A New Kind of Trans-Pacific Partnership?
South Korea and China Warming To Crypto-Blockchain
Asian market could be huge drivers of crypto1-blockchain2 adoption in the coming years, if recent events are any indication.
First, take South Korea, a burgeoning hub of activity: about 30% of salaried workers are crypto investors; the country accounted for one-third of ether-based transactions3 just last summer; and by the fall it had surpassed China in overall crypto trading. Then regulators cracked down: banning securities firms from handling bitcoin futures, imposing new capital controls on crypto-exchanges, and banning anonymous accounts. Rumors even swirled about banning initial coin offerings4. Crypto market tumbled on the news.
But an enormous popular backlash forced the government into a u-turn. Now it seeks to “normalize” cryptocurrencies and is even proposing a taxation scheme to begin in 2019. Two of South Korea’s largest commercial banks have each launched partnerships aimed at building crypto-based payments systems.
Second, consider China, where top mining pools control more than half the global hashrate5for bitcoin. Despite its crackdown on crypto markets, the government recently announced its backing for a $1.6 billion blockchain development fund. Chinese tech giants Tencent, Alibaba ( BABA ), and Baidu ( BIDU ) are battling to lead in the blockchain space. And while central bank governor Yi Gang remains skeptical about cryptocurrencies, he is “exploring a better way for digital currency to play a more active role in service to the real economy.” And just this month the bank affirmed that cryptocurrency R&D was a “top priority.”
It’s hard to imagine China, given its competitive nature, ceding crypto markets to regional leaders Korea and Japan. A more likely scenario is that China finds some sort of regulatory scheme that enables crypto-adoption, but with strict government control.
Macro Factors Supportive for Crypto Growth
Negative Sentiment Potentially Creates Opportunity For Investors
The trends taking shape across Asia point to the early stages of a mass adoption trend—among billions of potential users around the world.
What does that mean for valuations? JPMorgan ( JPM ) seems to think it’s a bad thing, telling investors they should be worried, for example, that 20% of chipmaker AMD’s ( AMD ) revenue could be driven by crypto markets. (Cryptocurrency “miners” rely almost exclusively on graphics cards made by AMD and its key competitors.)
Since when does leading an enormous potential growth market translate into a negative? When the market believes that the growth is unsustainable. That’s JPMorgan’s view, and that pessimism may be weighing on AMD’s stock price.
Yet, mass adoption trends are only looking stronger as time goes on. The danger here is that investors betting against crypto-driven earnings growth could get caught wrong-footed when sentiment reverses, as I believe it will once mass adoption gains even more steam.
Here is a back-of-the envelope calculation of what mass adoption could look like for cryptocurrencies. Back in April, Tim Draper forecast a bitcoin price of $250,000, and while that may sound outrageous, consider6:
- From a macro viewpoint, a currency’s market cap generally grows to whatever size is required to support the underlying economy.
- The most compelling use case for cryptocurrencies is that they become the de-facto monetary standard for the rapidly developing Internet of Things (IoT).
- How big, potentially, is the IoT? John Chambers estimated that the market could be as large as $19 trillion. Roughly the same size as the entire U.S. economy.
- If we look at the monetary base supporting America’s current GDP of $18.6 trillion, it’s about $3 trillion.
- Using that as a baseline market cap for bitcoin, one could back into a figure in the mid-$200,000s.
WHAT DOES MY 2 CENTS ADD UP TO?
If you are an investor, you generally fall into one of two categories. You invest in things that don’t change, or you invest in things that do. (Sometimes both.)
Famed value investor Warren Buffett recently called cryptocurrencies “rat poison.” But consider his frame of reference. To quote Buffett himself: “[My] approach is very much profiting from lack of change rather than from change.” He buys established companies with slow, steady growth that may compound over the long term, things like: Wrigley’s Chewing Gum, GEICO insurance, Seas Candies, Southwest Airlines, etc.
That’s why he hates crypto-assets.
By contrast, I’m a macro investor who invests in things that do change. And I have found that, when those things are misunderstood, that’s where investors may find the highest potential returns. Don’t forget that just a year ago Buffett admitted he “blew it” by not investing in Google ( GOOGL ) and Amazon ( AMZN ) during their early days.
So in conclusion, let’s consider another Buffett quote: “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”
My view is that Mr. Buffett is obsessed with the scoreboard of speculation—i.e., what the hot money is doing in the crypto-blockchain space. That’s not what I’m focused on at all.
I’m focused on the playing field: a nascent digital IoT marketplace, potentially worth $19 trillion or more, which is in the midst of creating a new type of monetary standard. This diverse, digital ecosystem is showing signs of rapid growth. And many different types of coins may have a place in this ecosystem, with overall cryptocurrency growth supported by interoperability among all of them.
It is not a winner-take-all scenario, in my view. Bitcoin ( BTC-USD ) probably won’t be the only winner. There could be plenty of winners as this new world unfolds—among cryptocurrencies, hardware makers, and businesses that learn to capitalize on the blockchain.
It’s only “rat poison” if your investment philosophy is based on optimizing the status quo. For those of us who invest in change, it’s called “opportunity.”
This entry is intended for information purposes only and does not constitute investment advice. This entry contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex ( BKC ) ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.
1 Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.
2 A swap contract is an agreement between two parties to exchange financial instruments at specified periods of time. Most swaps involve cash flows based on a notional principal amount based on a benchmark rate or index price. For example one party may swap cash for an asset with promise to swap back at a later time at a specified price or a floating price based on an index.
3 A cryptocurrency is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.
Exchange Traded Concepts, LLC serves as the investment advisor and Vident Investment Advisory & BKCM Funds, LLC serve as sub advisors to the fund. The Funds are distributed by Foreside Fund Services, LLC., which is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.
Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' summary and full prospectuses, which may be obtained by calling 1-844-REX-1414. Read the prospectus carefully before investing.
There is little regulation of cryptocurrency and blockchain technology other than the intrinsic public nature of the blockchain system. Any future regulatory developments could affect the viability and expansion of the use of cryptocurrency and blockchain technology. Cryptocurrency and blockchain technology systems may operate across many national boundaries and regulatory jurisdictions; therefore, cryptocurrency and blockchain technology may be subject to widespread and inconsistent regulation.
Currently, there are few public companies where blockchain technology represents an attributable and significant revenue stream. Blockchain technology may never develop optimized transactional processes that lead to increased realized economic returns to any company in which the fund invests.
Generally, cryptocurrency and blockchain technology is not a product or service that provides identifiable revenue for companies that implement or otherwise use it. Therefore, the values of the stocks in which the fund will invest may not be a reflection of their connection to cryptocurrency and blockchain technology, but may be based on other business operations.
Cryptocurrency Risk . By virtue of the Fund’s investment in stocks that derive revenue from cryptocurrency-related activities, shareholders may be exposed indirectly to the risks of cryptocurrencies. Cryptocurrencies are extremely new and nontraditional assets and a potential shareholder’s ability to evaluate the performance of cryptocurrencies be limited. Digital assets, represented on a decentralized public transaction ledger that is maintained by an open source protocol, are substantively different from traditional assets and investments. Because if the complex nature of cryptocurrency, an investor in the Fund may face numerous material risks that may not be present in other investments. Current IRS guidance indicates that digital assets such as cryptocurrencies should be treated and taxed as property, and that transactions involving the payment of cryptocurrency for goods and services should be treated as barter transactions. This treatment may create a potential tax reporting requirement in any circumstance where the ownership of a cryptocurrency passes from one person to another.
Blockchain Technology Risk . The stocks in which the Fund will invest will be subject to the risks associated with blockchain technology, which is a new and relatively untested technology. The risks associated with blockchain technology may not emerge until the technology is widely used. Blockchain systems could be vulnerable to fraud, particularly if a significant minority of participants colluded to defraud the rest. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility.
An investment in the Fund in is subject to risks including loss of principal. There can be no assurance the Fund will achieve it's investment objectives. The Fund can be more volatile than broad market averages. Additional risks for the Fund include: emerging markets risk, foreign securities risk, geographic risk, geopolitical risk, liquidity risk, non-diversification risk, technology risk, and valuation risk. For a complete description of these risk please read the prospectus carefully.
Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. REX NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid-Point between the Bid and Ask price as of the close of exchange. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. In emerging markets, these risks are heightened, and lower trading volumes may occur. Investments in smaller companies typically exhibit higher volatility.
