The investment case for cryptocurrency is moving on from being a speculative play to more of a venture capital focus, as a growing number of start-up entrepreneurs move into the space.
Daniel Weinberg, chief executive of blockchain technology company Kenetic Capital, says: “What we see is the evolution of initial coin offerings into a form of crowdfunding for early stage venture capital. Some interesting technology is emerging from that direction.”
Speaking at the AIMA Australia Annual Forum in Sydney last week, Weinberg says: “Some of the big US venture capital funds are getting into the ICO market because they are following proven entrepreneurs who have taken that route.
“There is still a lot of riff raff in the market that is still to be washed out but there is value there as well. The key is to take a broad portfolio approach.”
At the same time, a number of investment banks and other financial institutions are working on a range of cryptocurrency business opportunities, including asset custody, exchange services, insurance and portfolio management. A market infrastructure is starting to emerge that will encourage institutional investors to back the asset.
Another speaker at the conference, Dave Chapman, the chair of Hong Kong based cryptocurrency brokerage Octagon Strategy Ltd, says: “A couple of years ago bankers were describing cryptocurrency as a ponzi scheme. They are not saying that now.”
Chapman says he is aware of a number of institutions going through proof of concept on business opportunities.
Richard Galvin, the chief executive of Digital Asset Capital Management, says cryptocurrency is a very volatile assets class and investors are looking for some comfort in the form of custody services, custody insurance, banking services and regulation.
When those things fall into place, the investors will follow.
Galvin says there was an important development last month, when Kingdom Trust, a company that stores digital currency for investors, secured insurance cover through Lloyd’s of London to protect against theft or destruction of those assets.
Kingdom Trust holds US$12 billion of assets. The company has been seeking insurance since it started operating in 2010 and the fact that Lloyd’s has come to the party has been seen as an important sign that the insurance industry is overcoming its reticence about dealing with the cryptocurrency market.
Another important development is Intercontinental Exchange, the parent company of the New York Stock Exchange, announcing the formation of a new company Bakkt to develop a mainstream cryptocurrency exchange, with the backing of companies such as Boston Consulting Group and Microsoft.
Chapman says there are now around 280 cryptocurrency funds operating around the world. “Investors want diversification and this asset class is not going away,’ he says.
The sector may pass another important milestone at the end of this month if the US Securities and Exchange Commission approves an application from fund manager VanEck to launch a cryptocurrency exchange traded fund.
The SEC has turned down several crypto ETF applications in the past but commentators have said the regulatory climate is changing and VanEck’s application is more likely to succeed.