Hedging your bets

Our weekly opinion piece and overview View this email in your browser February 10th, 2017 Going after the wrong target   Blockchain startups in the asset management space seem to regard hedge funds as the target to disrupt. They're looking in the wrong place. (Find out more below in THE TAKEAWAY.)   TOP FIVE STORIES ON COINDESK China, again. It has been a turbulent week for bitcoin exchanges in China. After the Chinese central bank confirmed earlier this week that it had met with more bitcoin exchanges, the sector was rocked by the announcement from two of China's largest businesses – Huobi and OKCoin – that they were temporarily suspending withdrawals of bitcoin and litecoin. All cryptocurrencies got spooked, experiencing sharp price declines. The reaction was more muted, however, when smaller exchanges followed suit with an announcement that bitcoin withdrawals would no longer be on demand. Furthermore, the fee changes continue, with several introducing or increasing trading charges. Yes or no? Activity is heating up in the runup to the decision by the SEC, due by March 11th, on whether or not to approve the Winklevoss' bitcoin ETC application. The twins increased the offering from $65 million to $100 million, and the exchange BitMEX launched a prediction futures contract to allow traders to bet on the likelihood of approval. CoinDesk contributor Willy Woo takes a look at the potential impact approval would have on the bitcoin price. Global trade. IBM announced a new blockchain-based trade test, this time with the participation of a telecommunications company, two banks, a freight forwarder, an airline and two branches of the Dubai government. In a global transaction that saw fruit move from India to Dubai to Spain (with documentation, payment and tracking managed on the blockchain), the parties involved were able to demonstrate the feasibility and practicality of cooperation across sectors and between countries.   Email me. 21 Inc has launched a new bitcoin-based paid email platform, a far cry from its roots as a bitcoin miner. The service is similar to LinkedIn's InMail, but the recipient gets paid, not the platform. The company's CEO explained to CoinDesk that this is not so much a pivot as an extension of its goal to get millions of people using bitcoin.   Sticking together. South Africa is showing how a collaboration involving the country's big economic influencers can help an entire sector prepare for change. A working group created by the central securities depository Strate and South Africa's "big four" banks, with the participation of the central bank and Financial Services Board, has started planning their investigation into the potential reach of blockchain technology.   See all CoinDesk stories JOB LISTINGS GENESIS TRADING - Sales Marketing Associate The Sales and Marketing Associate is a sales-support position, responsible for identifying and contacting prospects, with the expectation of bringing revenue-producing clients into Genesis' digital currency business lines. More info. GENESIS TRADING - Research Associate The Research Associate will support the continued growth and expansion of the business, and will proactively assess new market opportunities and products within the digital currency space. More info. QUOTE OF THE WEEK "Computer science secures money far better than accountants, police, and lawyers." – Nick Szabo, Money, blockchains, and social scalability   THE TAKEAWAY  Blockchain technology wants to take on the hedge fund industry.   At least that was the message conveyed in a report CoinDesk published earlier this week on Melonport. The startup's idea is to counter the high costs and onerous requirements of hedge funds, and make it easier to set up and manage portfolios.   Melonport is not alone. Several companies are taking a run at this space, from a range of angles. Some focus on the underlying platform. Others focus on the returns, offering access to a managed selection of digital assets.   Most seem to regard the hedge fund industry as the target to go after.   But the real target is elsewhere.   On the surface, blockchains and hedge funds seem made for each other. Setting up a hedge fund is expensive, not just because of the upfront legal and administrative costs, but also because of the amount of money needed to break even ($300m is considered "small"). Furthermore, that amount is increasing, as rising regulatory costs, pressure on fees and lackluster performance are encouraging a consolidation of the industry. Times are tough – the first three quarters of 2016 saw the highest number of closures since 2008. However, on a blockchain platform, the costs would be lower due to enhanced transparency, smoother data flows, efficiencies in custodianship and more automated compliance. And the assets currently available, with their "alternative" structures and relatively high risk profiles, seem to be right up a hedge fund manager's alley: digitized representations of real-world assets, cryptocurrencies with no tangible value, digital "coins" promising a share in future dividends, tokens granting holders access to a service, derivatives based on any of the above...   Yet while the proposals may make sense, it's unlikely that this new type of hedge fund management will make a dent in its target sector.   Although consolidating, the hedge fund industry is still huge: approximately $3tn under management. With Trump vowing to reduce regulations, managers have reason to be more cheerful. And hedge funds tend to love turbulent and inefficient markets.   Rather than fear the potential competition, it's more likely that hedge funds will incorporate blockchain technology into their operations, improving the sector's outlook even more. That's hardly "taking on" the sector.   Where the blockchain asset management startups will make a difference is in another field entirely: venture capital.   Much has been written on initial coin offerings (ICOs) as an increasingly popular funding method for new companies, albeit one with unregulated risks and strategic disadvantages. Instead of having to undergo stressful rounds of presentations and negotiations, often giving up decision-making freedom, blockchain businesses can issue digital tokens that either represent a future utility or a participation in the earnings of the company.  At the moment, it is not simple for venture capital firms to invest in this new type of asset. Some have invested in digital token hedge funds, but that's not the same as vetting and supporting individual blockchain startups.         If the blockchain businesses working in the fund management space are able to launch solid platforms that make it easy to set up and manage a portfolio of digital assets, we could well see venture capital firms setting up their own ICO funds.   This would allow them to participate in this new funding trend, while still capitalizing on their expertise and vision.   In the process, they would add liquidity and respectability to a young asset class, while actually participating in the innovation and technological progress that they profess to actively seek.   In summary, the hedge fund industry will probably end up being supported by the blockchain. But its overall structure and purpose are unlikely to change. Where we will see a greater impact, in processes and objectives, is in venture capital. This in turn could end up stimulating a new breed of startup, and encourage the growth of a new asset class that manages to both harness and promote the technology. - Noelle MORE BACKGROUND: Irish Fund Managers Investigate Blockchain-Powered Data Reporting Cryptocurrency Index Funds: Can They Beat Bitcoin's Returns? Asset Managers Expect to Be Using Blockchain in Five Years JPMorgan: Blockchain Tech is an 'Opportunity' for Asset Managers Share Tweet Beyond CoinDesk... OTHERS ARE TALKING ABOUT Wow, this week we had deep posts by two of cryptocurrency's most respected thinkers. Vitalik Buterin, the founder of ethereum, published a thought-provoking treatise, on decentralization and how our sector doesn't seem to understand what it means. And Nick Szabo wrote an epic piece on how trust minimization is necessary for social scalability, which in turn makes progress feasible. Elsewhere, the Wall Street Journal published an article in which analysts warned of "irrational exuberance" if the Winklevoss' ETF fund is approved for BATS listing. Forbes featured an opinion piece on how we should be focusing more on blockchain implementation in the developing world than in the developed. And the Gulf Times carried a fascinating analysis showing how bitcoin and blockchain technologies are "more halal" than paper money. UPCOMING EVENTS Feb 13-15 – Global Summit on Blockchain in the Energy Sector – Vienna, Austria Feb 20-22 – Blockchain & Smart Contracts 2017 – Berlin, Germany Feb 21-22 – d10e-The Leading Conference on Decentralization – Bucharest, Romania Feb 27 – Distributed: Markets – Atlanta, GA Feb 28 – Blockchain Technology – Moscow, Russia REPORTS Distributed Ledger Technology: Implications of Blockchain for the Securities Industry – FINRA   WHAT WE'VE BEEN UP TO Aaaaaand… it's out! The first sneak peek at the agenda for Consensus 2017. It's still in skeleton format, but it's enough to start getting excited over… (What, you thought we'd take a breather after Construct? Are you kidding?) You can check it out here. If you haven't got your ticket yet, do so here. Prices go up on the 1st of March, so if you want to pay more, there's no need to hurry. Oh, in case you were worried, we survived the snow storm. For those of you not on the northeast coast of the US, it was spectacular, and pretty scary for anyone not tucked in safe. I, for one, learnt a bunch of new meteorological terms (bombogenesis, anyone?)   Copyright © 2017 CoinDesk, All rights reserved. You're receiving this email because you subscribed for updates on our website. Our mailing address is: CoinDesk 636 Avenue of the Americas New York City, NY 10011 Add us to your address book Want to change how you receive these emails? You can update your preferences or unsubscribe from this list Received this from a friend? Subscribe here.