The toothpaste doesn’t go back into the tube…

And now that the technology (blockchain technology, to be clear) underlying the crypto-craze is out, it is here to stay.

How the technology is used effectively for the benefit of society and how it is regulated are the big remaining questions.

Like anything else, just because you can doesn’t mean you should. So, just because one can create a “crypto-kitty” and sell it for unfathomable amounts of digital currency doesn’t mean one should.

I have heard it tossed around that “blockchain technology” is a solution looking for a problem. I have never heard anyone raving about their great experience with buying a home (let alone in a foreign country) or trying to locate shares of stock to sell short in the market from their prime broker. Ever heard of Regulation SHO?

Rule 203(b)(1) and (2) – Locate Requirement. Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security. This “locate” must be made and documented prior to effecting the short sale.

There are an infinite number of use-cases for blockchain technology, as with “internet technology” – but that didn’t (and doesn’t) make a good and profitable idea. So, there will be many coins, currencies, tokens, etc… that fail. Go to zero. Done. Investors will lose everything. But there will be the Microsofts, Facebooks and Amazons, which will more than make up for the losers. Again, the max loss in any cryptoasset is generally 100%, but the max gain for those that survive is infinite.

I think Bitcoin was a good proof of concept for blockchain technology and the idea that a digital currency does work. Erik Townsend of described it well using the Wright Brothers’ first aircraft – the Wright Flyer – as an example. The Wright Flyer was never going to take hundreds of people from coast to coast several times each day. It was designed with one goal in mind: to prove that air travel was possible. It succeeded beautifully but it was never going to compete with Boeing. Bitcoin is similar. It proves that it is possible to exchange value for goods and services using no designated trusted third party to maintain the record of accounts. It has not yet proved itself as a store of value. It may never succeed there – and to be fair, no other currency has done so, to date so it would be an absolute miracle if it happens. In fact, the historical record is unambiguous in its verdict – all fiat currencies that have ever existed have eventually collapsed in on themselves amid political thievery called inflation... except for the ones that haven’t failed yet.

Here is the thing… Bitcoin may never have to prove itself as a store of value. It may continue to exist as a medium of exchange between stores of value and utilities. For example, when I want to move my own assets from a store of value position, to a utility position in my portfolio, I may use the “US Dollar Token” as the medium of exchange between my gold (store of value) and the plumbing work (utility) that I need done. The dollar is essentially an extremely short-term store of value in this case. We can shorten that time exponentially with:

1.        A digital token backed by physical gold – this is my store of value.

2.       Bitcoin – this is my medium of exchange. It could be any cryptocurrency.


The digital token backed by physical gold has an exchange rate with Ethereum (or Bitcoin). The digital token can be exchanged to Ethereum faster and more cheaply than you could exchange US Dollars for Euros at your local bank. So, in my example, I would convert the appropriate amount of my (store of value) token into the appropriate amount of Bitcoin at the very moment I received the bill from the plumber – and transfer it to his address with my cell phone. If he then at the same moment converts the Bitcoin he just received from me to whatever his preferred store of value is, the chain is complete. The Bitcoin exists only to facilitate the exchange from store of value to store of value.

The very idea that people can’t figure out how to value “a” Bitcoin let alone “all” the Bitcoin(s) is not all that surprising.  Valuation of currency exchange is one of the more difficult aspects of a full understanding of global economics. Consider if I asked you, “What is the dollar in your pocket worth?”, how would you answer? Would you answer me differently if we were in a foreign country?

The CFA® Institute curriculum on the subject shares this quote from former Federal Reserve Bank Chairman, Alan Greenspan:

“Having endeavored to forecast exchange rates for more than half a century, I have understandably developed a significant amount of humility about my ability in this area.”

Ultimately, Bitcoin (and any other currency or network) gets its value as a function of the demand for, and supply of it. If people suddenly begin to use crypto-kitties as their “short-term” store of value, i.e., their medium of exchange – then Bitcoin will go to zero. Fast. On the other hand, if adopted as a reliable (or preferred) medium of exchange then the upside is unlimited.

Those who are speculating on Bitcoin, and other cryptocurrencies are betting on future network size. Period. They are betting that there will be greater demand for “short-term stores of value for exchange purposes” than there is today. I’d say that is a good bet. But unfortunately, we can’t know which cryptocurrency (if any) will stand the test of time. The “die hard” Bitcoin, or Ethereum enthusiasts may think they are betting on the future of the internet, what they may be doing is putting all their chips into… and we know that while the internet was massively successful, went bankrupt (along with many other use cases) along the way. My point is that it’s not enough to know that the underlying trend is going to be successful - you must also be willing to admit when you’re wrong (and you will be), cut your losses, and move on to the next idea.

So, I don’t think my grandkids will pay for an oil change with Bitcoin – but I also don’t think they will pay with a dollar, or a piece of plastic that says “Visa”. In the interim, there is a lot of money to be made (and lost).

One of the major reasons for starting our fund was to get ahead of any Exchange-Traded product that might become available in the market. Anytime something goes from being hard to buy, to being easy to buy there is a rush to get invested. Well, the SIX Swiss Exchange started trading this very product last week. This doesn’t make it easy for most Americans to buy, but it’s a step in that direction. The genie is not going back in the bottle now. The trick is figuring out how to regulate the marketplace.

My personal belief is that the area most-ripe for speculation in the blockchain space is in asset-backed digital tokens. These tokens exist to unlock value for society while reducing the cost society must pay to physically extract this value. This could be applied to real estate, fine art or precious metals, to name a few. The possibilities are virtually infinite. What is missing is institutional participation.

KPMG recently published a paper titled “Institutionalization of Cryptoassets” which is a must-read for anyone interested in the space. Interestingly many of the very institutions which could help bring legitimacy to the space are directly threatened by the success of the technology – for this reason and others, it is likely to be volatile market for some time to come.

To hear directly from someone on the frontlines of the institutional side of the crypto business, check out this episode of the Chat with Traders Podcast featuring Bobby Cho of Cumberland – the crypto arm of Chicago trading firm DRW. And lastly, if you question whether the institutional money will ever make it into the crypto space – look no further than what we are doing here with the Third Wave Digital Asset Fund, and for a much larger scale example you can check out the Morgan Creek Digital Asset Index Fund.


The institutional wave is coming – the Third Wave is ready.



Shane Fleury

President & CIO | Elevate Ventures