Security Tokens: An Emerging Opportunity in Crypto

This is the first in a multi-part series analyzing the potential of security tokens in the world of crypto assets. 

2017 was the year of crypto. Bitcoin became a household phenomenon and increased ~13x in value, Ethereum spurred interest in decentralized applications (dapps), and ICOs became the newest speculative rage.

By contrast, 2018 is shaping up to be a year of maturation for crypto. The SEC has made it clear that they intend to oversee the industry. While some may dislike regulation, it does bring with it a sort of legitimacy and it should deter bad actors. In 2018, we expect to see the emergence of the security token.

The intent of this series is to explore the security token market and better understand the use cases and opportunities. In part 1, we’ll outline the basics of utility tokens, security tokens, and what makes something a security. Future parts will dive into specific analyses of opportunities.

From the highest level, it’s useful to delineate coins from tokens, which both fall under the higher-order bucket of cryptocurrency. Generally, coins operate on an independent blockchain with their own set of rules. It may be a native blockchain like Bitcoin and Ethereum or a fork of another blockchain like Litecoin (of Bitcoin). Coins are typically useful as mediums of exchange and/or a store of value. By contrast, tokens are typically built on top of an existing platform, like Ethereum, and add their own rules and functionality to an existing platform.

Tokens can be further broken down into two categories: utility tokens and security tokens.

  • Utility tokens give holders access to a specific protocol or network, oftentimes enabling them to use an associated product or service. With utility tokens, no ownership rights to the underlying company behind the associated product or service are granted to token holders.
  • Security tokens grant holders ownership rights to an underlying asset. In essence, they are asset investments governed by the protocol set forth by the associated blockchain.

Utility tokens are the most common type of token in existence today. Two examples of utility tokens are:

  • Filecoin – a decentralized file storage platform. Users can pay participants in the network to store files on participating computers’ unused hard drive space. Filecoin is similar to Google Drive or Dropbox, but with no centralized storage location.
  • Golem – a decentralized computing platform. Users can pay participants in the network for unused processing power from participating computers. Golem is a decentralized Amazon cloud compute platform.

The important takeaway is that utility tokens grant the right to participate in a network, not ownership of the network.

What makes something a security? The SEC determines whether something is a security under the Securities Act of 1933. The Supreme Court case of SEC v. W. J. Howey Co is often referenced here, which resulted in a structured test whether or not an offering qualifies as an “investment” and requires registration.

An important clarification needs to be made about the use of the word “security.” As an industry, the crypto world has adopted the term security token to represent ownership in an underlying asset as described above, but the SEC uses the word security to define a broad set of investment instruments, which they regulate. This could mean that utility tokens are also recognized as securities according to the Howey Test.

The Howey Test. If a token (or another instrument) meets all of the following criteria, the SEC considers it an “investment.”

  1. The user is investing money.
  2. The user expects to profit from the investment.
  3. The investment is in a “common enterprise.”
  4. Any profit comes from the efforts of a third-party or promoter.

The first part of the test is fairly easy and most tokens pass. Users are always investing money. This part of the test has been expanded to include the investment of other “assets” in subsequent court cases. Some cases have defined money as “any form of consideration with value.”

The second part, whether or not users expect a profit, is often the case in token raises today. Many of the networks and protocols that are offering utility tokens through ICOs aren’t live at the time of the ICO, so the argument that a holder simply wants access to a particular network (and doesn’t expect to profit) is a difficult one. If there were no expectation of a profit on the side of the ICO utility token buyer, it would make more sense to wait until the project is live before purchasing tokens. Where there is risk, there is reward. We’ve seen some tokens ask for “donations” in order to see a project launched. These tokens offer “consideration of allocation” when a project is live. This seems like a semantic workaround that the SEC probably won’t accept, but companies are likely to continue to try.

The third part of the test talks about whether or not the investment is in a “common enterprise.” Different courts have had different definitions of common enterprises. Some federal courts refer to a horizontal commonality and count the pooling of assets for investment in a common enterprise. Other federal courts refer to the vertical commonality and count the efforts of a third-party or promoter. With two broad definitions, it seems likely that most tokens will be considered a common enterprise.

The fourth part addresses whether or not the profit comes from the efforts of a third-party or promoter. This test is often passed by tokens, as there are always individuals working on the project or network. The profit would derive from their efforts in building a better network.

Applying the Howey test, it’s clear that security tokens will be “investments” and require registration with or exemption from the SEC. This likely isn’t a major issue because security token issuers and investors will likely anticipate regulation in this manner. However, if the SEC applies the Howey test to utility token offerings, it may ultimately determine many of those offerings are also securities and regulate them as such.

Regulation and issuance of security tokens. Issuers of security tokens will have several different filing options with the SEC:

While the SEC hasn’t issued much specific direction regarding security token offerings (STOs) or ICOs, we expect many companies issuing security tokens to follow Reg D (Rule 506c) or Reg A+. Some high profile ICOs have moved to only offer tokens to accredited investors, like Telegram, allowing them to file under 506c. We expect this to be a continued trend given current market demand among large investors.

Security tokens face three major problems today. Despite there being relatively more regulatory clarity on security tokens versus utility tokens, there are some challenges that security tokens face before they become a more widespread investment option.

  1. Security tokens have limited liquidity options for investors. Today, investors in security tokens don’t have the same liquidity options as other crypto assets, which is arguably the biggest issue for the asset class. There are effectively no exchanges that exist to trade security tokens. To offer trading of assets that the SEC classifies as “investments,” exchanges must meet strict know-your-customer (KYC) standards and Anti-Money Laundering (AML) requirements. While there are some exchanges (e.g., Coinbase) that attempt to meet these standards, they are often the ones that offer the fewest cryptocurrencies and tokens to trade. Depending on the security token, exchanges may need to be set up to interact with dividends, distributions, or communications with customers about things like proxy voting. Because of the additional regulations imposed on exchanges listing “investments,” many existing exchanges have avoided security tokens. There are a few exchanges under development for security tokens (see tZERO), but it will be some time before these exchanges are launched and have sufficient trading volume.
  2. Current securities laws aren’t easily adapted and pose additional complications. The Howey Test is a good place to start for security token regulation, but there may be additional regulations required for token-based securities. For example, many in the crypto community want transactions to be anonymous or pseudo-anonymous, which makes compliance with KYC and AML standards difficult. The SEC may need to offer additional guidance on what is and is not acceptable when it comes to anonymity and security token ownership. Exchanges that offer trading of security tokens may also require additional regulation.
  3. There are unique technical challenges in creating security tokens. Security token creation faces different challenges than utility token creation. The stakes are not only higher, but additional securities requirements come into play. Beyond the security and compliance issues, security tokens may also need to include instructions on how to handle dividend payments, coupon payments, splits, voting, and other common functions of securities. Finally, security tokens need to be flexible enough to allow for changes in the terms of the security, which may be difficult after issuance.

A few companies like Polymath and Harbor see these technical challenges as opportunities and have set out to simplify these issues and make it easy for companies to issue security tokens.

What’s next? We’re going to dive into what a security token exchange might look like, and how it would compare to existing securities exchanges.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Nvidia Posts April Results; Continues to Advance Frontier Tech

  • Nvidia reported April earnings after the close today. Shares of NVDA are down 3% in after-hours trading given the company missed Datacenter revenue by a fraction of a percent. High growth stories have high bars to clear, and the company failed to exceed expectations in the Datacenter segment. Keep in mind, shares of NVDA have appreciated 20% in the past month.
  • That said, the Nvidia story is intact, and remains one of the best-positioned tech names for the next decade, as its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, gaming and eSports.

What’s New? First, we’ll start with the bad news. Nvidia’s Datacenter growth has continued to slow, growing at 71% y/y vs. 186% y/y growth a year ago. Analysts expected Nvidia’s Datacenter to reach $703M in Q1, while it only reported $701M in the segment.

In addition, Nvidia offered more clarity around the impact that cryptocurrency mining is having on its business. Nvidia’s OEM and IP business grew 148% y/y due to the addition of cryptocurrency mining specific products. Despite stronger than anticipated impact from cryptocurrency mining, Nvidia does not expect this tailwind to continue. Nvidia shared that it believes OEM and IP to be 1/3 it’s Q1 level going forward.

Our GPU prices are normalizing, allowing gamers who had been priced out of the market to get their hands on one. Cryptocurrency demand was stronger than expected but we were able to fill it with crypto-specific GPUs. – Nvidia CFO Colette Kress

Earnings and model recap. Nvidia reported Apr-18 revenues of $3.21B vs. Street at $2.89B (up 66% y/y), and EPS of $2.05 vs. Street at $1.46. Updated model here.

What’s Next? We are still believers in the Nvidia story and want to reiterate our belief in three key catalysts for Nvidia’s growth.

1. Gaming – Demand for core gaming business products remains strong. Tonight’s call highlighted the impact that the Battle Royale game mode has had on the gaming market.

Bottom line, Fortnite is a home run, PUBG is a home run… Battle Royale is incredibly social and sticky. More gamers play, and more of their friends join. It’s a positive feedback system. – Jensen Huang

Gaming demand remains strong for Nvidia. Jensen shared positive feelings that Nvidia would be able to continue to fill channel inventory of graphics cards, helping normalize the price for gamers.

2. Datacenter – Companies are adopting artificial intelligence in order to remain competitive. Nvidia’s datacenter business saw triple-digit growth for the seven consecutive quarters, and 71% in the April quarter. A big part of this growth is due to the expanding use of artificial intelligence by companies, specifically deep learning. On tonight’s call, Jensen expressed his pleasure with Nvidia’s Volta architecture, with it being the first GPU designed specifically for deep learning. Volta architecture chips shipped to cloud customers in the last quarter. While the Volta chips have been used internally for qualification, for the most part, they are beginning to open up to external cloud customers.

3. Automotive – The market for autonomous vehicles will be bigger than most people think. Nvidia’s opportunity in the automotive space is bigger than many anticipate. As stated in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. On tonight’s call, Jensen Huang re-iterated his belief that everything that moves will be autonomous, or have autonomous capabilities. This includes cars, taxis, agriculture, and pizza delivery equipment. Jensen shared that he anticipates driverless taxis to go to market in 2019, with autonomous cars going to market in 2020 or 2021.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Nvidia Results: Intoxicating Combination of Faster, More Profitable Growth

What’s new. Shares of NVDA are up 7% after hours as the company reported an intoxicating combination of faster, more profitable growth. What’s new?  Tonight’s results are further evidence of the magnitude of the opportunity ahead of Nvidia. Its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, and eSports. We remain believers in the long-term Nvidia story. While shares of NVDA are up 100% over the past year (market cap of $129 billion), we think there’s further upside given Nvidia’s foundational exposure to frontier technologies.

Earnings and model recap. Nvidia reported Dec-17 revenues of $2.9B vs. Street at $2.7B (up 34% y/y), and EPS of $1.72 vs. Street at $1.16. Updated model here.

Pole position in three green field growth markets: As we’ve written about previously, gaming, datacenter, and automotive, all have open-ended growth opportunities.

1. Gaming

Nvidia’s gaming business revenue was $1.74B, up 29% y/y. This was driven by high-quality, hit games in the market, notably PlayerUnknown’s Battlegrounds (PubG), Destiny 2, Call of Duty WWII, and Star Wars Battlefront II. PubG has reached 30 million players in 9 months, two months faster than Activision’s Overwatch. It’s worth noting the new Overwatch league launched last month and recorded 10 million unique users in its first week. The success of these games is leading to both an increase in the number of GPUs sold, as well as ASPs for Nvidia.

Additionally, demand for GPUs for cryptocurrency mining has boosted Nvidia’s gaming segment results. The rise in cryptocurrency demand has contributed to historically low channel inventory levels of GPUs being reported.

Long-term, the outlook for gaming remains promising.

I’ve always believed that the video game market is going to be literally everyone. In 10-years’ time, 15-years’ time there’s going to be another billion people on earth. And those people are going to be gamers. Not to mention that, almost every single sport could be a virtual-reality sport. – Jensen Huang

Part of the upbeat guidance for the April quarter is because gaming channel inventory is at historically low levels and the company expects to fill channel inventory during the quarter.

2. Datacenter

Nvidia’s datacenter revenues were $606M, up 105% y/y. For the 7th consecutive quarter, Nvidia’s datacenter revenues saw three-digit growth.

Driving datacenter growth are investments in artificial intelligence from a broad range of companies. Nvidia commented on the earnings call that every major cloud provider, including Alibaba, Amazon, Baidu, Google, IBM, Microsoft, Oracle, and Tencent have adopted Nvidia’s Tesla V100 GPUs for training deep learning networks.

We’re in the early innings artificial intelligence and just as all companies evolved to be internet companies in the early 2000s and mobile companies in the late 2000s, they will soon evolve to be AI companies.

3. Automotive

Nvidia’s automotive revenue was $132M, up 3% y/y. Despite little growth, remains Nvidia’s biggest opportunity. On tonight’s call, Jensen Huang outlined three near-term opportunities in Automotive:

  1. Nvidia’s DGX system is used to train neural networks for autonomous driving at data centers.
  2. Nvidia’s DRIVE PX platform provides cars with the necessary on-board computing strength for autonomous capabilities.
  3. Nvidia is reaching development agreements with major OEMs, ride-hailing companies, startups, tech companies, and many others to support their efforts in autonomy. Each project is engineering intensive, and companies rely on Nvidia for help.

Longer-term, the market for autonomous vehicles will be larger than most people think. Today, automotive accounts for 6% of revenue, and we expect it to rise to 13% by 2023. As we outlined in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. 

Transportation is a $10 trillion industry. Between cars and shuttles and buses, delivery vehicles, I mean, it’s just an extraordinary, extraordinary market. Everything that’s going to move in the future will be autonomous. – Jensen Huang

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

8 Tech Predictions for 2018

Loup Ventures’ predictions of 2018:

  1. AI theme continues and artificial general intelligence takes small step forward through Google’s “Deepmind” initiative.
  2. VR gets untethered but it still takes another year to take off.
  3. Google Home continues to gain market share in smart speaker market.
  4. Tesla Model 3 production ramps from 2,500 in 2017 to greater than 150,000 in 2018.
  5. Major automakers announce expanded electric vehicle line-up, but autonomous driving will not ramp up until 2021.
  6. Bitcoin pulls back.
  7. iPhone ASP’s $740 vs. Street at $710.
  8. Amazon will acquire Target.

AI theme continues and artificial general intelligence takes small step forward through Google’s “Deepmind” initiative. We believe the hype around AI is justified given it’s hard to understate the significance that AI will have on the future. In 2018 we expect the AI momentum to continue. In July of 2017, we counted 11% of Fortune 500 companies mentioned AI on their quarterly conference calls. We expect that number to grow in 2018. As for leaders, it’s clear that Google CEO Sundar Pichai is trying to get his point across: AI is the future of Google. We went back and looked at his opening comments over the last year and found he has led his prepared remarks by asserting Google’s evolution from a mobile to an AI-first company on each of the past four earnings calls. The company is pushing its AI into hardware devices (Google AI hardware note) and seeing its work pay off (Google Home’s the smartest smart speaker). Artificial narrow intelligence (ANI) is being mastered and we expect more news about the next frontier in AI, artificial general intelligence (AGI, the ability of a machine to think like a human), to be top of mind in 2018. We expect Google to play a thought leadership role in AGI with its Deepmind platform, but keep in mind true AGI is likely another 20 years away.

VR gets untethered but it still takes another year to take off.  The Wall Street Journal said it best in their Dec 30 article titled “Virtual Reality Needs to Cut the Cord”.  Oculus Go ($199 untethered) which comes out early in 2018 will be a step forward in ease of VR use, but it won’t be until 2019 until more powerful untethered hardware lay the groundwork for content developers and consumers to fully embrace VR. For those disappointed VR won’t be mainstream in 2018, you can at least look forward to Ready Player One’s release on March 30th. Here’s our Facebook in VR outlook.

Google Home continues to gain market share in smart speaker market.  In 2017 the smart speaker market was led by Amazon with the release of 3 new Echo devices (Echo, Echo Plus, Echo Spot), Alexa for Business, sub $50 pricing, and the Alexa app being the #1 downloaded app on Christmas Day vs. Google Home at #6 across Android and iPhone. That said the market is still up for grabs, as evidenced by Amazon and Google collectively spending more than $70m on TV ads from Thanksgiving through Christmas to push the theme. Despite Alexa owning 75% (Loup Ventures) of the global smart speaker market today, we expect in 2018 Google Home will be a share gainer in smart speakers given its performance lead. Here are the details of our recent face off between the smart speaker players.

Tesla Model 3 production ramps from 2,500 in 2017 to greater than 150,000 in 2018.  Near-term, we expect another miss in Model 3 production, but in 2018 we predict production will turn the corner. We continue to stress that Model 3 production over the next several quarters will be largely a guessing game and that short-term production numbers do not materially affect the long-term story. The last update on Model 3 production calls for “a production rate of 5,000 Model 3 vehicles per week by late Q1 2018,” which we believe is ambitious. That said, we’re encouraged by hundreds of Model 3s have been spotted at delivery centers and at the Fremont factory shown in a video here, along with several suppliers reporting that they are back to delivering Model 3 parts at volume.

The reason we remain upbeat on the Tesla story despite the prolonged Model 3 production problems is that EV and autonomy are the future. Tesla is fighting to gain production scale to create that future. While other car manufacturers build gas-powered vehicles at scale, building autonomous EVs is a vastly different process that will require traditional auto manufacturers to re-engineer their production facilities. That means every automaker that wants to compete in the future needs to go through the production pain Tesla’s experiencing today. Here’s our recent note on Model 3 production outlook.

Major automakers announce expanded electric vehicle line-up, but autonomous driving will not ramp up until 2021. 2018 will likely be the year of announcements around expanded EV lineups from traditional automakers. The Detroit Auto Show (Jan 13-28th) is an obvious window for these announcements and we expect a steady drip of EV model announcements throughout the year. We don’t believe these new vehicles will be available until 2019 or 2020. The autonomy theme will be equally top of mind in 2018, lead by likely updates from Apple around their autonomous shuttle project. We continue to expect 2021 as the year autonomy begins to ramp, and our bet is Waymo, GM’s Cruise, and Tesla will be first to market.  Here’s our autonomous vehicle industry model.

Bitcoin pulls back. We feel cryptocurrencies are in a bubble, but something can be in a bubble and still over time become a foundational technology, just like the internet. Those who jumped on history’s greatest “get rich quick” event enjoyed 1409% increase in value in 2017 as the world watched a coin formerly synonymous with the “Silk Road” break into Wall Street. We believe that blockchain technology and cryptocurrencies are here to stay and represent the future of storing value, however, we anticipate that increased oversight (banking and government), speculation amongst institutional investors along with operational difficulties on trading platforms will trigger a crypto sell-off in 2018.  Here’s our recent Bitcoin outlook note.

iPhone ASP’s $740 vs. Street at $710. We remain optimistic that iPhone units in FY18 will be inline with the Street (~242m up 12% y/y), but the mix of iPhone X will exceed Street expectations and have a higher ASP of $740, up 13% y/y compared to the Street ASP of $710. Our ASP estimate is based on a 30% mix of iPhone X and iPhone 18% mix of iPhone 8 (iPhone 8+ and iPhone 8). In a typical iPhone cycle, the newest phone represents about half of the mix, in line with our FY18 outlook of a 48%new phone mix. Here’s our recent note on why we remain comfortable with our iPhone estimates.

Amazon will acquire Target. We saved our boldest 2018 prediction for last, Amazon acquiring Target. Getting the timing on this is difficult, but seeing the value of the combination is easy. Amazon believe’s the future of retail is a mix of mostly online and some offline. Target is the ideal offline partner for Amazon for two reasons, shared demographic and manageable but comprehensive store count. As for the demographic, Target’s focus on moms is central to Amazon’s approach to win wallet share. Amazon has, over the years, aggressively pursued moms through promotions around Prime along with loading Prime Video with kid-friendly content. As for retail stores, Amazon’s acquisition of Whole Foods 470 stores along with testing of the Amazon Go retail concept is evidence that Amazon sees the future of retail as a combination of mostly online and some offline. Despite gaining Whole Foods, Amazon’s ~470 store presence still dwarf’s Walmart at 11,695 (global).  If Amazon acquires Target’s that would jump its store count to about 2,300.  As for anti-trust, the Trump administration won’t do any favors for Jeff Bezos, but the market share numbers suggest the deal will be approved. Walmart will reach about $315B in U.S. sales in 2017 (total 2017 Walmart is expected to be $500B, up 2.6% y/y), and Amazon North American ($105B in 2017 up 31% y/y) and Target ($71B, up 2.4% YoY) would equal about $176B in U.S. revenue. Looking at the top 18 U.S. retailers (including grocery), Walmart has about 23% share and an Amazon/Target combination would have about 13% share. Lastly, Amazon can afford Target. If you assume they pay a 15% premium to the current TGT trading level would imply a take-out valuation of $41 billion, about 8% of the value of Amazon’s current $564 billion market cap.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

My Barber Asked if He Should Buy Bitcoin

First of all, we’re not cryptology experts. We couldn’t tell you what fundamental reason exists for the dramatic move in cryptocurrency prices over the past year, if one even exists. We are experienced financial market observers and lived through the last two bubbles in dot-com and real estate. Maybe we’re still scarred from those, but it sure seems like crypto is in a bubble. However, being in a bubble and being a potentially foundational technology are not mutually exclusive. When the dot-com bubble popped, it didn’t mean that the Internet was over. Few would argue that in the 17 years since the 2000 collapse, the Internet has transformed how humans work and live and has proven to be as impactful a technology as investors thought it might be in 2000, just a few years too early.

Source: Fortune

We think we’re in a near term bubble.  Cryptocurrencies are a polarizing topic, and those that suggest that Bitcoin is in a bubble are often portrayed as not understanding the underlying technology or simply non-believers. We think cryptocurrencies, whether Bitcoin or something else, have a future in how consumers store wealth and transact, but since January 1st, the price of Bitcoin is up 1425+% to $15,250 (as of 12/10 at 10AM ET). Bitcoin has more than tripled in just the last few months. It’s more likely than not that Bitcoin is in a bubble and the price of Bitcoin will be extremely volatile, especially as more futures exchanges open.

Fundamentals don’t seem to support move. Using Bitcoin is still not easy. Setting up digital wallets, using an exchange, and understanding the mechanics of how to conduct Bitcoin transactions is something than many people would find challenging. Transaction volume via Bitcoin has been increasing steadily, up 60% y/y as of year December, but few retail locations accept Bitcoin. This move in transaction volume is far below the 1425%+ the currency value has increased. Bitcoin investors are betting on the price of Bitcoin rising, not on the practicality of the currency. Cryptocurrencies were formerly used as payment on the Silk Road. If Bitcoin intends to be a viable store of value, it needs to have a viable community willing to trade that value because “value” is only valuable to the degree it’s valuable to another person.

Source: Blockchain.info

Upcoming headwind. Bitcoin futures trading opened up yesterday on the CBOE, and will open on the CME on December 18th. We think this could have a material negative impact on the price of Bitcoin for two reasons:

  1. Investors will have an easier time betting against Bitcoin.
  2. Investors could move towards trading futures contracts and out of Bitcoin itself. Futures contracts settle in USD, and provide investors with better liquidity than Bitcoin. For institutional investors, betting on Bitcoin without having to conduct Bitcoin transactions is likely to prove easier.

Other challenges for cryptocurrencies.

Exchanges have had problems processing transactions. The easiest way to purchase Bitcoin is through an exchange. Coinbase operates one of the most popular exchanges in the U.S. From Wednesday through Saturday of Thanksgiving weekend, Coinbase signed up 300,000 new users. Coinbase has had problems with traffic during important periods. During Thursday’s $2,500 drop in Bitcoin, sell orders were temporarily suspended. It’s also worth noting that Coinbase’s CEO warned customers about investing responsibly in an email and blog post on Saturday, which included problems they’ve faced processing orders during times of high volatility.

There is uncertainty about the future regulation of Bitcoin. When China banned ICOs in September, there was a significant drop in the price of Bitcoin. In November, Coinbase was forced to turn over 14,000 customer records to the IRS. With the latest explosion in price, government around the world can no longer ignore Bitcoin. How they decide to deal with cryptocurrencies will have a significant impact on the future. An environmental researcher also noted that Bitcoin mining might consume as much energy as the country of Denmark by 2020, giving a greater incentive for governments to take a longer look at Bitcoin.

As the old adage goes: “When your barber gets in, it’s time to get out.” Well, it’s 2017 and our Uber drivers may be just as good of a measure. Two weeks ago, we had an Uber driver ask us how to buy Bitcoin. We showed her how to sign up on Coinbase and she made the purchase before the end of our trip. A cautionary one-off story that illustrates the Bitcoin investor shift over the past year from tech-futurist, to professional investor, and now the general public.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.