As our Titan Crypto launch draws near, I'll be answering some of our client's excellent questions about all things crypto.
Q: In your opinion, what is the most valuable utility that a cryptocurrency can provide today?
A: The first version of blockchain was introduced by the Bitcoin protocol as a form of “peer to peer electronic cash” over a decade ago. In the years since, the breadth of use cases within the crypto ecosystem has truly exploded. There are thousands of decentralized applications out there, each offering different utilities, use cases, characteristics, and economic models.
In my mind, Decentralized Finance (DeFi) is the most obvious answer to your question. DeFi aims to democratize finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services. Users can trade, lend to earn interest, or borrow without an identity, credit score, or a bank – all from the comforts of their crypto wallets and web browser.
Lenders, borrowers, buyers, and sellers transact with each other directly without the need to trust each other, through agreed-upon rules and conditions set in smart contracts. These smart contracts are secured on a blockchain, making them trustworthy yet decentralized.
The markets are always open and there are no centralized authorities who can block payments or deny users access to anything.
Having said that, DeFi is merely the financial piece of a wider movement towards Web 3.0 and the “ownership economy.” Non-Fungible Tokens (NFTs) have found use cases in industries including the arts, collectibles, gaming, and identity management due to their provable authenticity property.
Meanwhile, Decentralized Autonomous Organizations (DAOs) are internet-native organizations with no central leadership. DAOs enable new forms of governance where users collectively make important decisions about how the organizations evolve, what behaviors are permitted, and how economic benefits are distributed.
The great thing about this movement toward ownership economy is that it allows for shared ownership and direct monetization models for creators and users. For example, in decentralized exchanges, users can play the role of the exchange itself, providing liquidity to an exchange pool and earn trading fees when users trade.
Q: How big of a threat to crypto is broad regulation?
A: Direct regulation of Bitcoin or other blockchain networks can’t be done due to their decentralization nature, but all the actors participating in those networks can be regulated (e.g. crypto exchanges, miners, nodes). Authorities have focused on regulating network edges (crypto exchanges) and monitoring flows (payments) instead.
If regulators control the entrance and exit ramps to exchange local currencies for crypto, it would make it difficult for citizens to buy crypto. The most draconian steps regulators could take then would be to shut down these public crypto exchanges. This is unlikely to happen and is not the approach that most governments are taking.
Most governments permit exchanges to operate so long as ‘Know Your Customer’ (KYC) procedures function to assess customer risk and there is compliance with Anti-Money Laundering (AML) laws. This kind of regulation is actually beneficial for the crypto ecosystem, and could assist in the further growth of crypto, giving the industry the boost it needs for the masses to experiment with it, embrace it, and adopt it.
So not all regulation is net-negative for crypto. AML and KYC compliance measures would help to purge the market of bad actors and illegal activities, thereby providing a safer environment and engendering trust for genuine investors, both institutional and retail.
Financial institutions, centrally governed or otherwise, can facilitate the crypto ecosystem’s development as well. Regulation through these means can provide a legal backing to cryptocurrencies, which would result in increasing the pool of investors for the asset class. It would also come with a more pronounced consumer protection establishment.
Institutional money is waiting for regulatory clarity of the sort already implemented in other industries (e.g. hedge funds, public equities trading, etc). More institutional money flowing into the crypto system is always good: it provides more liquidity and less volatility.
In the end, this is a developing industry and there remains legal uncertainty in the space. Cryptocurrencies are here to stay, but we should fully expect that regulators will continue to provide appropriate guidance as this new asset class matures.
Q: Will there be a hedge for the crypto portfolio?
A: No. Given we’ll be recommending a very small allocation to crypto alongside our equity portfolios, we don’t believe a hedge is appropriate. Crypto has interesting hedging qualities in and of itself. Crypto could be seen as a hedge against continued irresponsible monetary and fiscal policy: surging in price if/when the extended debt cycle finally comes around.
As potential long-term investors in crypto, it’s invaluable to gain an understanding of (and confidence within) this emerging space. I’m here to help, to guide, and to lead Titan Crypto clients to long-term crypto-driven growth.
It’s all just getting started.