headlines are about their crazy price fluctuations and who are the latest bitcoin billionaires. But the insanity we are witnessing now is no different from 2000 when the dotcom bubble burst. For those of use who lived through it, we have seen this kind of insanity before. We should be able to to cut through the b.s. and focus on the real technology. Remember, even after the excesses of 2000, a few tech startups did survive and thrive. My previous employer, eBay, is one of them. The company is still doing well as they got the fundamentals down right. There was a real business built by good people using awesome technology. I would argue that blockchain and other forms of distributed ledgers, which bitcoin, etherum, Ripple even TenX are build on is a sound technology breakthrough.
Payments is only one of the most obvious use case for the blockchain technology. But there are so many other use cases out there, like settlements of trade, execution of contracts, even cracking the toughest online challenge, proving you are who you claim you are, digital identity. With the backlash against Facebook and its monopoly on our attention and I think, more insidiously, its hold on our digital identity, maybe a distributed ledger system is the way for new technologies to be built for our individual identity that we own, control and can take along with us across different applications and platforms. Instead of having one single company owning our identity online (which is what has already happened), no one but ourselves will own that identity and we can verify that identity and anything we do with that identity across many millions of ledgers out there with no fear of a centralised control by one person or one company or one government.
This next generation of innovations with blockchain will hopefully take us beyond cryptocurrencies and bring back the glory days of the early Internet where everything is open-source.
Time will tell.
