NEWS

Early Bitcoin Investor Has Some Advice On How Much Money to Hold in Bitcoin

As bitcoin approaches yet another record, Union Square Ventures LLC’s Fred Wilson says investors should be careful how much of their portfolios are allocated to digital currencies.

Wilson, who first invested in the sector in 2013, wants to set the record straight on exactly what percentage of someone’s investments should be tied to things like bitcoin.

“I have about five percent of our net worth in crypto assets, across a number of vehicles; direct holdings, Union Square funds, token funds, etc.,” Wilson said in a blog post. “I think that’s likely at the high end of what the average person should have, but I also think its not a ridiculous number for the average person to have.”

If someone had invested in bitcoin the same day that Wilson announced his venture capital firm’s investment in Coinbase Inc., a trading platform for cryptocurrencies, they would have seen their investment rise a whopping 5,000 percent.

Here’s a look at how much a few different types of investor should have tied to cryptocurrencies, according to Wilson:

  • Young, aggressive risk takers should have the highest allocation at 10 percent of net worth
  • Someone who’s a sophisticated investor, but maybe not as much of a risk taker should have 5 percent
  • The everyday investor who’s more conservative, but still willing to take on some risk should devote 3 percent
  • Someone at the retirement age and simply trying to preserve their portfolio shouldn’t have anything in crypto
Bitcoin surges past $5,000 per coin

It has happened: A single Bitcoin, the same digital crypto coin that you could’ve bought for a couple of cents less than a decade ago, is now worth more than $5,000.

This isn’t the first time Bitcoin crossed this milestone — at some exchanges, it was briefly over $5,000 on Sept. 2 before sharply pulling back that same day. But this time, it broke through with ease — one Bitcoin is currently trading at $5,161, having risen more than 7% in the last 24 hours alone.

Bitcoin’s price has been on a crazy rollercoaster (isn’t it always) since reaching that high mark in early September. First, it plummeted to about $3,000 on Sept. 15, and then it started a new sharp rise.

It’s never easy to determine the reason for Bitcoin’s price swings, but the likely culprit this time is an upcoming hard fork, scheduled for Oct. 25. Similar to the Bitcoin Cash split in August, a group of developers is creating a new version — or fork — of Bitcoin, called Bitcoin Gold, which will live on as a separate entity from Bitcoin. The two cryptocurrencies will share the same chain, meaning that everyone who owns Bitcoin at time of fork will also own the same amount of Bitcoin Gold — and the last time this has happened, it essentially resulted in free money for Bitcoin owners.

The exact terms of this new Bitcoin split are still somewhat murky, so there could be more volatility ahead. Right now, however, it appears that Bitcoin is about to set some new records.

Warnings grow louder over cryptocurrency as valuations soar

With bitcoin and Ethereum gathering momentum among investors, some experts fear a bubble could soon burst

Joe Kennedy, patriarch of the Kennedy clan, said he knew it was time to exit the stock market after a shoeshine boy gave him stock tips. If everyone thinks its time to buy, its time to sell, reasoned Kennedy. Then came the great crash of 1929 to prove him right. Perhaps some of that thinking could be applied today to the digital currency bonanza.

In recent months, warning voices have grown louder as the digital assets known as cryptocurrencies have attained record valuations. The price of bitcoin, the most famous cryptocurrency, has soared this year, from $969 to more than $5,000 in September; rival Ethereum began the year at $8 and has traded as high as $400 while new coins or tokens are issued weekly, often attached to tech startups as a way to raise venture capital.

According to Token Report, a database of cryptocurrencies, 105 initial coin offerings (ICOs) worth $1.32bn were sold in the last quarter, with more than $956m sold in first half of the year. The year-to-date tally stands at $2.27bn, compared with $100m raised in 2016 and all without paying fees to underwriting banks.

This increase in activity comes despite a warning shot from the US Securities and Exchange Commission in July that some offerings qualify as securities and therefore fall under securities law. On Friday, the regulator charged a businessman and two companies with defrauding investors in a pair of coin offerings.

Last week, the Chinese government defended a recent decision to outlaw token sales and continuing efforts in China (and in South Korea) to outlaw coin exchanges. The Xinhua news agency, Beijings media arm, said the exchanges were known to have concocted pyramid schemes and engaged in criminal activity disguised as scientific and technological innovation.

But as with everything cryptocurrency, the picture is complicated. Japans government has implemented rules that recognized bitcoin as a payment method; India and Sweden are said to be considering their own virtual currencies. Celebrities have jumped into the game, with the boxer Floyd Mayweather, the socialite Paris Hilton and the actor Jamie Foxx promoting coin offerings on social media.

In late September, Goldman Sachs confirmed it was exploring a new trading operation dedicated to bitcoin and other digital currencies. If that plan goes ahead, it will make Goldman the first Wall Street firm to deal directly in the crypto market.

The banks, too, are conflicted: will they respond to pressure from investors, or remain on the sidelines of a new market that has traditionally been the realm of criminals and drug dealers? North Korea is reportedly using cryptocurrencies to evade international sanctions.

Those moves were followed by stark remarks from the JP Morgan Chase chief executive, Jamie Dimon, who in September described bitcoin as a fraud.

If we had a trader who traded bitcoin, Id fire them in a second, Dimon said. Its against our rules. Any trader that dealt in them, he added, was stupid.

So is crypto approaching a denouement or just getting started as a rebellious, anti-institutional, anti-government, frictionless currency? It depends on whom you ask, but across the board theres a growing wariness that there could be a correction, a shake-out in the crypto party, especially in the market for initial coin offerings.

The venture capitalist and crypto investor David Siemer equates the current market of around 1,000 digital currencies and token-like alt-coins to 1995-1996 in the dotcom revolution. The crash of 1999 was still ahead but so too was the potential to create economic giants like Google, Amazon and Facebook.

In 1995, the entire internet world was worth around $80bn. The entire cryptocurrency space right now is valued at around $170bn. In 1995, there were 24 million internet users, and theres not even 20 million in crypto. The analog is almost perfect across every level.

Siemer predicts that while platforms like bitcoin and Etherium are here to stay, it is likely that SEC regulation will ultimately put a big dent in things.

We dont know when, but Im almost certain the SEC will declare ICOs to be securities because they have no effective tech utility.

Sam Feinberg, CEO of Cypher Capital, believes less than than 5% of the 50 to 60 ICOs coming to market each week have any utility at all; if the government announces any kind of regulation, there will be a rapid dropoff in the number of offerings that could ultimately benefit the sector.

A lot of people are scared of cryptocurrencies right now, so some kind of US regulation is needed for institutional money to come into the market, Feinberg says. It would allow the market to grow maturely.

Others are more skeptical. Angela Walch, associate professor at St Marys University School of Law and research fellow at the Centre for Blockchain Technologies at University College London, acknowledges concern around crypto valuations.

Were in a cycle where prices have been driven up and now crypto hedge funds are driving them up higher. Its a game, and it looks very much like a bubble. Of course, theres no way of knowing when a bubble is going to pop, but thats what it looks like.

The characteristics of a crypto bubble, says Walch, are self-evident, and include a significant number in finance looking to get into the field. Its just the latest thing, and I dont necessarily see that people jumping into crypto investing have an understanding of the fundamental characteristics of cryptocurrencies.

They are doing it because they see other people doing it and they dont want to miss out. If you put the word crypto or token or coin around an offering, it doesnt matter what the substance or fundamentals behind it are, they are drawing money, and thats a dangerous situation.

Analogies to the dotcom bubble and the subprime mortgage crisis are self-evident, Walch says.

Im worried were throwing money at things we dont understand, were building complex structures we dont understand, and acting as if we understand it or not caring if we understand it, and those types of decisions have proven very problematic in the past, she says.

Other warning signs, says Walch, include the jargon that has grown up around cryptocurrencies. In a paper published in the Journal of Internet Law, Walch lamented how the jargon of crypto had entered the legal realm. Recent legislation passed by the Arizona state legislature described blockchain technology as immutable and auditable and providing an uncensored truth.

It also obscures the reality of the hard sell, Walch said. The vocabulary around crypto currencies and blockchain technology is very deceptive and misleading. There are many conflations people make and they overstate the benefits and capabilities of the technologies but because the terminology is so much in flux it hides that.

Still, the revolutionary fervor around crypto is undoubtably seductive. Last week in New York, Patrick Byrne, the Utah-based CEO of Overstock.com, came through New York to promote the launch of an alternative trading system for tokens named tZERO.

Byrne, a Cambridge University philosophy graduate, explained that bitcoin and its derivatives were a way for people to check out of financial institutions we dont trust in anymore.

With blockchain technology, we can create a version of Wall Street where no one can cheat and where all kinds of mischief cannot even occur. Crypto currency gives us a way to communicate value thats outside the control of any government mandarin, and I think thats good, he says.

And this is where Byrne and Walch beg to differ. As Walch says, the crypto sector springs from a desire for tech to solve human problems and to establish an alternate setting where we trust code.

Centralized government is corrupt, the financial sector is flawed. We cant trust it, so lets go to a place were we dont have to trust other people this is the messaging. Of course, the truth is you havent escaped humans, and you dont get away. You just move from one power structure to another. But people are so desperate to get away that theyre buying the messaging, says Walch.

Some VCs want to jump into ICOs, but a host of challenges remain

Venture capitalists are in a pickle. Companies have raised more than $1.7 billion through initial coin offerings, or ICOs, this year by selling their own customized virtual currencies. For the companies, the trend is a godsend. They can raise the money and use it to fuel new projects without having to give away a piece of their company to venture capitalists. Meanwhile, both accredited and non-accredited investors are buying the tokens on the assumption that once these these projects are completed, their tokens will balloon in value.

Given ICOs’ momentum, it’s no wonder that a growing number of startups are contemplating them. Equally unsurprising is that some VCs, including Andreessen Horowitz and Union Square Ventures, have been looking to capitalize on the trend, in some cases, by participating in what are called pre-sales of companies’ ICOs, wherein they’re purchasing tokens at a discount in exchange for diving in early.

Still plenty of other investors are nervous, and for good reason, starting with the SEC, which hasn’t offered much guidance to date relating to ICOs. Though the agency said in July that it thinks some virtual currencies should be considered securities and therefore made subject to federal securities laws, it’s currently making determinations on a case-by-case basis, depending on “facts and circumstances.”

That kind of wait-and-see stance largely explains why general partner Jules Maltz of Institutional Venture Partners says he’s “actually pretty scared” of ICOs. Speaking at a StrictlyVC event hosted earlier this week by this editor, he told the crowd, “A few of our companies have asked us about them and my conservative feedback to them has been, ‘I don’t want to go to jail as a board member.’ Seriously,” he added. “If you’re issuing something that could be deemed a security, and then everything goes to pieces, and the board wasn’t legally on top of it, I think the companies and the CEO [will be liable].”

Speaking alongside Maltz at the event, Megan Quinn, a general partner at Spark Capital, said her firm is also “treading pretty carefully” when it comes to ICOs, on the assumption that it’s a “matter of when, not if, the SEC becomes much more involved.” Indeed, after she noted that Spark is a venture investor in the popular chat app Kik, which this week closed its high-profile ICO with $100 million, Maltz asked Quinn if Spark has a board seat with the company. Quinn quickly noted that they are “board observers,” to chuckles from the crowd.

Yet the SEC may not even be the biggest complication right now, said two other speakers who’d come to address the crowd of largely VCs and founders, and who spend their days and nights focused on cryptocurrency issues.

Stan Miroshnik, an L.A.-based banker whose outfit, Element Group, is exclusively focused on the digital token capital markets, said that simply figuring out how to appraise a venture-backed company that has also raised money through an ICO is proving a minefield.

Asked specifically how VCs are calculating tokens on their balance sheets and whether these might impact valuations, Miroshnik said he’d “had this same conversation with [global accounting firm] Deloitte this week, and the answer was something like, ‘We have no idea.’ ”

The crowd laughed, but Miroshnik, who wasn’t joking, continued on, saying, “There’s no rubric for it, so these are questions that, when I’m talking to folks in the boardroom, they’re struggling with how to balance those interests.

“You have a management team that’s been focused on building equity value, and now they have all these thousands of constituents [the people who’ve bought tokens] who are customers and who are incentivized and who are now evangelizing for that company.”

For them, the question begged is: “How do you dictate care of them, and is that ultimately in the interest of the equity holders?” he said.

Marco Santori, a New York-based attorney who leads the fintech practice of Cooley — and who says the law firm now has one attorney dedicated full-time to amending the limited partner agreements of venture firms that want to invest potentially in ICOs — identified a separate pain point that he suggested is even thornier.

While “the securities issues are certainly big and important” and “tax issues are a big concern, too,” the “real impediment,” Santori said, is “where do I put these things?”

While VCs are jumping into pre-sales of ICOs, as happened recently with a decentralized storage marketplace called Filecoin, whose ICO raised a record $257 million, they’re aren’t just counting on their tokens turning into valuable holdings, says Santori. They’re counting on custodians that can manage their various crypto holdings, and not a lot of great options exist currently, he said.

“So I’m going to get the next token. It’s going to [soar] 500x in a week. Everyone’s going to pat me on the back and give me some attaboys,” he said. “But where do I put the thing? How do I keep it?” Though he noted there are “three” qualified custodians right now for crypto, when it comes to storing “institutional” crypto and how VCs do it, “the answer today is, well, you can’t all that well.”

Santori said that he “knows for a fact” that some of Cooley’s venture clients are “right now buying these tokens in advance [via pre-sale offerings] . . . and that once they actually get the tokens, they are banking on having somewhere to put them.”

He added that some solution had better materialize soon, “because right now, they don’t.”

For more about how ICOs work, along with how to stage one, check out some of our earlier coverage here.

Crypto-Mania Grips Hong Kong as City Looks for Life Beyond Banks

In the mid-1990s, Johnson Leung embarked on a career in shipping. In the early 2000s, he moved to finance. And now, he runs a Hong Kong startup that aims to improve how container ships are booked using blockchain technology.

Many in Hong Kong hope the city can make a similar leap. The shipping and banking hub, which has struggled for years to nurture a domestic technology industry, is embracing the blockchain revolution as it looks for new sources of growth.

Skeptics say it’s a risky bet on an unproven technology — one with more than its fair share of hype and, in some cases, fraud. But a growing number of Hong Kong entrepreneurs and policymakers are convinced the online ledger system that underlies cryptocurrencies like bitcoin will eventually reshape everything from financial services to supply chains. They say the city’s laissez-faire approach toward regulation, along with its expertise in finance and logistics, make it a natural hub for blockchain startups.

“I don’t see why Hong Kong can’t be a leader of blockchain technology,” said Leung, who co-founded 300cubits.tech after more than a decade in the financial industry that included stints as a research analyst at JPMorgan Chase & Co. and Jefferies Group LLC. “It’s so new that it’s not like any country has a huge advantage compared to us.”

Read more: A Blockchain explainer

Hong Kong’s government has been throwing resources at the technology. The city’s monetary authority is developing its own digital currency and is testing blockchains for trade finance, mortgage applications, and e-check tracking. Hong Kong’s securities regulator has joined R3, a global consortium that develops blockchain technology for financial transactions, while a government-backed research institute has worked on a blockchain-based system for tracking property valuations, among other initiatives. Hong Kong Exchanges & Clearing Ltd., the city’s publicly-traded exchange monopoly, plans to start a blockchain platform for early-stage companies and their investors next year.

“Blockchain is a very high priority for us,” said Charles d’Haussy, head of fintech at InvestHK, a government economic development agency.

That doesn’t mean Hong Kong is giving the industry carte blanche. This month, the city’s Securities and Futures Commission told investors to be on the lookout for fraud in initial coin offerings — a form of cryptocurrency fundraising — and warned ICO issuers that they may be subject to local securities laws.

“We have to be very careful with this because, on the one hand, we encourage innovation and free markets, but on the other hand, we do have to look after our small investors,” Paul Chan, Hong Kong’s financial secretary, said in a Sept. 11 interview.

Still, the city is taking a softer approach toward regulation than China, which banned ICOs this month and called for a halt in trading on domestic cryptocurrency exchanges.

Read more: A QuickTake Q&A on initial coin offerings

The crackdown should reinforce the case for a hub in Hong Kong, which is under Chinese rule but operates its own legal and regulatory systems, according to Aurelien Menant, the chief executive officer of Gatecoin, a Hong Kong-based cryptocurrency exchange. Just last week, a blockchain conference organized by Bitkan, a Chinese cryptocurrency trading company, was moved to Hong Kong from Beijing in response to the ICO ban.

Building a sustainable blockchain hub in Hong Kong won’t be easy. Many applications for the technology, including Leung’s proposal to create digital tokens for the shipping industry, are still largely theoretical. (Leung says his tokens could be used in conjunction with so-called smart contracts to reduce the risk of default on shipping agreements.)

At the same time, competition to lure the most promising blockchain firms is fierce. Singapore, Hong Kong’s biggest regional rival, is pouring resources into its local fintech industry, as are other financial hubs including Dubai.

Read more on the fintech rivalry between Hong Kong and Singapore here

What’s more, Hong Kong doesn’t have a great track record when it comes to tech startups. Its Cyberport business incubator has been criticized as a housing development in disguise, while many local workers are reluctant to leave their steady jobs for riskier ventures. The city has zero unicorns, or startups valued at $1 billion or more, according to CBInsights.

Optimists say the blockchain industry’s overlap with finance plays to Hong Kong’s strengths. Some of the city’s early startups illustrate that point: they include BitMEX, a bitcoin derivatives exchange; Bitspark, a remittance platform; and Kenetic Capital, a blockchain investment firm.

While Hong Kong doesn’t publish statistics on the growth of the local blockchain industry, InvestHK’s d’Haussy said anywhere from 10 to 20 companies are expected to raise funds via ICOs in the city over the next six months.

“There is hype, and there is the fast grab of money with ICOs in some cases,” d’Haussy said. “But what we are looking at building here in Hong Kong is an infrastructure for new businesses and existing businesses, to make sure the technology and innovations remain a key enabler for financial sector growth.”

Close

CONTACT US

Complete the form below and we will get back to you shortly.

  • Subscribe error, please review your email address.

    Close

    You are now subscribed, thank you!

    Close

    There was a problem with your submission. Please check the field(s) with red label below.

    Close

    Your message has been sent. We will get back to you soon!

    Close