Global Market Commentary

Introducing Guild’s Periodic Digital Asset and Blockchain Update

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Executive Summary  

For 46 years, Guild Investment Management has had one goal: to help investors succeed.  We have historically focused on investing in stock, bond, currency, and gold markets in the U.S. and worldwide. 

In recent months, clients and readers have asked us to consider launching an investment partnership for accredited investors, devoted to cryptocurrency, blockchain, and digital asset investments. There are few investment advisors willing to assist their clients in this area, and we are evaluating this request.  If you are an accredited investor and you are interested in such a partnership, please contact our office.

1.  Guild inaugurates periodic coverage of news and analysis on cryptocurrencies, digital assets, and blockchain technology.  This week, we’re launching a new feature, a periodic report on the most significant news and developments in the world of cryptocurrencies, digital assets, and blockchain technology.  We’ll provide the same filter we do for market news — identifying significant events and trends that should be in the minds of intelligent speculators and investors, and helping you focus on the information that’s genuinely useful.

2.  Tokenization: the next phase of digital asset and blockchain development.  Most media attention over the past several years has been focused on cryptocurrencies, which use a distributed ledger (or blockchain) but are not linked to assets existing in the real world.  The next major phase of blockchain development will probably involve tokenization: the representation of real-world assets through tokens on a blockchain, providing a host of potential benefits in trade ease and efficiency, ownership clarity, fractional ownership, and the application of smart contracts.  Major platforms and organizations, including financial incumbents such as the NASDAQ exchange, are already exploring tokenization, and upstarts such as Coinbase are clearly positioning themselves for a world in which all financial assets are tokenized.

3.  Crypto news in review.  We run through the most significant digital asset and blockchain news from June, covering the integration of crypto platforms and organizations into the financial mainstream, important events in the evolving regulatory landscape for cryptos, risks to pay attention to, and developments in the broader blockchain space.

4.  Market summary.  The fundamentals look very strong for the U.S. economy; at the same time, the U.S. stock market has begun a correction based upon fears of an escalating trade war.  The market is currently very psychologically driven, and the correction could last awhile.  We do not believe that this correction and fear of a trade war will have any permanent effect on the U.S. economy.  Trade negotiations are ongoing, and we will see ups and downs, and in our opinion, a potentially positive outcome for U.S. GDP growth.  We anticipate a normal correction that will create a buying opportunity later in the summer or in the fall.  We are not calling for a recession or major market decline, but a normal correction. One key to monitor is the U.S. dollar.  A stronger dollar hurts U.S. growth and helps our trading partners who seem to be lowering their currencies in order to gain trade advantages. So if they cut their tariffs they still benefit by having a lower currency which stimulates exports.  Global growth sectors will be attractive buys as the correction removes valuation excesses from the market.  Europe and emerging markets are being penalized by the strong dollar.  Modest inflation means that gold is likely to continue in a trading range unless inflation accelerates.

Introducing Guild’s Periodic Digital Asset and Blockchain Update

This week, based on requests and feedback from our clients and readers, we’re launching what will now be a regular feature of our Market Commentary — a periodic review of significant news and developments in cryptocurrencies, digital assets, and blockchain technology.

Tracking potentially disruptive innovations is one aspect of the work we’re doing for our investment management clients to constantly stay abreast of trends that could have a significant impact on investment markets.  At Guild, we’ve been aware of cryptocurrencies since shortly after the launch of the Bitcoin network almost ten years ago.  Still, many years passed before cryptocurrencies and other digital assets matured to the point that it was worthwhile to begin examining them as potential investment vehicles rather than just for speculation.  That day hasn’t yet arrived, but it is approaching quickly.  Alert observers can see the writing on the wall.  Accredited investors have asked us to consider starting an investment partnership devoted to blockchain and cryptocurrency investments, and we are considering doing so.

The news media remain preoccupied with the superficial news covering cryptocurrencies’ continued price volatility.  Beneath the surface, though, the technologies’ underlying digital assets are developing rapidly, and around the world regulators and established financial firms are racing to grapple with, develop, and take advantage of the promise of the blockchain.  In our rundown of recent digital asset news below, we’ll point out some examples of these trends.  We are watching these developments because we believe they will ultimately transform global investment markets.

The largest currently existing cryptocurrencies — such as Bitcoin itself [XBT] and Ether [ETH] — will continue to experience volatility.  They have technological problems we’ve often commented on that may or may never be solved.  Also, as regulations tighten, and fraud and manipulation are cleaned out, cryptocurrency markets will react and change.  But the technology underlying cryptocurrencies is here to stay.  As we show below in our discussion of “tokenized assets,” this technology is likely to become pervasive in global financial markets.  We believe that by hook or by crook, investors will end up holding a portion of their portfolio in digital assets — perhaps not today, but eventually.  We want to be prepared for that day, and to be ahead of the curve — and we want our investment management clients to be as well.

We hope you find this coverage valuable.  Please feel free to reach out to us with any questions you have relating to cryptocurrency and digital asset technologies.  

At some point in the future, we hope to be able to assist accredited investors in building and managing digital asset portfolios; if you are an accredited investor, and this is of interest to you, please give us a call to be placed on a communication list for further updates and news. 

Tokenization — All Assets Coming to a Blockchain Near You

Crypto exchange Coinbase is pursuing licensing on several fronts — as a broker-dealer, as a registered investment advisor, and as an alternative trading system.  We believe this strategy is one that many platforms will follow that are currently functioning as cryptocurrency exchanges.  They are trying to get ahead of what is already the next major emerging stage of blockchain development — the tokenization of assets.

Asset tokenization, in essence, simply means that real-world assets are assigned to digital tokens which exist on a blockchain.  These tokens differ fundamentally from the first generation of cryptocurrencies, which exist simply as entries in a distributed digital ledger and are not linked to any assets existing in the real world.  A token, however, could be linked to intellectual property (trademarks, patents, copyrights, etc.), physical assets such as real estate, commodities such as precious metals, or any other real-world asset.  Of course, tokenization may ultimately be applicable to securities, such as stocks and bonds.  NASDAQ’s exploration of blockchain is surely looking squarely at a potential future of tokenized securities markets functioning on blockchains.

By linking assets to a token which exists on a blockchain, users could secure significant efficiency benefits, particularly if smart-contract platforms such as Ethereum, EOS, and others are able to scale and achieve their promise (a smart contract is an electronic contract on a blockchain platform that can execute automatically under specified conditions).

Tokenization could reduce trading friction and transaction costs, and clarify ownership quickly and easily (something, as we’ve noted, that’s especially relevant to real estate titling).  Tokenization would also make fractional ownership simple and easy.

In a nutshell, tokenization is likely to be the next major phase of the development of blockchain technology, and all the recent blockchain initiatives from governments, financial firms, and educational institutions, will help to move it forward.  Tokenization may ultimately eclipse the original cryptocurrencies in significance.

Cryptocurrencies, Blockchain, and Digital Assets:  News In Review for June, 2018

The first theme we want to bring to your attention is the ongoing entry of digital asset platforms and firms into the mainstream, regulated financial system.  Some crypto enthusiasts view this as a betrayal of cryptos’ original principles, but we emphatically disagree.  This trend will help purge digital asset markets of rampant fraud and manipulation.

• Crypto exchange Poloniex implemented new “know your customer” rules, freezing accounts with inadequate ID verification.  The “wild west” days of anonymous crypto trading are coming to a close.

• Crypto exchange Bittrex is securing banking relationships to offer crypto-to-fiat exchange for customers in several states.  Bittrex was popular and well-known for the wide variety of digital assets traded on its platform; this move implies that the banks teaming with Bittrex are becoming comfortable with its regulatory compliance.

• Coinbase announced they’re on track to become a registered broker-dealer, pending regulatory approval.  This announcement came after Coinbase’s rollout of a suite of products targeted at institutions, and they are pursuing a leading role among fully regulated platforms for the trading of all blockchain assets.

Second, we want to point out that the regulatory landscape for digital assets is becoming more stringent and more serious, and that this trend will continue.  This also bodes well for the future place of digital assets in the global financial system.

• The Securities and Exchange Commission (SEC) created a new crypto-asset position.  The new “crypto czar” at the SEC, Valerie Szczepanik, will work across the organization’s divisions to coordinate the incorporation of digital assets into existing and new securities laws.  The appointment of a single SEC senior advisor for digital assets continues to suggest that the commission is taking a serious but fundamentally welcoming approach to digital asset and blockchain innovation.

• The SEC filed a complaint at the end of May to block an initial coin offering (ICO) that had raised $21 million.  This is more evidence that the 2017 ICO boom, with all its associated frauds, is in the rear-view mirror.

• SEC decided that Ether is not a security.  In a widely anticipated decision, the SEC clarified its view that Ether [ETH], the second-largest cryptocurrency behind Bitcoin [XBT], is not a security, and that exchanges of ETH are not securities transactions.  A lot of signs show that the SEC, while it wants to rein in fraud, is not fundamentally hostile to digital asset innovation, and this favorable ruling for ETH is a case in point.

• The Bank of International Settlements weighed in.  The central bank of central banks issued a report highly critical of cryptocurrencies.  This is not surprising.  Many critics noted shortcomings in the report, which does not address the more significant recent developments in blockchain technologies.  Interested readers can find the BIS’ report here.

Third, risks are still out there, and would-be investors and speculators should be aware.

• Stanford professors’ study alleged price manipulation in Bitcoin’s 2017 price spike.  Crypto exchange Bitfinex has been under pressure since last year due to allegations that the allegedly one-to-one U.S.-dollar backed cryptocurrency “Tether” was actually being created out of thin air to generate artificial demand for XBT and forestall price declines.  In the absence of a formal audit (which Bitfinex has still not provided), the analysis of two Stanford professors largely corroborates the accusations made earlier this year by anonymous Medium analyst “Bitfinex’d.”  If true, the allegations underscore the need for regulated crypto exchanges where participants can have a measure of certainty that they are not being fleeced.

• Cryptocurrency Verge [XVG] suffered another “51% attack.”  A 51% attack refers to a vulnerability in cryptocurrencies that, like Bitcoin [XBT], rely on a proof-of-work algorithm to secure transactions.  An attacker who can muster 51% of the total computing power deployed on a coin’s network could reward themselves fraudulently.  For some of the smaller proof-of-work cryptos, these risks are not negligible.  Speculators should know what they own and how it works.

And fourth, educational institutions, financial firms, and governments continue to pour research dollars and hours into research and development of blockchain technologies.  

• On June 7, Mastercard [NYSE:  MA] filed a patent for a blockchain system for payment authorization.  Interestingly, the patent (which interested readers can find here) refers to the system’s use of “publicly accessible data sources.”  This seems to suggest an open, permissionless blockchain rather the permissioned blockchain that many observers expected established financial system participants to use.

• The South Korean government’s Ministry of Science announced the creation of a Blockchain Technology Development Strategy.  The new agency will receive $200 million in funding by 2020, which it will in turn provide to fund blockchain initiatives and blockchain-focused enterprises in South Korea.

• Stanford University established a blockchain research center.  Funded by a number of digital asset organizations and foundations, Professors Dan Boneh and David Mazières are establishing the five-year project to “[bring] together engineering, law, and economics faculty, as well as post-docs, students, and visitors, to work on technical challenges in the field.  The center’s primary mission is to support the thriving ecosystem by developing new technologies needed to advance the field.”  Next February, the university will host its third annual blockchain conference.  When an institution with Stanford’s reputation is taking blockchain seriously, we think it would be foolish to ignore.

• NASDAQ completed a proof-of-concept for the application of blockchain in collateral transfer for margin calls.  We believe these kinds of use-cases will help drive blockchain adoption by the mainstream financial system.  NASDAQ certainly sees a future of blockchain-based token exchanges complementing, or perhaps even supplanting, the current dominant exchanges.

Market Summary

The U.S. Market

The fundamentals look very strong for the U.S. economy; at the same time, the U.S. stock market has begun a correction based upon fears of an escalating trade war.  We disagree with the call for a trade war, but acknowledge that the market is currently very psychologically driven, and the correction could last awhile.  We do not believe that this correction and fear of a trade war will have any permanent effect on the U.S. economy.  Trade negotiations are ongoing, and we will see ups and downs and in our opinion a potentially positive outcome for U.S. GDP growth.  Current tariffs proposed by others on the U.S. represent a very small percentage of total U.S. GDP.

We frankly are grateful that the issue of the theft of U.S. technology by China and many other countries has come up, for it has been a big concern of ours for decades.  Foreign countries are devaluing their currencies in order to be more competitive in trade.  This also is an issue that we have warned about in the past.

We anticipate a normal correction that will create a buying opportunity later in the summer or in the fall.  We believe that the market and economy have further to go and further to grow, so we are not calling for a recession or major market decline, but a normal correction.

Global growth sectors will be attractive buys as the correction removes valuation excesses from the market.

Europe and Emerging Markets

Both are being penalized by the strong U.S. dollar.  The U.S. stock market, which is far outstripping emerging and European markets, has been attracting global investor funds.  

Gold

Inflation is gradually rising while gold goes sideways.  Longer-term, gold will rise if inflation exceeds 3% for a prolonged period.  Currently, inflation is 2.2% ex food and energy, and 2.8% including food and energy.

For our usual coverage of cryptocurrencies, digital assets, and blockchain, see our new special monthly section above.

Thanks for listening; we welcome your calls and questions.