Apollo Capital's Response to the Australian Treasury Consultation

Apollo Capital is a multi-strategy crypto fund based in Melbourne, Australia. Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. Our investment process includes a regulatory review of compliance to relevant regulatory frameworks.

Definitions and Token Categories

1.1. What is the clearest way to define ICOs and different categories of tokens?

There is an increased industry understanding in categorising crypto assets. Note that we will use the term crypto assets as a broad term for all assets that are secured on an open blockchain network. Apollo Capital suggests the following categories:

  • Cryptocurrencies. These are crypto assets whose main purpose are ‘money-like’. This include crypto assets like Bitcoin and Zcash.

  • Tokenised securities. These are crypto assets that represent ownership and rights and would fall under the regulatory framework of a Financial Product. An example of this are tokenised shares with voting rights in a company.

  • Utility tokens. These tokens have a specific utility but doesn’t offer rights that reach the threshold of being categorised as a Financial Product under Australian regulatory framework. We believe examples of this include Augur and Maker.

We refer Treasury to the FCA recent ‘Guidance on Cryptoassets’ for a similar categorisation as above.

Drivers of the ICO Market

2.1. What is the effect and importance of secondary trading in the ICO market?

Crypto assets are often similar to early stage venture investing. One key differential factor is the early liquidity as crypto assets trade on exchanges. This increases price transparency and lowers liquidity risk compared to venture capital investing.

2.2. What will be the key drivers of the ICO market going forward?

The big boom in ICOs in H2 of 2017 was prompted by a market fuelled by speculation. ICOs have been around for around 5 years and will continue to play a role in launching new blockchain network independently of where in the market cycle we are.

Opportunities and Risks

3.1. How can ICOs contribute to innovation that is socially and economically valuable?

ICOs offer a way to bootstrap new networks by making early users stakeholders in a new network. This is a flatter and more democratic versus traditional venture capital investing. See this blog post by Chris Dixon (a16z) for further thoughts on this. Economically, as blockchain networks predominately are a new computing platforms for trust, massive savings can be made. See RMIT Prof. Jason Potts article ‘The $29 trillion cost of trust’.

3.2. How important are ICOs to Australia’s capability to being a global leader in FinTech?

Crypto networks are a new computing platform for trust. It heralds a new design space for entrepreneurs, investors and computer scientists to build global software applications that utilise this primitive of trust. This has, and will continue to, lead to an explosion of innovation, particularly in the finance vertical. ICOs are a way for crypto startups to raise working capital without such a heavy reliance of venture capital funding, itself centred in Silicon Valley. On a high level, ICOs are a new source of innovation funding - this should be taken seriously.

Specific to Fintech, Decentralised Finance, or #DEFI, is arguably the most promising emergent vertical in crypto.

There are projects that enable the borrowing and lending of assets peer to peer, i.e. without a bank or lending institution in between. Dharma and Compound are key examples here.

Other projects enable the creation of credit through a collateralised debt position. Similar to how people leverage their house as collateral to secure a mortgage, MakerDao allow users to collateralise ether, the native token to Ethereum, to draw out a debt position denominated in their USD-pegged token, Dai. Soon other assets will be able to be used as the underlying collateral.

Binance, the world’s largest exchange, is developing a decentralised exchange that will enable the peer to peer trading of assets. This exchange will allow users to retain custody of their assets throughout the trading process. And Binance have the resources to deliver - they made more in profit than Deutsche Bank in Q1 of 2017.

Crypto is both a patent threat to incumbent financial institutions and perhaps the biggest innovation opportunity of a generation. Australia should support, and incentivise, projects to be based in this country. Having clear ICO guidelines is a critical first step. As with any enterprise, certainty is highly valued.

3.5. Are there other risks associated with ICOs that policymakers and regulators should be aware of?

ICOs have been very polarising. Most are not worthy of the money they raised through their ICOs. Hype, no doubt, drove much of the ICO boom in H2 2017. Conversely, some ICOs have funded extremely innovative projects that are provided substantial value to investors.

Key risks associated with ICOs include:

  • Fraudulent promises and claims

  • Some bad actors targeting unsophisticated investors

  • The token sold in the ICO having little or no current or future value.

  • ICOs do not represent an equity stake in the enterprise. They offer few rights, particularly in the early stage of a network.


Regulatory Frameworks in Australia

4.1. Is there ICO activity that may be outside the current regulatory framework for financial products and services that should be brought inside?

It’s Apollo Capital’s view that crypto assets that are representative of a high enough level of rights in centralised projects are considered Financial Products under Australian regulation. All other crypto assets are either too decentralised or do not meet a sufficiently rights threshold to be considered a Financial Product.

4.2. Do current regulatory frameworks enable ICOs and the creation of a legitimate ICO market? If not, why and how could the regulatory framework be changed to support the ICO market?

More clarity is needed.

We believe increased regulatory clarity of what constitute a Financial Product would benefit innovation in Australia. We would like to emphasis the global nature of the crypto landscape.

Specifically we believe the relevant regulator needs to clarify what ‘rights’ a crypto assets need in order to be categorised as a Tokenised Security (our proposed categorisation above).  We believe that the rights associated with a token to fall under this category should be similar to traditional shares or debt instruments. We further note that section 9 of Corporations Act (Managed Investment Scheme) refers to a ‘common enterprise’. Apollo Capital believes crypto assets that are sufficiently decentralised cannot be categories as a common enterprise. Therefore we recommend the regulators evaluate the categorisation of crypto assets both along the lines of rights and decentralisation. As an example, in our view, a crypto asset with ‘shareholder like’ rights that are not sufficiently decentralised should be categories as a Tokenised Security regulated under existing framework of a Financial Product. If a crypto asset is either sufficiently decentralised or does not reach the threshold of rights it cannot be categories as a Tokenised Security and it should fall outside the perimeter of regulation of Financial Products. Apollo Capital believes that categorising crypto assets that are either sufficiently decentralised or do not have shareholder like rights as Financial Products would significantly impede the innovative landscape in Australia.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.


Bitcoin and Ether are Oversold  -  Here's Why

In this post, I walk through some key indicators of health in a crypto network to demonstrate why Bitcoin and Ether may be oversold, relative to their network fundamentals. 

Both demand-side and supply-side factors are analysed. I look at:

  • Price (demand-side);

  • Transaction count (demand-side);

  • Price vs. Realised Capitalization (demand-side);

  • Hash-rate (supply-side);

  • Developer talent (supply-side).

Folks myopically analyse price movements (and price movements alone) as if they were the only factor determining a network’s health. This couldn’t be further from the truth. Look at Ripple’s token XRP’s market capitalisation relative to its node distribution, or at Ethereum Classic’s recent 51% attack. This is not to discount price as an indicator, but to view it as a relative indicator, not an absolute one. 

By looking at only price, 2018 looks bleak:

Source: coinmarketcap.com

Source: coinmarketcap.com

Source: coinmarketcap.com

Source: coinmarketcap.com

This is not the whole story, even from the perspective of price. Note that in the past 2 years:

  • Bitcoin has increased in value 3.88x 

  • Ether has increased in value 10.80x 

But even if you bought recently, don’t be alarmed. There is an indication of overselling relative to fundamentals. 

Comparing price to usage in the Ethereum and Bitcoin networks (i.e. price to transaction count)a clear divergence is visible:

Source: Apollo Capital. Data from coinmetrics.io

Source: Apollo Capital. Data from coinmetrics.io

Source: Apollo Capital. Data from coinmetrics.io

Source: Apollo Capital. Data from coinmetrics.io

Similarly, the next graph looks at Bitcoin’s Price vs. the Realized Cap. 

Realized market capitalization is a novel economic metric designed by Coin Metrics, a leading crypto data site. Because large fractions of cryptocurrencies tend to get lost or go unclaimed, a measure is needed that weighs coins according to their actual presence in the Bitcoin economy. This is what Realized Cap does. 

When we analyze Realized Cap against Bitcoin’s Price, we can again see that Bitcoin’s Realized Cap is substantially higher than its current price. This again indicates Bitcoin is oversold:

Source: Apollo Capital. Data from coinmetrics.io

Source: Apollo Capital. Data from coinmetrics.io

On the supply-side, the price of Bitcoin and Ether has fallen below the hash-rate for both proof of work networks. A higher hash rate is better when mining as it increases your opportunity of finding the next block and receiving the reward, and in turn secures the network. It reflects more people contributing more real world resources to each network.

Source: bitinfocharts.com

Source: bitinfocharts.com

Source: bitinfocharts.com

Source: bitinfocharts.com

Another supply-side indicator is that of developer talent. More work is needed to gather accurate data, but anecdotal evidence suggests that Ethereum is winning the battle over its major current rival EOS. Likewise, Bitcoin’s developer pool is similarly impressive, particularly in regards to the off-chain scaling solution Lightening Network. Looking at their respective GitHub contributions one way of doing this, but again, more work needs to be done in this area to draw any conclusions.

To summarise:

  • The price of Bitcoin and Ether has slipped markedly more than their respective network transaction count (i.e. real network usage is price inelastic);

  • Bitcoin’s Realized Market cap remains robust relative to its price;

  • Hash-rate in both Bitcoin and Ethereum are down substantially less than their respective prices.

  • Zooming out two years, both Bitcoin and Ether are some of the best-performing assets, with a return of 3.88x and 10.80x respectively. 

  • The developer pool of Bitcoin and Ethereum could be a moat that cannot be easily replicated, although more data gathering is needed here.

Valuation frameworks for crypto networks remain an inchoate and nascent activity. We have a long way to go. In most asset classes, there are agreed upon models, and only the models’ inputs are debated. In crypto, we are still trying to work out the models themselves.

However, relative to network fundamentals, Bitcoin and Ether look cheap. 

Happy 10th Birthday Bitcoin

Front page of The Times Jan 3, 2009

Front page of The Times Jan 3, 2009

Today marks the 10 year anniversary of the launch of the Bitcoin network on January 3, 2009.

The network started with what we know refer to as the Genesis block or block 0. Encoded in the Coinbase of this very first transaction is a message: 

The Times 03/Jan/2009 Chancellor on bring of second bailout for banks”.

Coinbase of Bitcoin’s Genesis block.

Coinbase of Bitcoin’s Genesis block.

(You can see this for yourself on eg. Blockchain.info’s block explorer if you enter the first transaction hash: 4a5e1e4baab89f3a32518a88c31bc87f618f76673e2cc77ab2127b7afdeda33b)

I think there are two reasons why Satoshi included this message:

  • It proves that the network wasn’t pre-mined. Bitcoin is a distributed timestamp server — by submitting a transaction to the Bitcoin blockchain we can prove that an event didn’t take place later. By including a headline from a newspaper, Satoshi proved it also didn’t take place beforehand. No one cheated, it was fair game with no undue advantage.

  • It wasn’t any message. Bitcoin has libertarian roots. The launch of Bitcoin took place during the last financial crises and and the headline talks about ‘bailout for banks’. Bitcoin unlike the banking system is not based on debt but offers an alternative form of money, a digital bearer instrument.

Ten years later Bitcoin has had an extremely consistent existence. Blocks are found about every 10 minutes, 24/7, 365, transactions are being confirmed and the network is growing. This is despite it being completely open, not controlled by anyone. It has endured an endless amount of technical and social attacks through the years. 

The longer an idea or a technology (really anything non-perishable) has been around without failing, the longer its future life expectancy — this is what author Nassim N. Taleb refers to as the Lindy Effect

We at Apollo Capital think that together with Network effect, the Lindy effect is key when looking at crypto assets. The network effect is why Bitcoin and other crypto assets have value despite having no IP, the code can be copied. The Lindy effect is the reason Gold has a value of USD 8–10tr while Bitcoin is at 68bn — less than 1% of Gold’s value. Gold has been around for a much longer time. The fact that Bitcoin has been around un-harmed despite all that has been thrown at it for the past 10 years bodes well for the next 10 years — it actually gives it more strength.

Today, the debt level in the banking system that caused the financial crises of 2008 is much less, however the total debt level in the world is at record levels. This is the front page The Times today, Jan 3, 2019:

Screen Shot 2019-01-03 at 11.43.16 am.png

The Times warns that a number of British universities are on the brink of a credit crunch after embarking on a record borrowing spree.

We believe the next financial crises that might be fuelled by a long period of record low interest rates and corporate debt will be a net positive for crypto assets such as Bitcoin. While crypto assets are currently off their lows, the volatility in the stock market just increased at the fastest pace ever

Crypto assets is an uncorrelated asset class, still very young, small with a potential big upside. We think it makes a lot of sense to have some in your portfolio or as Satoshi expressed it:

“It might make sense just to get some in case it catches on.”
- Satoshi Nakamoto

At the bottom’s of today’s edition of The Times there is a block hash. The coinbase transaction of that block includes another message.

“ThanksSatoshi”

Thanks indeed.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Financial Privacy and Cryptocurrencies

As I write this blog post, the Australian government has just enacted a decryption bill that according to experts can only lead to systemic weaknesses that will put us all at risk.

Apple is protesting this bill in a letter saying:

“Encryption is simply math. Any process that weakens the mathematical models that protect user data for anyone will by extension weaken the protections for everyone.”

Apple and others are arguing that it is precisely because of the threats from criminals and terrorists that we need strong encryption.

Indeed it was likely software from an Israeli firm sold to governments and used by Saudi Arabia to spy on Jamal Khashoggi’s WhatsApp messages that later lead to his brutal murder.

MBS and Putin at G20 in Argentina.

MBS and Putin at G20 in Argentina.

Privacy has always been front of mind for the cypherpunks in the digital cash and cryptocurrency community. For many of these people privacy is a basic human right.

With Bitcoin, money for the first time became indistinguishable from speech. This was predicted by cypherpunks decades ago. Timothy C. May, a founding member of the cypherpunk movement, wrote in ’97 that ‘Digital Cash = Speech’. As Bitcoin and other cryptocurrencies are open source software (arguably a form of speech), lines of code are now money.

Is this a Bitcoin transaction or a classic text?

Is this a Bitcoin transaction or a classic text?

David Chaum and others worked on untraceable digital cash in the 90s. Hal Finney was one of the first people involved in Bitcoin and was also the first receiver of a bitcoin transaction. This was Hal’s first tweet after Bitcoin launched in January of 2009:

1_LSHrGdSm51Qu9H83Hp1eVg.png

Cypherpunks understood that if you like to support (including financially support) the opposition in say Saudi Arabia or Russia — a private means of communication might mean the difference between life and death. 

While Bitcoin is pseudo-anonymous, other cryptocurrencies offer in-built privacy. Dash was an early fork of Bitcoin offering a mixing technology for private transactions. Monero is a well known privacy focused coin using ring signatures which combines signatures to obfuscate the inputs to a transaction.

When Zooko Wilcox, a cypherpunk who worked for David Chaum at DigiCash founded Zcash, it marked a new area in private cryptocurrencies. Zcash uses zero-knowledge proofs to provide absolute privacy. We can think of zero-knowledge proof as a way to proof something without revealing our secret. As an example, when I log-in to password manager Lastpass, that service has stored a hash of my password. Since a hash function as one-way function, it is enough to transmit the hash of the password to Lastpass, not the actual password — in other words, I don’t have to reveal my secret.

Former CIA, nowadays President of the Freedom of the Press Foundation.

Former CIA, nowadays President of the Freedom of the Press Foundation.

We are now close to the launch of a new technology which combines privacy with scalability. This technology is called MimbleWimble and one implementation of this, Grin, is set to launch next month. A recent episode of the ‘What Bitcoin Did’ podcast gives a good overview of MimbleWimble and Grin. MimbleWimble transactions are based on proofs that input minus outputs are zero, thus very little data needs to be revealed and the blockchain will stay very small.

Grin is set to launch around January 15, 2019.

Grin is set to launch around January 15, 2019.

We are actively investing in some of the technologies helping to bring financial freedom to everyone in the world. Apollo Capital holds Bitcoin, Zcash, we invested in Orchid protocol which is building a more secure Internet and we look forward to the launch of Grin. For Bitcoin, the Lightning Network being built on top of Bitcoin could potentially provide more privacy there too.

The good news here is that cryptography is a rare technology where it is much easier (and not just a little bit easier) to defend yourself than to attack — due to a fundamental asymmetry behind public-key cryptography.

Open source + cryptography can and will continue to protect speech — both in the form of conversations and digital money. With the advent of encryption laws like we are seeing in Australia — open source software becomes a critical infrastructure for communication and free speech. With cryptocurrencies cypherpunks are extending the roam of free speech to digital money — a development very much still ongoing.

For those of you interested in staying safe online, The Electronic Frontier Foundation provides a good guide for ‘Tips, Tools and How-Tos for Safer Online Communications’.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Crypto Dips & Dives: A Long-Term Perspective

Extreme hype or FUD (Fear, Uncertainty, Doubt) oftentimes drive the price of crypto assets up and down — this presents an opportunity for the long-term investor. 

Preface — Long Term Conviction is Critical 

[Skip ahead for Bitcoin Price Analysis]

Disclosure: I have no idea what makes the price of crypto assets rise or fall in the short term. I’m not a fan of charting, of triangles, of ‘support lines’, or reading tea leaves…

At Apollo Capital, we have strong conviction in a small collection of crypto assets. 

These crypto assets will likely be fundamental to the emerging Web 3.0 stack on which sophisticated applications hosting money, financial services, credit, debt, and derivatives will be built. 

Screen Shot 2018-11-29 at 4.14.19 pm.png

In the above graph, the top layer will consist of millions of applications mostly funded by equity. These will likely remain centralized entities, built specifically for the unique preferences, tastes, and regulatory climate of each target market. 

At the bottom, there will be tens of core blockchains. These are the railroads of the new Web 3.0 stack. Assets such as Bitcoin, Ethereum, and perhaps Dfinity and others will run on and will be funded by crypto assets. 

In between, we will have thousands of middleware crypto assets such as stablecoins, oracles, and file storage. Smart contracts built on top of blockchains will interact with these middleware building blocks. 

For example, in this new decentralized world that we call Web 3.0, a smart contract interacting with a stablecoin and an oracle could provide the basis for an application providing trustless and permissionless lending and borrowing. 

This exists — Dhama and Compound are two leading examples.

We see now that there will only be a few major winners in the core, fundamental blockchain layer. These blockchains will optimize on these key variables:

Key Properties of crypto assets

Key Properties of crypto assets

The key criteria to evaluate are: 

  • What is the project’s capacity to build the critical network effect?

  • Is the optimization between the different ‘properties’ attractive (listed above) and differentiated enough from other projects? 

Value will accrue to moneyness and governance, not utility tokens. There will be a limited number of successful crypto assets that will be tremendously valuable. 

We will trust these blockchains to run the world’s native crypto assets, decentralized applications, and today’s securities. 

I bring all this up to demonstrate the key attributes of quality crypto assets. 

When investing long-term in crypto, a conviction in the value of your assets is critical — because in this market, weathering multiple 50–90% dips in your asset’s value is a certainty, and it’s how one reacts and responds to these events that is important. 

In the rest of this article, I will go back in time and look at Bitcoin’s price data. I limit this analysis to Bitcoin because it has the largest sample space and is used as a leading indicator for other crypto assets. 

This will demonstrate that we have seen many bubbles and many bursting bubbles in the history of bitcoin. It is part of the course when investing in an emerging form of money. 

I hope that this will make you feel more confident in the longevity and robustness of quality crypto assets over time. 

Bitcoin Price Analysis 2010–2018

July 2010: The first major increase in the price of Bitcoin. The price of bitcoin increases from $0.008 to $0.08 (a 900% increase) in five days.

June 8, 2011: Bitcoin reaches a new all-time high of approximately $30. This is often thought of as the ‘First Bubble’ in bitcoin:

Screen Shot 2018-11-29 at 4.17.21 pm.png

July to October 2011: The bubble then bursts and the price of bitcoin declines by about 95%.

Screen Shot 2018-11-29 at 4.18.12 pm.png

Early 2013:From March to the beginning of April the price of bitcoin soared from$32 to a new record high of $230:

Screen Shot 2018-11-29 at 4.18.49 pm.png

April 2013: Bitcoin then plummeted for about a week — all the way to $68 — a decline of 70%.

Late November 2013: On the MtGox exchange, the price of bitcoin soars to its highest price of approximately $1,100.

February 2014: it was discovered that the price increase over October — December 2013 was partially due to the closure of MtGox and the 800,000 lost bitcoins that were the cause of the start of the bear market.

The price of bitcoin plummeted over the rest of rest of Q1 2014:

Screen Shot 2018-11-29 at 4.20.49 pm.png

The price of bitcoin did not begin to significantly recover again and worsened. In August 2015, bitcoin was trading at approximately $200 — an 80% decline.

There was a slow recovery, and it took until January 2017 for it to reach the $1000 region again:

Screen Shot 2018-11-29 at 4.21.24 pm.png

January to October 2017:the price of Bitcoin climbs to $6000 (a 500% increase):

Early December 2017: Bitcoin surpasses $10,000, marking a 900% increase in price that year.

Screen Shot 2018-11-29 at 4.22.25 pm.png

And it didn’t stop. 

December 17 2017: Bitcoin reached a record high of $19,783, just falling short of $20,000. 

January 2018 — Now: Bitcoin has declined approximately 78.5% from its high of approximately$17,000 to $3700–$4000in recent days. 

We have seen this all before. We have gone through multiple steep, downward corrections in the history of bitcoin. And we will go through some more until this money is freely and widely accepted globally. 

Gold as money has been accepted for millennia —  Bitcoin has only existed for 10 years. These things take time.

Keep in mind one thing: throughout all these turbulent moments, the fundamentals of Bitcoin have not changed. 

If you have conviction in the need of a digital hard money, a global decentralized settlement layer for the internet, for Web 3.0, these short-term price cycles should be seen as a blessing: they present buying opportunities. 

James Simpson is an investment analyst at Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.

Roubini Rebuttal

Our response to Nouriel Roubini’s October 2018 testimony for the US Senate
(
https://www.banking.senate.gov/imo/media/doc/Roubini%20Testimony%2010-11-18.pdf)

Crypto Bubble (2017) and Crypto Apocalypse and Bust (2018)

Roubini fails to recognise that Bitcoin and other crypto assets have gone through many bubble/bust cycles in the past. Anything that starts at a price of zero would need to go up a lot in price to gain significance. With Bitcoin’s ‘market cap’ at $75bn - it is still very small compared to other assets.

This chart show the price of Bitcoin on a log scale from ~2012.

Screen Shot 2018-11-23 at 5.09.58 pm.png

These are some of the ‘bubble-bust’ cycles that Bitcoin has gone through so far:

Screen Shot 2018-11-23 at 5.10.57 pm.png

As seen, Bitcoin has gone through multiple retracements of 80%+, but the plateaus are getting higher and higher.

Crypto is not money, not scalable

Roubini is right that Bitcoin is not a good currency today or a store of value - it’s too volatile. While I think it might one day be used in payments, there is an increasing view of Bitcoin as a Digital Gold. Purely because the characteristics of Bitcoin is superior to that of gold. The value of the gold market is USD 8-10tr, Bitcoin is at 75bn. The only way for Bitcoin to reach a ‘market cap’ in the trillions of dollars is to be volatile.

The properties of gold is almost entirely inferior to crypto, except that gold has been around longer. Bitcoin and other crypto assets have low storage cost, small physical attack surface (with a ‘brain wallet’, Bitcoin is unhackable), it is divisible etc.

With time and wider acceptance, we expect the volatility to decrease substantially. Once this occurs, it will be able to be used as a unit of account and medium of exchange.

Regarding scalability, there are several solutions being worked on (and implemented) currently including:

● Lightning Network
● Segwit

Just like the early internet was ‘not scalable’ (dial up, slow, little infrastructure), we have seen that these are issues are surmountable.

Until now, Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering.

This is a false statement. In the early days of Bitcoin, Silk Road and other dark markets where active. These have mostly been shut down by regulators and the people behind these markets have faced the legal consequences of running these operations. Bitcoin is far from anonymous, much less so to than cash.

This is what DEA is saying:

https://www.bloomberg.com/news/articles/2018-08-07/bitcoin-speculators-not-drug-dealers-dominate-crypto-use-now

UK Treasury rates Digital Currency risk for money laundering as ‘low’ (the traditional financial system pose a ‘high’ risk): https://www.coindesk.com/uk-treasury-digital-currencies-low-money-laundering-risk

Since the invention of money thousands of years ago, there has never been a monetary system with hundreds of different currencies operating alongside one another.

We agree with Roubini that there will like be one winner in the category for store of value, now it looks like Bitcoin has the highest probability.

What he misses is the point that although crypto assets are known as ‘cryptocurrencies’ they are not all intended to be used as currencies. As an example, Ethereum serves a specific use case as a platform for smart contracts; it’s ‘currency’ ‘ether’ is the fuel of that platform.

There are over 2,000 crypto assets, most of which will not have long term value. There are a lot of experiments going on, but only a limited amount of long term winners in the space.

Worse, cryptocurrencies in general are based on a false premise. According to its promoters, Bitcoin has a steady-state supply of 21 million units, so it cannot be debased like fiat currencies. But that claim is clearly fraudulent, considering that it has already forked off into several branches and spin-offs: Bitcoin Cash and Bitcoin Gold.

Blockchains are based on open source code, the fact that the code can be replicated and new coins can be created doesn’t mean it’s inflationary. If I copy a USD bill in a photocopier, my copy will have no value. If I copy Bitcoin’s software and create ‘Bitcoin-Henrik’, likewise it will not have any value. We believe most of the forked coins will ultimately have very little value precisely because it is not just the technology that is valuable but the network of users.

Bitcoin’s inflation is set in code for anyone to verify. We no longer have to trust central banks not to print more money, or make educated guesses about Gold’s future supply.

Crypto-currencies instead have not and will never have the tools to pursue economic and financial stability. The few like Bitcoin whose supply is truly constrained by an arbitrary mathematical rule will never be able to stabilize recessions, deflations and financial crises; they will rather lead to permanent and pernicious deflation. While the rest – 99% - have an arbitrary supply generation mechanism that is worse than any fiat currency and, at the same time, will never be able to provide either economic or price or financial stability. They will rather be tools of massive financial instability if their use were to become widespread.

This is a Keynesian argument that might or might not be true should the world switch to a currency based on ‘sound money’ or ‘hard money’. If Bitcoin really would be a threat for massive financial instability, Bitcoin would need to be in the tens of trillions of dollars - a huge success.

Below table shows some of history’s period of hyperinflation:

Screen Shot 2018-11-23 at 5.15.18 pm.png

Buterin’s inconsistent trinity: crypto is not scalable, is not decentralized, is not secure

Roubini makes the assumption that this technology will not scale. Considering the number of people from tech giants, universities, etc who have joined the crypto industry in the past 5 years, this is likely a mistake.

Roubini doesn’t mention the ‘second layer’ approach that is very promising. Bitcoin’s Lightning Network could potentially handle millions of transactions per second - that is getting deployed right now. Dfinity is an example of a new blockchain using new cryptography that might be able to scale to thousands of transactions per second while still being decentralised. Many other projects are underway that are attempting to tackle this exact problem. To write off future innovations I believe is a mistake not unlike another economist, Paul Krugman, who in 1998 wrote off the Internet as a fancy fax machine: “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”.

Given these massive security problems of crypto, the solutions to these severe security problems are all variants of going back to the stone age: do not put your long private key – that no human can memorize ever – on any digital device but rather write it down on a piece of paper and hide it in a hole where hopefully no one will find it or no insect or rat will destroy it.

Custody of crypto assets is akin to securely store cash or gold. There are methods to safely store crypto assets using hardware wallets. For institutions, custody solutions are being built by some of the most trusted names in finance such as ICE (NYSE), Fidelity, Goldman Sachs, and Nomura. If all these services already existed, the value of crypto assets would likely be much higher - the fact that custody has and still is a big barrier to entry is an opportunity - not a permanent problem that never will be solved.

There are hundreds of stories of greedy crypto-criminals raising billions of dollars with scammy white papers that are nothing but vaporware and then literally stealing these billions to buy Lambos, expensive cars, villas in the Caribbean and the French Riviera. These large scale criminals stealing dozens of billions make the small and petty Wolf of New York robbing small investors in criminal penny stock manipulation schemes looks an amateur.

It is true that the price bubble last year attracted many people that saw quick and easy money. With prices coming down, a regulatory clampdown from SEC and regulatory bodies around the world - we will hopefully see much less of that going forward.

The main problem is any oligopolistic cartel will end up behaving like an oligopoly: using its market power to jack up prices, fees for transactions and increase its profit margins. Indeed, as concentration of mining has increased over the last year transaction costs of crypto – as measured by miners’ fees divided by number of transactions – have skyrocketed.

This is factually incorrect. The below graph shows the miners’ fee divided by number of transactions, which has been declining all year:

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First, miners are massively centralized as the top four among them control three quarters of mining and behave like any oligopolist: jacking up transaction costs to increase their fat profit margins. And when it comes to security most of these miners are in non-transparent and authoritarian countries such as Russia and China. So we are supposed not to trust central banks or banks when it comes to financial transactions but rather a bunch of shady anonymous concentrated oligopolists in jurisdictions where there is little rule of law?

The testimony gives an impression that Roubini believes the miners control Bitcoin. The miners influence of Bitcoin is in reality very restricted. All a miner can do while having less than 51% of the network (hash power), is mine empty blocks - a block without transactions or censor a transaction - both of which are not detrimental to the network. A single miner having more than 51% of the network could in theory do more damage. No Bitcoin miner is that large by a big margin and as Bitcoin and its hash power grows this type of attack wouldn’t make much sense. An attack would require 100s of millions of dollars for the chance of reversing a transaction and potentially be kicked out of the network making the initial investment obsolete. I.e. the miners are incentivised to keep the network secure, not compromise it.

Smaller cryptocurrencies using the same ‘mining algorithm’ could however be in danger and as Roubini points out we have seen attacks happen in these smaller coins.

Fourth, wealth in crypto-land is more concentrated than in North Korea where the inequality Gini coefficient is 0.86 (it is 0.41 in the quite unequal US): the Gini coefficient for Bitcoin is an astonishing 0.88.

This is also factually incorrect. According to DSHR’s blog: ‘The link is to Joe Weisenthal's How Bitcoin Is Like North Korea from nearly five years ago, which was based upon a Stack Exchange post, which in turn was based upon a post by the owner of the Bitcoinica exchange from 2011! Which didn't look at all holdings of Bitcoin, let alone the whole of crypto-land, but only at Bitcoinica's customers!’

We have noted many of these studies include big wallets belonging to companies such as Coinbase and Binance - which in turns have hundreds of thousands of customers.

Blockchain’s boosters would argue that its early days resemble the early days of the Internet, before it had commercial applications. But that comparison is simply false. Whereas the Internet quickly gave rise to email, the World Wide Web, and millions of viable commercial ventures used by billions of people in less than a decade, cryptocurrencies such as Bitcoin do not even fulfill their own stated purpose.

We note that both TCP/IP one of the fundamental protocols for the Internet as well as email was invented in the early 70s and two decades later was still not widely used. A boost in usage was seen in the 90s as Marc Andreessen co-founded Mosaic, the first web browser. Bitcoin is not yet 10 years old. Marc Andreessen sees the similarities to the Internet and in 2014 published the now seminal article about Bitcoin in NYT: https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/

He is putting his money where is mouth is, the VC firm Marc Andreessen co-founded, a16z, a few months ago launch a USD 300M fund dedicated to crypto investments.

Jay Clayton, the chairman of US Securities and Exchange Commission, recently made it clear that he regards all cryptocurrencies as securities, with the exception of the first mover, Bitcoin, which he considers a commodity. The implication is that even Ethereum and Ripple – the second- and third-largest crypto-assets – are currently operating as unregistered securities.

This is an odd statement by Roubini as SEC has made it clear that Bitcoin and Ethereum specifically are not securities. One of the major criteria as outlined by the SEC for a crypto asset to fail the Howey Test (and not being regarded as a security) is to be sufficiently decentralised. As almost all ICOs are not decentralised - they are very likely securities under US securities regulation. Roubini is right that ICOs not complying with regulations are unlawful. We have already seen a big reduction in ICO investments and many of the more serious offerings are operating within security regulation and only open to accredited investors like ourselves.

But now zealot supporters of crypto are pretending that this environmental disaster can be minimized or resolved soon. Since using millions of computers to do useless cryptographic games to secure the verification of crypto transactions is a useless waste of energy – as the same transactions could be reported at near zero energy costs on an single Excel spreadsheet...

We would strongly argue that Bitcoin miners are not performing ‘useless’ games. Their work is necessary, a crucial ingredient in creating a trustless, permissionless ledger that is probabilistic immutable. Gold mining, the global financial system - all human activity consumes energy. Almost by definition the energy consumption reflects the usefulness, miners wouldn’t use all this energy if it wasn’t worth it and they got paid for it.

As for how green Bitcoin is, there any many different opinions, this is one from Bloomberg Crypto contributor Elaine Ou: https://www.bloomberg.com/opinion/articles/2017-12-07/bitcoin-is-greener-than-its-critics-think

Blockchain is most overhyped technology ever, no better than a glorified spreadsheet or database

We mostly agree with Roubini about Blockchain being overhyped. ‘Blockchain’ is not very well defined and it has come to represent no more than a glorified or shared database. We strongly believe the revolution lies in open blockchains that are trustless, where ‘trust’ is the new primitive for applications. We recently published an article on how Blockchain is indeed hyped: https://www.apollocap.io/blog/2018/11/13/blockchain-vs-crypto


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.