Gold vs crypto: Who wins this time?

Our award-winning analyst has all the crypto news including Davos, Tron and a war with the yellow metal. 

Jan Van Eck, the chief executive of the eponymous fund management company VanEck Associates, thinks that crypto investors are souring on their chosen asset class in favour of a store of value of proven worth down the millennia: gold.

In an interview with CNBC, Van Eck said: "I do think that bitcoin pulled a little bit of demand away from gold in 2017."

He thinks that positioning has now reversed.

"Interestingly, we just polled 4,000 bitcoin investors. And their No. 1 investment for 2019 is actually gold. So, gold lost to bitcoin [before], and now it's going the other way."

Gold bugs and crypto investors arguably share similarly pessimistic assessments on the future performance of asset classes such as equities and bonds.

The classic safe haven may be about to enter a purple patch but, from a crypto perspective, it still has its weaknesses. Chief among those is the question of storage, which is invariably entrusted to third parties with well-secured vaults.

So, when the Maduro government in Venezuela tried to repatriate its gold from the Bank of England's vaults only to be rebuffed, the crypto crowd was quick to point out that with bitcoin (providing you were the custodian of your private keys and not an exchange) this could not happen. 

Tokenised gold 

Bringing together the gold theme with the tokenisation trend we identified last week, is a product from Allocated Bullion Exchange which aims to tokenise gold to make it more liquid by issuing tokens on a blockchain that are backed by gold. 

ABX (ABX) claims to be the leading electronic institutional exchange for allocated physical precious metals connecting the world's major liquidity centres for gold trading. It is in the business of making gold more tradeable and has turned to tokenisation to bring this about.

Thomas Coughlin, chief executive of ABX, commenting on the launch of the Kinesis stablecoin backed 1:1 by silver and gold, said: "With the global financial sector in turmoil, a renewed interest in traditional safe haven investment saw gold in 2018 out-perform many global equity markets and currencies. 

"The tokenisation of physical gold and the addition of a velocity-based yield combines the best of both precious metals and blockchain technology. Using innovative distributed ledger technology brings liquidity to trading and showcases how old-world investment and new-world technology can work together to create a new monetary system. 

"Explaining why they had decided to use a so-called stablecoin to effect the tokenisation Coughlin said:  "Most existing cryptocurrencies are too volatile for everyday use, whilst stablecoins such as Kinesis – based 1:1 on physical gold and silver – have the advantage of being uniquely positioned both within the gold market and as a stablecoin."

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Staying with the tokenisation, last week we said not to expect a flood of such efforts to appear but, judging by the number that have passed over my desk this past week or so, that may have been too cautious a statement.

Germany's crypto bank launches STO, tZERO is live

Bitwala, the German-based crypto bank, has launched a security token offering that will provide investors with a right to a share of revenues and regular dividend payments. The STO is at the private sale stage at the moment and the bank says it is compliant with German securities regulation which means EU passporting means is open to UK investors. Although the official prospectus has not yet been published, the token bestows 15% preferential participation rights to dividends and exit proceeds.

Regarding the business fundamentals, a company spokesperson provided the following statement to interactive investor: "Bitwala was founded [at the] end of 2015 with a BTC to EUR service which attracted a total of 75,000 users from around the world. During our two years of operations we processed €77 million in trades and had growth of between 20 to 30 percent month-on-month. End of 2018 Bitwala relaunched with its one account merging banking and crypto in one simple and safe-to-use investment platform."

Another STO, this time in the gaming space, comes from Planet Digital Partners. It is a gaming studio set up by top executives formerly from some of the biggest names in the industry. With a number of successful games already in its portfolio, such as Cabela's 'The Hunt,' Cooking Mama, and Bass Pro 'The Strike', this is a solid offering, already booking revenues.

Planet Digital is not just deploying blockchain for its fundraising, but also plans to integrate the tech in its games. Chief executive Steve Grossman said: "We're thrilled to bring blockchain to our games and deliver compelling new experiences to gamers that were previously impossible."

And finally, tZERO, a platform that has been at the forefront of the security token approach in the US, has opened its doors.

Stephen McKeon, associate professor of finance at Orgeon University and the chief strategy advisor at Security Token Academy, shared his thought s on the current clutch of high-quality STOs, starting with the Bitwala sale.

"The Bitwala token sale is an example of equity being issued on-chain.  In contrast to many ICOs we observed in 2017 and 2018, these tokens come with rights that investors are accustomed to receiving (cash flow rights in the form of dividends and exit proceeds) and the issuance is compliant with German regulations.  

"The advantage over traditional early stage equity is that the tokens can be traded and the investor doesn't have to wait for a liquidity event to realize gains that may accrue to equity holders."
 
Regarding tZERO, McKeon highlights the connection with the mainstream market given its ownership by Overstock, the crypto-friendly internet retailer that trades on Nasdaq.

"The long awaited tZERO launch adds another piece of first-generation security token infrastructure, which began arriving in 2018 and will accelerate in 2019.  Equity investors are clearly cheering the news as Overstock, which owns the majority of the tZERO platform, saw their common stock rise over 30% since Thursday (24 January) morning." 

Overstock.com (NASDAQ:OSTK) added to gains yesterday, trading 4.2% higher to close at $19.15. 

AK Jensen and London Stock Exchange warm to crypto

And in another indication of the crossover between crypto and the mainstream, asset manager AK Jensen has selected the Caspian institutional-grade crypto trading platform for its crypto arm, AKJ Crypto. AK Jensen has $18 billion of assets under management.

In a statement about the news, Neal Mitra, chief executive of AKJ Crypto, said: "Together with Caspian, we have a very powerful offering and this will put crypto funds on our platform in a very strong position for future growth in a more mature market. Powered by Caspian's institutional-grade trading infrastructure, AKJ Crypto now has a complete turnkey solution and intends to consolidate its position as the go-to platform for hedge fund managers and institutional investors seeking to invest in digital assets."

The cross-fertilisation doesn't end there. The London Stock Exchange (LSE:LSE) announced last week that it was licensing its trading technology to a new Hong Kong-based crypto exchange launching later this year to serve both institutional and retail customers.

The LSE's move comes after Nasdaq struck similar deals last year to provide its expertise to crypto trading firms and exchanges. 

Fidelity and the Intercontinental Exchange's Bakkt will also soon be providing trading and custodial services to institutional clients.

Crypto exchange woes

As the bear market rolls on, crypto exchanges are praying that the 'crypto winter' ends soon.

Huobi's chief executive warned it was doing all it could to preserve cash, presumably in response to shrivelling trading volumes.

Coinbase is diversifying beyond its US base with a move into Asia, still the dominant centre for crypto trading. In a company blog post it said it was opening an Asia-focused custody operation for its Coinbase Pro customers.

Falling trading volumes are not the only problem exchanges have to contend with – security issues continue to plague the sector. This time it is New Zealand outfit Cryptopia that has been hacked, with losses totalling $16 million , mostly in Ethereum and Ethereum-compliant tokens. The New Zealand police are investigating.

Davos crowd, JP Morgan and BIS weigh in

Blockchain was very much on the agenda at Davos, but bitcoin not so much. In one session devoted to distributed ledger technology Jeff Schumacher, founder of BCG Digital Ventures, while convinced of the worth of the  technology was not so enamoured with bitcoin. He said its value would eventually go to zero. "I do believe it will go to zero. I think it's a great technology but I don't believe it's a currency. It's not based on anything," he insisted. 

Ripple chief executive Brad Garlinghouse was also on the panel said he expected adoption of blockchain to be well-established in five years.

Edith Yeung from 500 Startup Partners expects adoption to take-off first in the payments arena, particularly in Asia.

"Many developing countries, where just to start with they don't even have credit cards, there's no particular infrastructure, it's almost easier to see sort of blockchain-enabled payments, to see in Asia, you will see more action happening in Asia more than US and Europe," she told CNBC.

The US is somewhat of a laggard in payments tech given that contactless payments are still non-existent.

Meanwhile, JP Morgan published a client note last week in which analyst Jan Loeys argued that bitcoin had failed as a store of  value and was currently trading at prices below the cost of mining. Its analysts say that it hasn't worked as an asset with low correlation to other assets such as equities. 

"Low correlations have little value if the hedge asset itself is in a bear market," he opined. 

The only scenario in which bitcoin had a future, according to Loeys was if there was a total collapse in confidence in established asset classes.

"We have long been sceptical of cryptocurrencies' value in most environments other than a dystopian one characterized by a loss of faith in all major reserve assets."

Adding to the doubts on crypto and bitcoin was a working paper from the Bank for International Settlements (BIS), sometimes referred to as the central bankers' bank. The paper by Raphael Auer from the monetary and economic department, specifically looked at bitcoin's proof-of-work mechanism for securing the network and minting new coins, concluding that bitcoin would eventually have a serious liquidity problem and would never be able to scale to a transaction speed that would allow it to function as a means of payment. 

Crucially, the report's author concluded that because the bulk of miner income comes from block rewards and very little by comparison from fees paid by those transacting, the funds available to miners will fall as the block reward halving mechanism (which occurs roughly every four years) will see liquidity evaporate from the system and miners exit, leading to a seizing up of transaction verifications. 

However, bitcoin's defenders point out that block rewards won't fall to zero until 2140, providing plenty of time for core developers to improve the protocol as required.

The paper concludes: "Simple calculations suggest that once block rewards are zero, it
could take months before a bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only
fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation."

The BIS is releasing papers on crypto because of the interest shown by central banks in exploring and experimenting with use cases for distributed ledger technology, although the issuance of a central bank digital currency is some way off, if it happens at all. 

Tron on a roll

The big talking point of the past couple of weeks has been the Tron network. A relatively new blockchain led by chief executive Justin Sun, it has been gaining traction at a fundamental level with decentralised application (dapp) development and also at the valuation level. Tron now has more dapps running on its blockchain than Ethereum.

Up until yesterday when bitcoin dropped, it had been bucking the trend with bullish price action. The reason was the initial coin offering which took place yesterday for the BitTorrent Token (BTT). The sale, in which the Binance exchange ran one of the markets, only lasted 15 minutes, such was the demand. 

Last year, Tron bought BitTorrent, the peer-to-peer file-sharing pioneer beloved of those pirating software and digital content such as music and films, for an undisclosed sum. It has now released a token to build value-added services on top of the file-sharing network, although there are doubts from some quarters that the Tron technology will be able to cope with the BitTorrent transaction volume. 

One of the first uses of the token will be to incentivize BitTorrent users to share more files (known as 'seeding') through payment of BTT.

The Tron token (TRX) price had been rising as the ICO approached, and is currently priced at $0.026 as the hoped for post-ICO boost fails to materialise.

The run up in the Tron price of the past few days may also have sucked some of the oxygen out of the rest of the market, helping to bring forward the sea of red that has afflicted the first days of trading in this week's crypto markets.