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Where I’m Investing in Blockchain – Shelly Hod Moyal

Uncertainties regarding regulation may discourage investors from backing blockchain companies. iAngels co-CEO shares blockchain investment insights

Written by Shelly Hod Moyal, this article was originally published in CTech

There are many similarities between the emergence of blockchain and the early stages of the internet. The Internet caused a lot of hype early on, but its real impact on our lives didn’t fully materialize until roughly 20 years had passed.

Many people don’t realize, but the blockchain doesn’t fully work yet for real-world applications, as the nuts and bolts aren’t fully in place. For example, real-world companies that process millions of transactions with millions of users can’t currently run on the blockchain, as the technology is too slow and too costly. For example, Ethereum can process 15 transactions per second whereas Visa processes 45,000.

This does not mean people should sit on their hands and wait for blockchain technology to mature. There are smart ways to invest in this still budding technology. Here is where investors should direct their attention in 2018.

Two words: blockchain infrastructure. With blockchain technology needing to pick up the pace, any technologies that enable the blockchain to be faster and more scalable are appealing. We have invested in several protocols that have built their own blockchain, Cardano and Neo for example, as well as networks, like Raiden, which enhance the performance of existing blockchains. Since each business comes with its own security, speed, and privacy requirements, we believe businesses will go on to adopt several blockchains for different uses. Technologies enabling blockchains to connect with each other, such as Aion and Icon, will play a key role in the future of the industry.

All eyes on China. There is a lot of uncertainty around the regulation, but if we look historically at how China dealt with the emergence of the internet and social media, it’s more likely that China will cooperate with local blockchain networks in order to take part in the economic opportunity they bring. Instead of outright banning blockchain, the likely scenario would be that China would compel the industry to comply with regulations, just as Chinese companies Baidu, Alibaba and Tencent have done. Given the size of the Chinese economy and the scale of the opportunity with companies like Alibaba, and Tencent—the most valuable internet company in the world—there is a lot of upside potential in China. We have made several investments in this theme, specifically in Chinese counterparts to some of the more established western blockchain platforms, such as Neo, Wanchain, and IOT Chain.

Tokenization is the theme. Tokenization of assets, equity, limited partner interests and other securities will be a very interesting theme in the coming years. In the long term, the majority of tokens are likely to disappear, leaving a select few that will be used for most blockchain applications. Like in the fiat money world, only a handful of strong currencies prevail. However, tokenization as a means to distribute a stake in a venture will gain popularity whether it be equity or LP interests. This will be applicable to any kind of venture. As blockchain technology develops, people will no longer want to lock up their funds in any given investment, as it will be possible to create liquidity throughout the lifecycle of the company, partnership, or network. Liquidity providers will include regulated exchanges like Quoine and Tzero for security-like tokens. We are already seeing innovators in this space. Recently, VC backed Kairos created a token distribution which includes both security and utility tokens and Spice VC is creating a platform allowing venture capital and private equity firms to create tokenized funds.

Blockchain-based business model. While we believe it is still relatively early to focus on the applications of blockchain, we are making select investments in businesses that have decided to transition to a blockchain-based model, and have pre-existing customers and revenues. Our investments so far in this space include Kin, Props, and Bread. These companies are unique because they are lead by entrepreneurs with business experience and assets they’ve built over the years, giving them a real shot at generating initial adoption of blockchain applications. Social networks, sharing economies, and mainstream access to blockchain assets are some of the applications that make a lot of sense for blockchain technologies.

Invest in the marketplace. In an economy with many networks and tokens, marketplaces that allow people to access, use, and convert token value are crucial. Any blockchain application will ultimately need to integrate exchange functionality in order to allow people to gain value. This is why we have invested in several exchanges, such as Binance, QASH, 0x, and Kyber.

Turning insight into action, I believe that the best approach to investing in the industry—with all the uncertainties around regulation and application—is to build a diversified portfolio of infrastructure companies with a heavy weighting towards tokens that are positioned to be winners can withstand volatility and market corrections.

Shelly Hod Moyal is the founding partner and co-CEO of iAngels, a Tel Aviv-based venture capital and private equity firm.

Mor Assia speaking at Globes Israel Business Conference

Mor Assia represented iAngels on stage at the Globes Israel Business Conference in Jerusalem, discussing the advent of blockchain technology and the impact it’s already having on the worlds of finance, VC, and banking.

*The following footage is in Hebrew.

5 reasons why Bitcoin is not a bubble

By Shelly Hod Moyal

Not a day passes without someone influential denouncing Bitcoin, often describing it as ‘a bubble’. Undeniably, bubbles do exist in the burgeoning world of cryptocurrencies but i’d argue that Bitcoin doesn’t fall into ‘the bubble’ category and instead question the skeptics’ motivations.

Before diving into Bitcoin, it is important to differentiate between bubble and speculation. In all types of investing there is speculation. The speculative aspect of the investment is the percentage of the asset price that relies on future expectations around the asset vs. the value it provides today. Let’s say the value it actually creates in the next 12 months vs. the value it is expected to create in the future. In this respect all our investments have a degree of speculation. In early stage investing that speculation is higher by magnitudes because many of the companies we invest in, haven’t yet created real value (at least not in the form of profits) and all of their prices are derived from expectations of their future. You can think of it as:

This speculation plays an important role in the venture capital world and innovation in general because the greed it creates is what incentivizes entrepreneurs and investors to play a part (found a startup or invest in one), making at least part of these dreams – around 3% – a reality. The thriving global startup ecosystem, responsible for building the likes of Facebook, Uber, Snapshat and WeWork, that has billions of dollars of investment money invested into it each year, is built on this exact premise.

So, what makes a bubble? When the price of an asset is untied to rational fundamentals around the potential future value of said asset. Let’s take for example, a market of $1bn and assume there is no annual growth. A startup company aims to capture 10% of this market over the next 10 years but currently has only a team and a proof of concept. This market has already several incumbents that are established and each are valued at $50-$100m. Assuming this startup has a strong value proposition and signaling from the market, one can imagine how this startup could be valued at $5-10m. However, if I were to tell you that the company is currently valued at $200m, this could signal that this asset is in a bubble because the volume and adoption this company would need to achieve in order to justify such a valuation (in present value terms) is unimaginable and unattainable given the market size, industry structure and valuation.

Taking this example, it’s possible to see how many cryptocurrencies in circulation today have over inflated valuations. Many have a market cap (network value) of hundreds of millions of dollars while some of their initiatives haven’t even proven their worth by way of a product or adoption. Even some of the most successful real-world counterparts, rarely reach such spectacular valuations as we see in the world of cryptocurrency, indicating that some of these asset prices are not tied to their respective market opportunities. Therefore, I view it as the job of the investor to ask the right questions and analyze each asset thoughtfully, to rise above the hype and separate the bubbles from the real opportunities of wealth creation. And yes, many of the tokens out there are part of this bubble, but I strongly believe that Bitcoin is not one of them. While the price rose quite rapidly in the past year, it was off the back of some of the following real fundamentals:

1. The single most important feature for money to be real is for people to believe in it and to want it. There is a real utility here as people are actively using it to store value and use it to pay for goods. Just look at Japan’s massive adoption of Bitcoin and the suggestions that several major Japanese banks will start trading Bitcoin as a currency like the yen, dollar and euro. Moreover, in the long run, the complexity of Bitcoin will not have a negative impact on adoption. Only rarely, do users understand the underlying technology of the products and services they use (e.g. the internet).

2. Bitcoin supply is capped. There is a real growing community of people that are sick and tired of having their wealth controlled by centralized governments who constantly tax their citizens by diluting their value through the printing of money at the government’s discretion. This trend is good news for Bitcoin and the fact that its supply is finite, makes Bitcoin a far more effective and attractive store of value.

3. The market for “store of value” is enormous and so you can easily see how if adoption grows at this rate and supply is finite, network value could reach trillions. To illustrate this, the market for gold which is used only as a store of value is ~7.8 trillion US dollars. Even if 5% of that moves to gold, the impact on Bitcoin’s price would be huge. We strongly believe that as Bitcoin investing becomes easier through better UX and financial products like ETFs, many more investors will become adopters.

4. The argument that Bitcoin can’t be a store of value because of its volatility is not strong enough. I can see why a volatile currency is problematic and I can also see why the volatility here is a disadvantage but if something is scarce and adoption is growing, it can be an effective store of value as it has been over the years for Bitcoin hodlers (those who ‘Hold On for Dear Life’). Furthermore, as network value grows, naturally, volatility will decrease. Although we don’t expect volatility to reach the level of traditional fiat currencies. Certain price fluctuations will remain due to the fact that fixed supply meets variable demand. Global economic activities and shocks in Bitcoin demand can always result in significant volatility (similar to that of gold).

5. When modelled using “the quantity theory of money” the value price of Bitcoin is justified. In our calculations, we do not include 1) lost coins due to loss of private keys or willful destruction and 2) coins that are HODLed. We do this, because in any given year these coins are not in circulation and therefore not available to the crypto-community. According to a study conducted by ARK Investment Management LLC & Coinbase, between 2012 and 2016, on average 54% of Coinbase users only purchased or held Bitcoin during the year and approached the cryptocurrency strictly as an investment. In addition, back in 2014, John W. Ratcliff concluded that around 30% of existing Bitcoins are lost, equating to 25% of existing coins today. Adding these figures together, we conclude that around 80% of outstanding Bitcoins are inactive. Given the average daily transaction volume of around $1 billion, the price of a Bitcoin today can be justified even when excluding discounted future expectations.

Now even though Bitcoin is not in a bubble, it doesn’t mean it doesn’t hold risk. For example the regulatory uncertainty worldwide can destroy value for many investors, especially if their time horizon is short. Another big risk is the distribution of Bitcoin. Most coins, are held by a few individuals, the so called “Bitcoin Whales” (around 3% of existing Bitcoin addresses hold approx. 97% of all Bitcoins in circulation). Therefore, as an investor, you need to be aware that the market could be manipulated by just a few. This can result in an event called “Slaying of the Bearwhale” in the Bitcoin scene. For example, on October 6th, 2014, somebody sent 26,000 Bitcoins to Bitstamp in order to sell. 

In the long run, the price of Bitcoin depends on the number of new users joining the community, be it as a store of value or to use it as a medium of exchange. It is very important to understand that nowadays there are only a few people who own Bitcoin (on a global scale). In fact, today only around 3.1m wallets hold more than US$100 worth of Bitcoin and only approx. 1.2m wallets hold more than US$1,000 worth of Bitcoin. While on the 1st of January, 2017 (see graph below), there existed only around 11m Blockchain wallets, today there exist 17.1m (+55.5% YTD). We expect adoption to continue increasing exponentially.

To conclude, based on all the analysis, not only is Bitcoin not in a bubble but it is in fact, undervalued in many respects. Not just on its future speculative value but on actual utility value that can be justified today. So, my recommendation is that if you haven’t done so already, go ahead and take advantage of the skepticism that is still out there to buy Bitcoins at a good price.

 

 

The Basics of Blockchain Technology

Source: coinmarketcap.com

The technology behind cryptocurrencies is called a “blockchain”, a continuously growing public ledger that tracks who owns which virtual coins. Imagine that, instead of a bank, there was simply a shared google spreadsheet with account names and account balances. That’s the blockchain. No single computer stores the blockchain alone, and no single entity owns the blockchain. Instead, the blockchain is distributed over a network of computers, which synchronize copies of the blockchain amongst themselves. Anyone can add their computer to this network.

Despite the public, distributed nature of the blockchain, clever cryptographic technology makes the system more secure than even government systems. It’s computationally impossible to transfer ownership of bitcoins in the blockchain without an account owner’s private key, which works like a password. This means that only the owner of a bitcoin can transfer that bitcoin to another virtual account. The system relies on “miner” computers, which are incentived to keep the system running in exchange for completing the computational grunt work that keeps the blockchain system active. As compensation, miners earn bitcoins.

Ethereum, an emerging cryptocurrency alternative to Bitcoin, allows users to transfer cryptocurrency with self-enforcing terms defined in “Smart Contracts”. A smart contract transfers currency automatically when certain conditions are met. This allows currency exchanges to take place without an intermediary. No centralized bank, government, or company is needed to mediate between parties.

Using the smart contract system, Initial Coin Offerings (ICOs) on Ethereum have emerged as a new way to fund Blockchain-based startups. ICOs are swelling in size. An Israeli cryptocurrency startup called Bancor recently raised a record breaking $153 million in an Ethereum ICO.

Self-enforcing smart contracts have the potential to make many middle-men and their overhead costs obsolete. Instead of Uber standing between drivers and riders, collecting fees, a smart contract could transfer payments automatically when a GPS chip in the driver’s car reached the rider’s destination. Imagine a decentralized Uber, eBay, or Facebook owned by the masses, with a fraction of the overhead cost.=

Blockchains’ security and decentralization promises to revolutionize how business networks operate. With over 90 central banks engaged in blockchain discussions worldwide, the internet is on the brink of change.

 

iAngels Newsflash Webinar – The Cryptocurrency Gold Rush

See Yoni Assia in conversation with iAngels Founding Partner, Mor Assia in this webinar.

Yoni Assia is Founder and CEO of eToro and an advisory board member at Bancor, who has just finished the largest ICO to date.

You can read our summary on the basics of Blockchain 101 here