Cryptocurrency — the digital or virtual currency used as a medium of exchange that employs encryption techniques to control the creation of monetary units and verify the transfer of funds — is one of the most disruptive trends for businesses today. Understanding cryptocurrency and its most well-known vehicles, blockchain and bitcoin, was a topic recently undertaken by a panel of YPO experts during a Facebook Live.
Founder and Chief Executive Officer at eToro group Yoni Assia, Managing Director at Softwire Zoe Cunningham and Co-Founder at Global Crypto Ventures Hervé Larren helped viewers understand the technology’s basic operating practices, as well as its potential ramifications on the economy and individuals investing in it.
Cryptocurrency has made it possible, for the first time, for people to own their financial assets as opposed to owning them in tandem with financial intermediaries and regulated financial institutions. For business owners, it enables a network where different participants and entities come together in a single infrastructure — the blockchain — to initiate some kind of function or transaction. Everyone ultimately arrives at a shared view of the world that minimizes reconciliation, reduces transactional friction, increases cybersecurity and creates opportunities for new products and services.
“When you own bitcoin, you own a private key that gives you access to your money without a third party or central authority’s involvement,” says Assia. “The majority of people in the cryptocurrency community believe that bitcoin will replace gold, or in essence, become digital gold as it contains the first qualities of ‘sound money.’”
Why mine crypto?
Mining, the process by which transactions are verified and added to the public ledger known as blockchain, involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the blockchain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released cryptocurrency.
“As miners (people who validate the transactions within the system), we are betting on the horse track instead of the horse — if applications on the bitcoin network are going to be successful, that means the underlying protocol is going to be successful as well,” explains Larren.
Investing in crypto
In terms of business and CEOs, Cunningham pointed to the recent YPO Global Pulse report, which found that most CEOs do not see blockchain and cryptocurrency as particularly likely to impact their businesses and are not likely to invest in those technologies.
“YPO recently conducted a survey of their members to find out where chief executives are looking at investing in technology right now — the most popular was the cloud and the least was blockchain. So, while there is great opportunity in the technology, it is not going to be something that every business will use,” says Cunningham.
The survey did find, however, that CEOs in the financial services sector expect blockchain technology to impact their organizations over the next 12 months, and as many as 40 percent expect to investment in it.
If you are going to have a crypto portfolio, Assia suggests 80 percent of it should be in the “winning horses” like bitcoin and Ethereum. The other 20 percent can be invested in smaller cryptocurrencies or initial coin offerings (ICOs).
“There are very interesting and lucrative returns in ICOs,” explains Assia. “ICOs are extremely high risk and much less liquid than big cryptocurrencies though like bitcoin and Ethereum. I think if you own a crypto portfolio, 80 percent should be in bitcoin and Ethereum and the other 20 percent you can play with smaller currencies and ICOs”
“I believe bitcoin is going to double as an asset class,” Larren says. “Goldman Sachs has opened a crypto desk and some of the largest hedge funds in New York have opened desks because their clients want to be exposed to it … even when you consider the volatility, adding crypto to your portfolio actually decreases the overall volatility of your portfolio because it’s unrelated to any other asset out there. In terms of allocation, it makes a lot of sense.”
A defining feature of a cryptocurrency and arguably its most endearing allure is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
“Cryptocurrencies cannot be regulated or controlled,” says Assia. “At eToro, we treat bitcoin as a security from a regulatory point of view — reporting it to the different tax authorities and ensuring we have anti-money laundering and compliance processes in place. I think that other firms which deal with cryptocurrencies locally will probably get regulated, but the coin itself and the ability to transfer it from one place to another can simply not be controlled.”
Your future in crypto
While some financial advisers remain skeptical, it’s hard to ignore the massive amount of money invested in crypto. If you talk to a futurist, many predict that crypto will replace some national currencies by 2030. Whatever the future holds, there are real reasons to keep crypto top of mind. While its value will most likely continue to be cyclical, it is changing the commerce landscape, and causing governments to take notice to possibly play a role in the near future.
“It’s quite clear across the whole range of technology that there’s a lot of opportunity here and we really are at a point where we can’t predict the future,” says Cunningham. “It’s a very exciting time and I think to some extent we have to just watch and wait to see what happens.”
“I truly believe this is a game-changer and highly recommend people do more research, learn more, explore owning their own cryptocurrencies and experiment with the technology which is as big as the internet,” Assia concludes.