What’s changed for blockchain since the crypto winter?

23rd October 2020

David Thomson has been featured in the new issue of New Model Advisor by Ian Horne.

It’s not the time to talk about second waves, is it? Thankfully, rather than discussing the outbreak of
a pandemic, I am referring to blockchain and cryptocurrency, and why the Bitcoin surge of 2017 and
the ‘crypto winter’ that followed will not define the success of either.
At the time of writing the value of Bitcoin sits just above £8,800. At this point should we still be
drawing comparisons with the tulip and dotcom bubbles?

New frontier

Crypto and blockchain have evolved since they last hogged the headlines. Ignore the Bitcoin price
for a second, because that is not really the point. Instead, let’s look at fundamental changes within
Bitcoin and crypto, and what they mean for people with traditional finance backgrounds.

For this I bring in Charlie Morris, chairman of Crypto terminal and asset manager Bytetree. I will
also bring in Ben Sebley, partner at crypto banking, trading and FX firm BCB Group.

It should be noted that Morris spent 17 years at HSBC Global Asset Management as the head of
absolute return. Sebley, meanwhile, worked as an emerging markets sales trader for Credit Suisse
for seven years.

These guys are not internet teenagers promising spectacular returns based on spurious arguments.
Nor are they doing it from their parents’ basements.

What’s new? From Morris’s perspective it is that perceptions of crypto should shift. Rather than view
it as currency, we should instead be viewing it as an asset.

In his view, this is where crypto has an intrinsic value – something that detractors have said it lacks.
Its intrinsic value, put simply, is the network. Much like Facebook or Twitter would be utterly
worthless if everybody stopped using it, so too with cryptocurrency. If you wanted to be pedantic you
could say the same about fiat currency also.

Through ByteTree, and the terminal that it has built, Morris has also been helping investors to
assess what is going on. As he runs through a demo of the terminal, he shows me recent
transactions for Bitcoin. Intriguingly, there are three transactions of $25m (£19.2m), made during
Chinese trading hours. There are also plenty of smaller transactions.
‘We’re trying to identify the truth in the network,’ says Morris.

Let’s look more closely at that. Morris points out transactions for a lesser-regarded cryptocurrency,
Bitcoin SV.
The terminal shows several transactions for thousands of pounds. But there are also 49
transactions at 1 cent.
‘The network depth is less convincing,’ Morris says.
What does that mean? Put simply, we are moving towards a point where risks in crypto are more
easily identified.
‘We need to do the homework to understand where the economic value add is, and if it works,’ he
says.

After the winter

So yes, there are risks. But any investment seminar attendee, especially after a long day, could be
one whisky from imitating Jack from The Shining and writing ‘investments may go down as well as
up’ 1,000 times in their notepad.

Morris points out that in 2017, the year where Bitcoin almost reached the $20,000 dollar threshold,
the average dollar price of Bitcoin was $3,898. At present, the average price for the past year is
pretty close to $9,000.

As we look ahead, we should now assess the total transaction values, while being wary of crypto
whales trying to manipulate the market.
‘If the network is growing the value is going up. You’re buying into the network, and the more people
involved the better it is. If people get bored of it, it stops workingm,’ Morris says.
We also need to look at the crypto in circulation. The ByteTree terminal shows that 6,300 Bitcoins
have been mined in the past week and 6,881 have been spent. This is good news for crypto
investors.
‘If the miners aren’t selling, it’s because they think the market is weak.’
Morris also mentions that crypto investors can do themselves a favour by trading or using the asset
regularly.
‘If you buy £1m of Bitcoin and hide it under your pillow, how useful is that? You’ll damage the
network by not using them.’

I could dwell on Morris’s comments for far longer, but it is high time I brought in Sebley.
BCB Group believes it has fixed one of crypto’s biggest problems by offering banking solutions to
crypto companies in 29 currencies.
‘There are very few banks who can deal with crypto in Europe, so you had to use the sleepy old
private banks,’ Sebley says.
‘They weren’t designed to work with tech companies who needed a full tech stack and needed to
move quickly. There were some fly-by-night challengers too, but they lacked the experience and
technology to stick around.’

Proper crypto banking is an advancement, and in fact BCB Group was the first FCA regulated
payment services firm dedicated to the crypto industry in existence.

This potentially puts crypto and blockchain firms in an unusual position. They are happy to take a
pop at old school methods and banking, and yet they are in need of legitimacy, regulation, and the backing of serious and professional investors. Sebley believes that the last few years have been vital in delivering these things.

‘When the crypto retail bubble popped, it was hyperbolic and unsustainable. The industry was
young, there was no regulation. They were young tech-focused guys and not professionals. They
lacked experience. We then went into the crypto winter, that dragged until the end of last year. The
prices went off, and to the outsider it looked like crypto was a one-off thing, a bad investment.
‘But in the background, people could see that the underlying tech was the future,’ adds.
‘People thought the traditional guys would buy crypto. They didn’t. Instead it was venture capitalists,
who invested directly into the crypto companies, getting that arms-length exposure to the industry.’

BCB Group felt the full force of this. ‘People were chucking money at us. They still are. Andreessen
Horowitz are oversubscribed multiple times for every crypto fund they have.’
‘It’s brought legitimate cash, and with that an influx of professionals. All the inexperienced guys went
bust in the crypto winter – it was a great shakeout. The good projects, the big infrastructure projects,
managed to stay. A lot of ex-fintech and finance people are coming along now.’

Bargepole territory

There is an argument, then, that this market has really changed.
Sebley now believes BCB Group, and others in the sector, can make banking better. For instance,
he explains that blockchain enables immediate currency exchange.
‘Over Swift, a transfer from Hong Kong to New York can take two days. We’ve made it so you can
now trade fiat immediately. This is really the future of banking,’ he says.
Sebley also discusses the role of Bitcoin.

‘Ultra-high net worth investors know it’s an inflationary and traditional banking system hedge,’ he says. ‘They can cross borders with it, move it around. It’s a useful thing to have if you’re ultra-wealthy.

‘Another big thing that’s starting to be discussed is that Bitcoin was always viewed as a currency.
That’s changed. It’s basically digital gold with extras.’

Morris and Sebley make interesting observations on the evolution of crypto.
But it is notable that the interest is largely from venture capital. As an adviser or wealth manager,
can you really have any confidence investing your clients in this? I sent this article to some of our
readers to gauge the current mood.

Colin Low, managing director of financial advice firm Kingsfleet Wealth, explains that he gives
crypto a wide berth.
‘We’ve always taken the view that if we don’t really understand the asset or can’t explain what
drives its demand, we don’t feel we should be involved,’ he said.

David Thomson, chief investment officer at VWM Wealth, has his own experiences of investing in
Bitcoin.
He opened up a Bitcoin account in 2017 to see what he could learn. Having lost £50 over the space
of a few months, he also recalls that it was difficult to invest and that his bank froze his card when
he tried. A pre-paid card delivered more favourable results.
Would he invest client money in it?
‘To say I wouldn’t go near it with a bargepole is an understatement,’ he said.
‘I might reconsider if governments started issuing cryptocurrencies and they gain more
respectability and credibility.’

I also put the question to Jon Smith, head of research at wealth manager Casterbridge Wealth.
He explains that he would not recommend crypto assets to clients but is actively seeking
opportunities where companies are using blockchain to create new solutions and efficiencies.
He also mentions that blockchain can be used to provide exact sources for every item in supply
chains.
‘As the world becomes more sustainable it is more important to know the source of our products,’ he
says.
Explaining his hesitance towards crypto investing, he adds:
‘The biggest flaws are that nobody controls supply, and the anonymity surrounding ownership.
Supply increases as an output of demand, and no central bank or government wants a mainstream
currency that they cannot provide intervention for.’

For a final perspective, I bring in Najib El-Rayyes, portfolio manager at Rivers Capital Management.
El-Rayyes has traded cryptos including Bitcoin, Etherium, Litecoin and XRP in the past, but says it
was from a speculative perspective.
‘I have much higher hopes for the blockchain technology at this stage than I do for cryptocurrencies
in their current form,’ he says.

It seems as though most regulated wealth and advice firms will need more convincing before diving
into Bitcoin and blockchain.
Nonetheless, there is clearly innovation here, and it would be needlessly dismissive to ignore this.
For those who properly understand the crypto markets, there may well be big opportunities.
As Morris and Sebley suggest, blockchain and crypto are evolving, and in a way that many
investors will be intrigued by. The post-bubble crypto world has been far from a barren wasteland,
and for those who can afford to take on the risk, there could well be upside.