Enter the DeFi sphere
Investors are always in search of the “New New” thing.
Investing in innovation has historically been rewarding, especially if you can get in position as a major paradigm change gains traction. Michael Lewis introduced the following timeless observation while doing press for his upcoming book; ‘The New New Thing’, back in 1999.
It’s easier to say what the “New New” thing is not than to say what it is.
It is not necessarily a new invention. It is not even, necessarily, a new idea — most everything has been considered by someone, at some point. The ‘New New Thing’ is a notion that’s poised to be taken seriously. It’s the idea that is moments from gaining general acceptance and, when it does, will change the world.” In the world of FinTech, and based on recent interest across the media and the general public, the so-called ‘Crypto’ sphere is the ‘New New Thing’ and it has been, on and off, for the last decade.
Crypto Currency’s increasing potential to be today’s “New New” thing means more and more investors are looking for ways to approach this area rationally.
I often get asked about the Crypto space by investors, who are looking for answers for how to approach this area rationally. Everyone seems to have a story of dipping their toes in the alluring waters or having a near miss with incredible potential riches or having been lured outside their comfort zone and having experienced significant losses – be it through a poorly timed market entry to the volatile realities, or the more upsetting experience of outright theft or fraud. Let’s dive into it all in search of answers…
The appeal originally seemed limited to money laundering and circumventing capital exchange controls…
At the time I first learned about Bitcoin, I could not really see its benefits over title-held physical allocated gold held outside the banking system for wealth protection. As a means of payment its functionality appeared suboptimal compared with existing platforms such as Paypal and traditional players such as SWIFT and the global credit card providers – too cumbersome, a little shady, with no real infrastructure, a limited network of dedicated but marginal participants and extremely volatile valuations. But I put it on my mental ‘Things to watch’ list and moved on with my life and business projects. The price of Bitcoin then was about that of a good double espresso.
Now, many find themselves having moments of wishful thinking; “if only I had…”,
However, as an investor on a personal level and as a fiduciary entrusted with the stewardship of other people’s hard-earned wealth, my focus has always been first on the ‘return of the money’ over the ‘return on the money’ and for all its promise the crypto space has only recently begun to meet my criteria for transparent and secure ownership.
The inherent value of a cryptocurrency as an alternative method to store and transmit units of value has gained acceptance from a critical mass of investors, technologists, regulators & many others.
It’s clear that cryptocurrency is more than a passing phenomenon. Many smart people believe that it represents the beginning of a new phase of technology-driven markets that have the potential to disrupt conventional market strategies, longstanding business practices and established regulatory perspectives – all to the benefit of consumers and broader macroeconomic efficiency as the middle-man, who has been displaced in other areas of our digital reality and even the financial markets, is finally sent the way of the open outcry markets and the bank teller.
Central Banks, legacy financial players, and ventures rising from the crypto sphere have been testing and implementing aspects of the distributed ledger technology and smart contracts within the existing system in order to further rationalize their ‘back office’ and market operations.
At first this may lead to a rationalization of the current ‘alphabet soup’ of service providers that handle processing and record keeping for traditional markets, such as CREST. Some exchanges may establish their own options or look to purchase some of the best operated crypto exchange operators to add a new line of revenues and in order to provide a comprehensive range of services, not to mention to tap into the energy of the current zeitgeist.
Over the long term, markets could very well transform from the current public centralized nature to a private decentralized format.
As for the mania, tall tales, fear and greed and outright fraud, none of these developments are all that surprising taken in the context of the history of financial innovation – surely some less than forthright characters set up shop in the alleys around 68 Wall Street back in the late 1790s and whispered alluring tales of massive gains with little risk to anyone passing who would listen. And certainly the madness of crowds is nothing new nor is tales of confused regulators, and fierce lashing out by the established order against any new challengers to their profitable system is a given.
So as a fiduciary, who takes their responsibility seriously, can you really sign off on an investment into this space?
The answer should be yes, if you have done your due diligence and found supporting fundamentals that match your mandate. Crypto tokens and related ventures – should in my opinion be considered akin to traditional VC investing – high risk/high return with increased illiquidity risk – and once the continuous boom/bust cycle clears out the hubris it may very well turn out to be one of the great wealth creation opportunities of our time.
As Shakespeare put it; “There is a tide in the affairs of men, which taken at the flood leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.” With a coherent clear-eyed approach and proper risk management this is the kind of opportunity serious long-term investors must look to harness.
Here’s how we are taking a strategic approach to Crypto…
At the Strategic Funds we have been monitoring the crypto sphere for a long time and have identified opportunities that warrant attention. From there we have devised investment strategies based on our experience in traditional markets combined with the input of a select group of digital asset native investment managers. Collectively this has enabled us to create a selection of diverse coherent clear-eyed approaches, as always with a focus on effective risk management, for harnessing this emerging opportunity. In 2021 we will be introducing these to Accredited Investors.
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