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Section 4: Investment and use-case by industry

USAGE OF BLOCKCHAIN IN BUSINESSES OUTSIDE OF THE PURE MONETARY DIMENSION
Not sure of the accuracy of the figure, but a little less than 2 Bn€ is said to be invested into blockchain technologies, specifically in research and development, almost half of it by the financial sector.


As anything that relies on data gathering, sharing, storing, treating can be linked to the blockchain, virtually all kind of businesses can be impacted; what is sure is that based on this, all sort of youngsters startuppers pretend to be magically disrupting everything with blockchain just thanks to the use of the buzzword. The real impact is yet to be proven. However, a powerful dynamic no doubt is there.

 

DLT-based solutions to replace conventional solutions to run processes face several technical limitations: the throughput rate is low, the delays of validation times are most of the time incompatible with business requirements, and the amount of information storable in the DLTs can only be small because of the distributed character. So overall, blockchain merely stores and manipulates hashes of information in a pretty inefficient way. Consequently, today after having conducted Proof of Concepts, very few companies decide to launch in production the related blockchain systems.

Nevertheless, on the side of advantages, DLT for data manipulation provides immutability, consensus by construction, un-stoppable executions, and built-in auditable value manipulation. Moreover, once a system is built using DLT, then no third party, in theory, is required anymore.
However, this last statement I fear needs to be mitigated. Nobody likes middlemen, intermediary fees; direct interactions is the big hype: known as “disintermediation,” “decentralization” of everything. 


In DLTs, there is still a fee! May it just be the small one that is paid to the network to validate the transactions.
If one individual or company designs and develops a Uber on the blockchain, they will not be doing this to kill Uber and for the beauty of the free world (well, I bet). They will want to eat at the end of the day, pay for their efforts to bring the service to the market, then ensure the maintenance of the platform, bring improvements, adapt for compliance when needed, etc. This requires again to be paid for, and so these people running the distributed application become a new middle man, nothing less.


Moreover, the best: once you have a performing platform, then you have a centralized offer and demand once again. So you end up with the new competition on businesses, that will succeed if and only if they are profitable enough to capture the activities from current proprietary applications.
It can be debated if in a distant future Ubuntu-like communities will volunteer to provide same services as companies, thereby putting pressures on prices of the fees, but shortly, Dapp may be the initiative of groups of people with lucrative objectives.


One more remark: the interest of the “truth in the middle” when blockchain is considered for whole ecosystem processes (such as containers maritime transportation for instance) implies that several industrial actors would want to operate together with a blockchain, thereby choosing potentially to make it a private one. Confidence in a public blockchain that can be subject to 51% attack, for instance, may be too much of a risk (think of military processes). Furthermore, when confidentiality of transactions is required, just like in the financial sector, private blockchains again are more convenient.


So, consequently today, Ethereum and the like are not in the situation to solve industrial problems thanks to DLT. Some more research and improvement is needed to keep the promise of IT total disruption. Also, even shortly once scalability is solved, nothing will prevent companies from implementing their versions of it that they would control to use it for their information treatments. As long as it is “decentralized enough,” what will matter is to bring value to the industrial processes, as disintermediation is not a goal in itself. Maybe it is too pessimistic from my side, but at least the debate is on to see how it will all organize!

MEASURE OF OVERALL HYPE AND INTERESTS IN DLT AND CRYPTOCURRENCIES
After the craziness of December 2017, the hype has been calmed down during T1 2018. In 2017, the general public came to discover bitcoin and its blockchain technology in broad considerations. This is to say that now almost everybody knows that there are cryptocurrencies, that this thing is new and exciting, it has many potentials to change our lives as a “trust revolution,” and it is alternative money. Further than that, depending on the intellectual background and genuine tech interest of a person, he or she will have dig a bit deeper, but to a large extent, the general public still does not know what is behind and sees it as quite sophisticated technology.


Then you have the DLT enthusiasts and ‘early investors’ opportunists. This is a group of people that has grown in size at a measure that the hype was inflating, and are now for some convinced to be geniuses at the center of the world. After the boom of ICOs and popularity of DLT last year, these people that had ideas or launched their funds now need to work and deliver on the promises they made.


Geographically speaking, the craziness has been the fact of Asia in the first place: Japan, Korea, China as long as individuals managed to overcome the Party’s grip. Demographically speaking, most individuals that have engaged in cryptos and DLT ventures are young males. Sociologically speaking, they present tech sensibility and risk appetite. So the typical person we have painted is a 26-year-old Korean man working at Samsung in product development!
So, from there to what? First, a diversification in stakeholders is happening. Nerds are not going to remain the kings forever in the domain; now big companies are all aware of it, they are going to generalize and increase their investigations and find what they can do with it. Awareness and knowledge are spreading fast. Many families have put some € in some tokens, advised to do so by their children. Regulators, as we have seen, are working on it.


In the end, it will all depend on what DLT can deliver for their users daily. As we have seen, on industrial usage of the technology, some work has to be done, in making it more efficient, and then in developing and promoting the applications themselves. IBM estimate three years to have significant systems running. So on this side, the hype may indeed cool down a bit, as people realize DLT is not going to do magic automation, nor immediately nor easily. As for monetary usages, it may obey to tricky societal mechanisms that we may want to study separately at some point in time.

DYNAMICS OF ICOS IN TERMS OF FUNDRAISING
T
o have an order of magnitudes, these days the flowrate of money being poured in ICOs is said to be in the 10-20 BnUSD per year. This is still small in the field of all companies general business financing, even though most companies using it are a start-up with a toilet-white-paper that are worth close to nothing, merely an expressed idea, and that many are scams that flown ‘investors’ will discover later on.


Note: Apart from ICO there also exists SAFT, ‘simple agreement for future tokens’ that is a very blur thing especially in views of market regulators. People will look as to how the SEC classify them: they will probably end up being securities as well, with no difference in legal treatment.


BLOCKCHAIN CREATORS, ENTREPRENEURS
Individuals that had the chance to mine cryptos early on and have loads of them are now whales on the market. Their movements can create panics or massive rallies. This may ease in the future, but their behavior is among the most important on the markets, while we know almost nothing about them, due to the sufficient anonymity that the cryptos provide.


Note that ICO tokens are something else, as they confine to being business interests, to be handled as such. However, in case of heavy distrust in cryptos, these individuals may decide to escape and further push a downturn.


Overall, the behavior of this class of people shall indicate the deep direction where cryptos are heading. If they hold and trust their choices, it will likely give something in the end, otherwise not. Sadly, no study is readily available on these individuals to provide a taste of what they think!


WHAT DO INVESTORS OR SPECULATORS SEEK IN THE VARIOUS CRYPTOS?
Foremost, they are seeking anything from decent to outstanding returns for their capitals. Certainty not to miss out the train in case cryptocurrencies end up mainstream; in other words, hedge against the risk to buy much more expensive cryptos later when their usage would be generalized. Also, they hedge against traditional fiat currencies that central banks keep depreciating to fund for public expenses sustainability. 


Investment in crypto can help to diversify as holding it for just a new asset class. Moreover, finally, usage of the tokens for real that is to may it be as a payment method, as a captive mean of transferring value in an ecosystem or to making VM run on the platform to register and process data. To a lesser extent, tech fun and commitment into decentralization / libertarian views.


So out of all this, genuine usage is completely minor; supporting alternative financial system is an excellent trigger but not the core motivation of actors, and definitely, the hope for projected values of tokens in several folds of their current value is what almost purely has driven the market in the last 18 months at least.
Hedging the case that cryptos take off big time or diversification pure purpose might be enough a motivation for hedge funds and investment funds to at least start to look for a fraction of their assets at what they could do. Moreover, even a fraction of theses AuM could be very significant.


Now, as a remark, we would probably all agree that all this speculative driven hysteria will be a bubble except if the use of tokens for what they are aimed at finally takes off and more or less correctly ends up explaining the intrinsic value laid in the sums of tokens available on the markets. The question is therefore if and when this may come. The fact that so many people believe in this is of little importance if the people who do not hold political power and crack down on it at the instant that they realize that the power may escape from them. However, as “normal usages” can be expected to remain quite low still in the next few months, this means that it is speculation and financial investments considerations that are to drive DLT tokens prices for some more time.


INDIVIDUALS ACTING FOR THEMSELVES
Most of the cash inflow witnessed in 2017 is likely to have been actions from individuals. More or less rich, with bigger or smaller entry tickets, ranging from billionaires curious to give it a try to students spending their nights working on technical analysis to capture growth. It has been people from all origins and countries that have blown in the sphere.


Forecasting the amount of money that can come further from this category of people may prove difficult. Many people have been hurt badly in the downturn, so if cryptos fail to overcome the last 830 Billion USD market cap peak, this source of cash should be expected to remain very cautious.
More dramatically even, as the speculative interest was the predominant interest up to now, any shortage of economic growth (especially if the stock exchange does correctly in the next months) should have an impact in this force of demand, and transform it in a source of the offer.


However, we have to recognize too, that if the usage of the coins for themselves take off, then adoption by individuals have the potential to make some tokens skyrocket again.


PRIVATE BANKERS AND CLASSICAL INVESTMENT FUNDS OR HEDGE FUNDS
Here is the Big Unknown that may decide, or not, a further rally in the crypto markets. Up to now, big banks and financial institutions have been rather critics towards cryptos while they acknowledge the emergence of it, and discretely charged their trading teams and customer management to check what could be done out of it.


If these actors were to embrace a more systematical, or even more industrial approach to the new asset class, then it would trigger a net capital inflow into the sector. How to estimate this is very tricky. For now, reports show that asset managers are watching, but none is jumping into the water. Even Goldman Sachs opening a trading position in cryptos looks much more like researching and practicing than entering full speed in the market.


These actors are interested in potential profits, and nothing else. It is neither technology nor use of the tokens; just speculation. So they will enter the markets if their teams in charge manage to convince their senior presidents that exceptional projected returns justify the risk taken. Moreover, their standards are already high!


Banks and funds are aware of crypto assets for way longer than the general population. Why is it that they had mostly chosen not to enter it before when it was at much lower prices than today, and to make a profit?


Probably some of it has to see with uncertainty in regulations, and lack of habits/facility to hold and manipulate these assets. In this sense, the more regulatory framework could help banks to invest in cryptos. Moreover, while this will happen for ICO tokens, the other tokens are another whole story.
The mindset that such UFA (Unidentified Flying Asset) could not change their way of doing may be in cause, too.


However, more than that, I bet that at least some must have reviewed it properly seriously. Moreover, they must have judged it too risky for the expected return. So, if they judged it like this in the earlier times when it was so cheap, how will these same investment committees judge them now? Even worse?
Then, the current volatility of DLT tokens is just too big for pension funds or insurers to even consider going into it.


From what the heads of these institutions have almost all been consistently claiming, we can doubt that they will full willingly engage into cryptos. Among their teams, there are going to be pros and opponents to any crypto investment strategy. It is difficult for humans to accept to change an opinion once they have engaged for a long time in a position.
Another scheme could be that institutional investors pour money into the crypto sphere because their clients ask them to do so, nevertheless, a crisis arrive and that altogether individuals and institutions stop entering and the bubble bursts only then.
Let’s be cautious: investors coming in can play it long or can play it short. The genius G. Soros entering the sphere lately is known for having played with success the fall of the British pound.
To conclude, it is difficult to decide if ‘traditional’ banks and funds will have an appetite for cryptos in the next times. I would bet that we will see some real-environment experimentations by the fund managers, but they will probably keep a distance with cryptos for another year.


CRYPTOCURRENCIES DEDICATED FUNDS
Dedicated crypto funds have multiplied since the boom of crypto assets in 2017. They will act in the name of wealthy individuals, other funds or for themselves.
By definition, they are here to allow their customers to invest in DLT tokens, choose the coins carefully, and hold them more or less dynamically. So, logically, these actors may end up playing more of a stabilization and cleaning role than it could first appear. Apart from in case of a severe downturn, they should act as a source of demand rather than the opposite.


It is difficult to estimate how much such funds already weight. Probably already a couple of tens of billions USD… One-tenth of the sphere? This is completely blind guess from my part, I admit.


PE/VC PROFESSIONALS
PE/VC activity is itself deeply impacted by DLT since the new way to raise funds for start-ups has been invented through ICOs.
Some PE/VC cabinets may have participated in such ICOs, but we should consider this as quite abnormal and insignificant. Given the average poor quality of the various whitepapers and the huge amount of money overvaluing the teams holding them, it is highly unlikely that any right-minded PE/VC professional would have agreed to pay such high prices.
This may change in the future, but as of today, these principles remain valid, and PE/VC shall not be expected to be a significant part of the demand for tokens.

 

CONCLUSION
Consequently, what is the fresh cash flow-rate entering or leaving the crypto-assets sphere; who is investing, who are divesting, where is the money coming from or going into in the real world?

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It is still as difficult to have a documented quantitative idea about how much cash is entering or leaving the crypto-sphere per day, let alone from which origin and belonging to which population.


DLT tokens exchange values depend almost exclusively from the offer/demand equilibrium at any point in time. Therefore, we can just say that in 2017, much cash entered the sphere, and in early 2018, the imbalance reversed.


For the next few weeks or months, honestly, I would hardly see a renewed great inflow of an individual’s money. The sole significant cash entry in cryptos that is possible would come from institutions, but they look to be still mild about the idea. Consequently, cash inflow/outflow could primarily depend on economic expansion or contraction. Non-correlation until now may have been due to the relatively small significance of the crypto sphere during its huge development.