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Crypto Investing: Mainstream or Alternative?

December 16th, 2020

As crypto trading and investing become mainstream, what does the future of this tech driven asset class look like? Will it become a permanent pillar of our financial ecosystem or will its volatility relegate it to an alternative investment opportunity for 2021?

In our last DiffuseTap session, we had the chance to discuss the next generation of crypto investing with Thomas Rush, who leads the investment platform at ConsenSys Mesh, and Brad Koeppen, head of trading and business development at CMT Digital.

What are Crypto Equity Investments?

Equity investments are similar to other venture style investment structures where a holder buys equity in an operating company. With the advent of blockchain, however, some firms, particularly in crypto, choose to issue tokens as a substitute for equity. There are different types of tokens, and they all have different values. Brad explains:

“In a token investment, there’s just a little bit more due diligence in terms of going through the token doc, seeing what the token gives you rights to, how that token will be distributed over time, and the so-called ‘token-omics.’ Essentially, they could be the same thing, but they could also be drastically different depending on how the token is created and its attributes.”

Where investors may find alpha is the knowledge that the value for a particular company accrues in for the most part unestablished and, to the untrained eye, unpredictable ways. Thomas explains:

“The value created by a prospective token distribution event raises important questions for both founders and investors. For founders, they may be able to decentralize elements of their company and incentivize users to engage with their product or protocol, whereas investors need to understand how capital will be returned after an initial investment is made. It’s also important to remember that a startup’s strategy may change midstream. There are companies that will launch a token years after investors have made a traditional equity investment,and so that presents a new set of challenges as investors work to capture value from an asset to which they may not have a legal right.”

What are the Advantages of Tokens?

Companies prefer to take the token equity route for many reasons. For one, they are given access to their financial instruments without a third party controller, such as a bank, making financial services more efficient and cheaper.

This is achieved with DeFi, or decentralized finance. DeFi is the recreation of existing financial systems using protocol-based platforms and technology to open up access to those financial instruments to a broader set of users, Thomas shares.

“The main difference is that the traditional finance system is centralized. It’s owned by third parties, such as banks and other financial institutions. On the other hand, the decentralized finance system is, quote-unquote, permissionless. And this means, assuming you know how to use crypto and similar assets, you can access any of the instruments at any given time, from anywhere, and there’s no one stopping you from accessing them.” 

This “permissionless” decentralized financial system opens up a range of different use cases as well as broadens access to users. Right now, these uses are limited to active users of crypto.

Improving Financial Inclusion

The goal of DeFi is to improve financial inclusion across the board by building systems without a high cost of entry with multiple third parties to access the financial system.

While we’re a couple of years away from mass adopting a truly free and independent financial system, we’re on the right track. This summer, multiple DeFi platforms experimented with attracting crypto users to hop on and use their platforms more, Brad said.

“There’s still a lot of financial experimentation in DeFi, and that’s what we saw this summer. Some of these platforms kicked off new incentive structures, where they would incentivize users with a token from the platform. You earn those tokens by using the platform either to borrow assets, lend assets, or trade on the platform. For the most part, these incentives worked as a way to engage the community and get people to use the platform.” 

While mainstream crypto investing may still have a ways to go, the world is irrevocably adapting to a free-for-all, borderless financial system. Crypto as a permanent pillar of our financial system does not look too far-fetched for 2021. Especially given the current social and economic climate, experts like Brad and Thomas predict that it is only a matter of time before we will all include this emerging asset class in our allocations across self directed and institutional portfolios. Keep an eye out for 2021, this could be a breakout year.

 

Meet the Speakers

Thomas Rush leads the investment platform at ConsenSys Mesh, home to a portfolio of blockchain startups working across DeFi, identity, gaming, and more. As head of the platform, Thomas partners with founders as they build their ventures, providing them with access to human networks, talent, and high-leverage services.

Brad Koeppen is the head of trading and business development at CMT Digital. With over 15 years of experience in proprietary trading from the floor of the CBOE to high frequency equity and ETF trading, Koeppen specializes in solving problems in a variety of assets including equity options, index options, equities, ETF’s, futures, and cryptocurrencies.