South Korea and China Warming To Crypto-Blockchain

Asian market could be huge drivers of crypto¹-blockchain² adoption in the coming years, if recent events are any indication.

First, take South Korea, a burgeoning hub of activity: about 30% of salaried workers are crypto investors; the country accounted for one-third of ether-based transactions³. just last summer; and by the fall it had surpassed China in overall crypto trading. Then regulators cracked down: banning securities firms from handling bitcoin futures, imposing new capital controls on crypto-exchanges, and banning anonymous accounts. Rumors even swirled about banning initial coin offerings⁴ (ICOs). Crypto market tumbled on the news.

But an enormous popular backlash forced the government into a u-turn. Now it seeks to “normalize” cryptocurrencies and is even proposing a taxation scheme to begin in 2019. Two of South Korea’s largest commercial banks have each launched partnerships aimed at building crypto-based payments systems.

Second, consider China, where top mining pools control more than half the global hashrate⁵for bitcoin. Despite its crackdown on crypto markets, the government recently announced its backing for a $1.6 billion blockchain development fund. Chinese tech giants Tencent, Alibaba, and Baidu are battling to lead in the blockchain space. And while central bank governor Yi Gang remains skeptical about cryptocurrencies, he is “exploring a better way for digital currency to play a more active role in service to the real economy.” And just this month the bank affirmed that cryptocurrency R&D was a “top priority.”

It’s hard to imagine China, given its competitive nature, ceding crypto markets to regional leaders Korea and Japan. A more likely scenario is that China finds some sort of regulatory scheme that enables crypto-adoption, but with strict government control.

Macro Factors Supportive for Crypto Growth

Negative Sentiment Potentially Creates Opportunity For Investors

The trends taking shape across Asia point to the early stages of a mass adoption trend—among billions of potential users around the world.

What does that mean for valuations? JPMorgan seems to think it’s a bad thing, telling investors they should be worried, for example, that 20% of chipmaker AMD’s revenue could be driven by crypto markets. (Cryptocurrency “miners” rely almost exclusively on graphics cards made by AMD and its key competitors.)

Since when does leading an enormous potential growth market translate into a negative? When the market believes that the growth is unsustainable. That’s JPMorgan’s view, and that pessimism may be weighing on AMD’s stock price.

Yet, mass adoption trends are only looking stronger as time goes on. The danger here is that investors betting against crypto-driven earnings growth could get caught wrong-footed when sentiment reverses, as I believe it will once mass adoption gains even more steam.

Here is a back-of-the envelope calculation of what mass adoption could look like for cryptocurrencies. Back in April, Tim Draper forecast a bitcoin price of $250,000, and while that may sound outrageous, consider⁶:

• From a macro viewpoint, a currency’s market cap generally grows to whatever size is required to support the underlying economy.
• The most compelling use case for cryptocurrencies is that they become the de-facto monetary standard for the rapidly developing Internet of Things (IoT).
• How big, potentially, is the IoT? John Chambers estimated that the market could be as large as $19 trillion. Roughly the same size as the entire U.S. economy.
• If we look at the monetary base supporting America’s current GDP of $18.6 trillion, it’s about $3 trillion.
• Using that as a baseline market cap for bitcoin, one could back into a figure in the mid-$200,000s6.

WHAT DOES MY 2 CENTS ADD UP TO?

If you are an investor, you generally fall into one of two categories. You invest in things that don’t change, or you invest in things that do. (Sometimes both.)

Famed value investor Warren Buffett recently called cryptocurrencies “rat poison.” But consider his frame of reference. To quote Buffett himself: “[My] approach is very much profiting from lack of change rather than from change.” He buys established companies with slow, steady growth that may compound over the long term, things like: Wrigley’s Chewing Gum, GEICO insurance, Seas Candies, Southwest Airlines, etc.

That’s why he hates crypto-assets.

By contrast, I’m a macro investor who invests in things that do change. And I have found that, when those things are misunderstood, that’s where investors may find the highest potential returns. Don’t forget that just a year ago Buffett admitted he “blew it” by not investing in Google and Amazon during their early days.

So in conclusion, let’s consider another Buffett quote: “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

My view is that Mr. Buffett is obsessed with the scoreboard of speculation—i.e., what the hot money is doing in the crypto-blockchain space. That’s not what I’m focused on at all.

I’m focused on the playing field: a nascent digital IoT marketplace, potentially worth $19 trillion or more, which is in the midst of creating a new type of monetary standard. This diverse, digital ecosystem is showing signs of rapid growth. And many different types of coins may have a place in this ecosystem, with overall cryptocurrency growth supported by interoperability among all of them.

It is not a winner-take-all scenario, in my view. Bitcoin probably won’t be the only winner. There could be plenty of winners as this new world unfolds—among cryptocurrencies, hardware makers, and businesses that learn to capitalize on the blockchain.

It’s only “rat poison” if your investment philosophy is based on optimizing the status quo. For those of us who invest in change, it’s called “opportunity.”

¹ A cryptocurrency (crypto) is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.

² Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.

³ Ether-based transactions are transfers of the ‘Ether’ cryptocurrency on the Ethereum network. The Ethereum network is a decentralized platform built on blockchain technology. For more information visit: www.ethereum.org.

⁴ An Initial Coin Offering (or ICO) is similar to an Initial Public Offering of a stock, where a specific cryptocurrency is offered to the public for the first time.

⁵ Hashrate refers to the total computing power thrown at a particular cryptocurrency network. For example, the more computing power dedicated to mining for Bitcoin, the higher the Bitcoin network’s hashrate.

⁶ Neither REX Shares nor Brian Kelly are endorsing this specific price target or methodology for valuing cryptocurrencies, instead these are discussion topics brought up by others. The BKC fund does not directly invest in Bitcoin at this time, however it may be subject to some of the risks associated with price movements of cryptocurrencies. Please review the prospectus for further disclosures of risk.