Published on 7 July 2022
By Tui Eruera, CEO and Founder of Jaaims
If consensus ruled we wouldn’t have contrarians – and history may show that today’s crypto naysayers simply don’t see the full picture.
It’s hard not to miss that crypto currencies have hit a major downturn. Plenty of economists and other pundits are pointing to the plunging value of digital currencies and having an “I told you so” moment.
Here at Jaaims, we are not convinced these commentators truly understand the sector.
We recently looked at the opportunities offered by crypto, and to make the debate a little less one-sided, we believe it’s time to clear up a few misconceptions around digital currencies.
Blockchain is both centralised and decentralised
There is a commonly held notion that all blockchain is decentralised. However, this is not entirely accurate.
Yes, the blockchain ledgers are held on decentralised infrastructure, but that is largely where it ends.
Almost 98% of crypto projects are backed by a CEO, CFO and a fully-fledged team. As a guide, Ethereum – the second largest blockchain by market capitalisation, is supported by a 50-strong team. At the helm is Vitalik Buterin, a Canadian programmer and probably the second most influential person in crypto behind Satoshi Nakamoto, the elusive founder of Bitcoin (if he exists).
So while blockchain may have a “power to the people” element about it, crypto assets still need to have the backing of an expert team.
Moreover, the industry is now accepting that projects need leaders and a degree of centralisation to be successful. However, the failures of crypto lenders Celsius and BlockFi have reminded us about centralisation risk and why regulations are needed to protect consumers and investors.
Bitcoin is probably the only true decentralised project. Yet there is a strong argument that to say that even bitcoin is centralised to some degree. National Bureau of Economic Research in the US, found 0.01% of the cryptocurrency’s holders – a miniscule 10,000 investors, control 27% of the supply, which raises ownership control concerns.
It can all sound complex, but the upshot is that blockchain is not 100% decentralised.
Crypto is not an inflation hedge as tokens and crypto assets are inflationary
The longstanding assumption that digital currencies would act as a hedge against inflation was never going to prove correct.
Yet we have seen claims made by analysts (who likely didn’t have a full grasp of the technology) that as bitcoin was not controlled by governments, it was free from monetary policy risk.
The fact is, pumping funds into the global monetary system – something that’s happened through the course of the pandemic, will inevitably stimulate investment across all industries including technology. And this has the effect of driving inflation upwards.
In essence, crypto was never going to be a sure thing to beat inflation. Those who suggested this either didn’t understand crypto – or were clueless about inflation.
Crypto is more of an equity than a currency
Okay, this one’s really going to set tongues wagging.
There is an argument that crypto is a currency. But seen through this lens it has serious limitations.
Fiat cash transfers can be made almost in real time at very low cost. Bitcoin on the other hand has an average payment confirmation time of about ten minutes, and the process can be fee-heavy.
However, if we look at a graph for any technology stock on the biggest exchanges, and compare it to a crypto graph, they can appear quite similar. Even the International Monetary Fund has noted the increasing correlation between crypto assets and equities.
There is a simple explanation for this: Crypto is more of an equity than a true currency.
Investment regulator ASIC has noted, “Our experience suggests that ICOs (initial coin offerings) by their nature seek to raise capital from the public to fund a particular project through the issue of crypto-assets such as tokens.” Sounds a lot like an initial public offering.
But it goes further.
These tokens are then traded on an exchange giving investors the option to have a stake in that project. Each project has governance (much like a company board), and each token competes with others in a bid to increase market share and growth.
That ticks plenty of boxes for an equity, and not many for a currency.
Blockchain is unmatched for transparency and speed
How fast is blockchain? Very fast – though it depends on which blockchain you’re talking about.
As we noted, the Bitcoin network has an average confirmation time for a payment of about 10 minutes.
However, Ripple – said to be one of the fastest blockchains, is capable of processing 1,500 transactions per second. Solana claims to process 50,000 transactions per second.
Why does speed matter? Because it creates a more efficient crypto.
Of course blockchain has uses beyond crypto. The Australian Securities Exchange is replacing its legacy CHESS clearing system with a blockchain solution, which will need to handle in excess of 45 million trades each month.
What about transparency?
Every crypto transaction is stored on a decentralised ledger, which can be tracked and readily looked up.
This ability to “follow the trail” is evidenced by the recent prosecution of a US couple charged with a $4.5 billion bitcoin heist.
Curating the game changers
The upshot is that it is important to understand how crypto assets work and what they really represent in order to grasp their full potential.
We have announced previously that later this year Jaaims will begin trades in exchange traded funds that focus on crypto, followed by direct investment in cryptocurrencies.
This reflects our view that the current fall in crypto markets mirrors the bursting of the dot.com bubble back in the late 1990s.
Just as many of the tech companies that survived the crash have gone on to become global leaders, our view is that the current downturn will shake-out the crypto market. Those crypto assets that survive will be those that serve a purpose.
That said, we will be highly selective about the blockchain assets Jaaims invests in. To make it through our rigorous curation process, crypto assets must:
- Involve projects that serve a purpose to benefit society
- Demonstrate high throughput capacity and growth for on-chain projects
- Have quality infrastructure and a trusted user base
- Be backed by a strong and experienced management team
- Demonstrate a pathway to inflationary neutral, that is remove reliance on issuing tokens for capital and payment.
For the record, metaverse projects have a long way until they reach maturity and will not be considered by Jaaims.
As always, we will keep you posted on this exciting development, and how you can be involved.
*Any advice provided is general in nature and does not take into account the viewer’s specific needs and circumstances. You should consider your own financial position, objectives and requirements to determine the type of advice and products to best suit your needs. Jaaims Australia is an Authorised Representative of Jaaims Technologies, AFSL 519985.