What is blockchain? How is it connected to crypto? Why has ethereum risen recently and is it justified? What percentage of your savings and investments should crypto typically comprise? Further to Matt Hougan of Bitwise investments talk to the Smart Money Series audience, I have laid out some more detail on these commonly asked questions.
What are some of the benefits of cryptocurrencies?
Cryptocurrencies bring efficiency to the market.
Cryptocurrency is essentially accounting and cryptocurrency allows for the disintermediation, it cuts out the middleman, for instance in the US, when migrant workers send money home, up to 8% of a transfer home is taken by the middle man.
So in essence, they are spending one month a year working for Western Union. (Matt Hougan on Wealthtrack)
Why can't the banking system become more efficient? The position in the middle, is rent seeking power. The wiring process is like a daisy chain, where they are all taking a slice for their services. According to Matt ''Cryptocurrency allows you to send the money to someone in Africa without a middle man. Yes banks could do differently but they'd get less 'rent' etc.''
What is a cryptocurrency index fund:
Matt hougan who joined us last week is chief investment officer of Bitwise but what do they do? Bitwise created the world's first cryptocurrency index fund, the Bitwise 10 Crypto Index Fund, in 2017. They provide 'single asset funds that are liquid, low-cost and secure'.
Matt said the easiest way to explain what they do is to say that they are:
''The S+P 500 for crypto''.
They have a number of excellent research papers on site including this one on the case for cryptocurrency in an institutional portfolio.
Are there any parallels between the initial rise of ETFs and crypto?
Matt was formerly the CEO of ETF.com and InsideETFs. He sees similarities between the skepticism (unsurprisingly by some of the big banks who stood to lose some fees) which greeted ETFs initially. Some of the qualities of ETFs are similar with Crypto. Most of the big banks and fund managers dismissed ETFs as risky etc initially even citing that their rise risked destroying entrepreneurship in the US (amongst other relatively wild statements.) In hindsight arguably they would all have wished they jumped on this opportunity. Now similarly they are all talking about crypto as a risk, fad etc. The disintermediation is similar with both. The same middle man existed prior to the rise of ETFs also.
Who should invest in crypto and how much should you invest?
Crypto is for the bleeding edge of high risk investors, some advise investing no more than around 2% versus 98% which your diversified ETF should hold. The vast portfolio of your asset should be in widely diversified low cost index funds
If you are having 1-2% of portfolio in a diversified cryptocurrency, then hold onto it for 5-7 years. The pay-off is longer term. One of the benefits is that is it non-correlated. However what you do, always bear in mind, it's a high risk investment.
What is Ethereum?
People may be understating the value of ethereum, as it is not just a store of value but has other capabilities which include that it has the ability to do actions such as smart contracts for house buying. ''Ethereum is a decentralized computing platform that uses ETH (also called Ether) to pay transaction fees (or “gas”). Developers can use Ethereum to run decentralized applications (dApps) and issue new crypto assets, known as Ethereum tokens.'' (Coinbase).
Ethereum has a use case AND store of value.
What is blockchain?
Blockchain is the underlying technology for all these cryptocurrency. Bitcoin is one blockchain. Blockchain has a process called mining. They timestamp the stream of numbers you are sent. It has created the concept of digital transactions. It becomes transactional when we can buy and sell things with it.
How many bitcoins are there?
Only 21 million coins which will ever be available. It's a true peer to peer network. The miners are controlling the blockchain. There are rules that can't be changed.
What is bitcoin cash?
'Bitcoin cash' which is separate to normal bitcoin is a recent innovation and has been created based on the rules system which allows for when 51% of those miners vote on something and they make a change, in this case to add a new system to increase the transactions on a blockchain etc. There are forks which allows for new decisions, but the traditional bitcoin will stay at 21m coins. Bitcoin Cash is a fork of Bitcoin that seeks to add more transaction capacity to the network in order to be useful for everyday transactions.
How will or could government regulation affect cryptocurrencies?
The federal reserve, Christine Lagarde of the ECB, are all commenting on cryptocurrency because it is undeniably a big investing growth area, something which could become very big and thus undoubtedly remains topical.
There is always risk of a reactionary government. China for instance has cracked down in some instances. However regulation isn't unwelcome if done right. Hougan has said that some elements of crypto need regulation, for instance to stop the flood of sometimes dubious ICOs (initial coin offerings).
There has been a massive swash of these with a high risk and Matt recommends avoiding these. The fraud potential is very high. However he does believe the imminent Coinbase IPO to be an exciting development and that it is a very exciting company.
What are the drawbacks of investing in cryptocurrencies like bitcoin?
There are undoubtedly a number of drawbacks to cryptocurrencies.
It's highly speculative, it's in it infancy, it's constantly evolving, isn't regulated and is highly susceptible to the booms and busts of every new technology.
Cryptocurrency however is certainly not short of it's naysayers including the acclaimed writer of Black Swan and economist Nouriel Roubini who recently said "In my view, [bitcoin] is not scalable, is not secure, is not decentralized, is not a currency, and remember, many central banks, starting now with the Chinese one, the Swedish, but even the eurozone, are starting to think about creating a central bank digital currency," Roubini said. "Once you have a central bank digital currency, every individual can use an account with the central bank to do payments."
I would highly recommend signing up to the Bitwise newsletter to stay informed on cryptocurrency whether you decide to invest or not. You can find more information on this here. To keep tabs on the prices of the top ten cryptocurrencies you can read more here.
As always none of the above should be regarded as advice and please do your own independent research before making any investments.