Saturday, February 24, 2018

Six compelling reasons for cryptocurrency.

I've been delaying this article during the ramp up of cryptocurrencies but since the prices have sort of corrected and calmed down, it is time to look at cryptocurrencies without all that excitement from the bull market..

Fortunately, David Lee Kuo Chuen, the lecturer who taught me fund management more than a decade ago, is the invited editor for the latest Journal of Alternative Investments and articles in Volume 20 Number 3 seems to be a very objective look at this new asset class.

The next few articles on this blog will be cryptocurrency related but, hopefully, hype free.

Today we will focus on six compelling reasons why cryptocurrencies should not casually dismissed as yet another bubble like Tulipmania. Cryptocurrencies is a significant advance for humanity, much like that moment we invented the idea of limited liability in companies.

Here are the six reasons for cryptocurrency :

a) Non-correlation with traditional asset classes

The first reason is that crypto-currencies are not correlated with the equity markets in general. While this is generally true, remember that during the massive market correction, cryptocurrencies had a mini-crash of it's own. One common theme that keeps repeating itself is that in a major market crash, every asset becomes closely correlated to each other.

b) Transparency

Blockchains have a unique ability to centralise trust. This provides transparency for philanthropy and other funds. This is a very understated advantage.

c) ICOs address the problems faced by  startups

As much as I refuse to touch ICOs ( It seems that all you need is a convincing White paper ), blockchain technology finally takes the power away from a VC and puts it in the hands of an entrepreneur. This is a new form of capitalism that can make or break our personal finances. Those who can tell the good ICOs from the scams will be able to enrich themselves very quickly.

d) Decentralised exchanges resolve the issue of illiquidity

The problem of illiquidity of early startup investing instantly disappears because decentralised exchanges gives you a constant exit after you put money in an ICO. Case in point, getting an exotic alt-coin like Doge Coin is way easier than buying one lot of Global Testing on SGX.

e) Cryptocurrency as a new asset class

I think David Lee's hypothesis is that Cryptocurrency is a completely new asset class. It makes a lot of sense because one possible definition of a  commodity is a valuable input to an industrial or agricultural process. Cryptocurrencies are not inputs to any process. More interestingly lawyers are;nt even clear whether when you deposit some crypto into an exchange, you are considered a debtor or someone with full property rights. So cryptocurrency is truly a unique asset class on its own.

f) Fractional ownership

Because you can have such a small component of a bitcoin, imagine the power of fractional ownership of assets and what difference this can make to really poor economies.

More hardcore details to come over the weekend.

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