Bitcoin’s price has already recovered more than 63% since its low in December.* The rule of thumb in the stock market is that a new bull market has officially begun once the price has recovered 20%. Although, that means we have, by some definitions, begun a new bull market, Bitcoin is just one part of the broader blockchain ecosystem that is developing in Europe. Bitcoin is a simple code that offers one application: digital storage of wealth. However, a new family of blockchain-based assets is arising. They are more complex technologically, and they aspire to disrupt capital markets by “tokenizing” stocks, bonds, and real estate. Regulators in Austria, Switzerland, and Liechtenstein have already approved several “security tokens”, which are basically investment contracts that are stored and executed on a distributed database.

Although there is currently no exchange that is licensed to trade security tokens, traditional exchanges such as the Börse Stuttgart and the Swiss Stock Exchange (SIX), as well as young startups, are vying to be first in line once regulators give the greenlight. For most investors, blockchain-based assets can be divided into two main categories: money and investment contracts. Blockchain based monies include Bitcoin, Litecoin, Dash, and Maker Dai to name a few.Investing in cryptocurrencies is a speculative bet on the purchasing power of the asset increasing overtime i.e. the asset becoming a currency one day, hence the name “crypto-currency”. This re­presents a capital gain for the investor similar to selling a piece of gold for more than one initially paid. Popular valuation methods for cryptocurrencies include scenario analysis with Fisher’s Quantity Theory of Money and network effects.

Demelza Hays
... studied economics at the University of South Florida and the Tolouse School of Economics. Recently she is a Ph.D. student in the Business Economics program at the University of Liechtenstein, researching in fields of Blockchain technology and Bitcoin. She is also a fund manager at Liechtenstein based Incrementum AG.

* Disclaimer: This article does not represent investment advice.

In contrast, blockchain-based investment contracts can represent profit sharing agreements, equity shares, dividends, or interest payments. This category includes digital assets such as Binance coin (which is technically a token), Mt. Pelerin token, and Lykke coin. This category is similar to investing in capital markets and can be analyzed with traditional valuation strategies, such as P/E ratios and discounted cash flow analysis.

Although Bitcoin has been around for over a decade, the average investor is still waiting on the sidelines because of regulatory uncertainty, low liquidity, and high volatility. However, large banks and financial intermediaries are already working on solutions to these problems. J.P. Morgan, Fidelity, Nasdaq, Goldman, Swissquote, and Vontobel are just some of the companies making moves within the space.

In the meantime, allocating a small percentage of a portfolio among uncorrelated cryptocurrencies and securities tokens has been shown to improve risk-adjusted return for traditional stock and bond portfolios. Rule-based rebalancing combined with writing covered call and put options can further reduce volatility while maintaining a permanent exposure to the asset class. Crypto spring has not arrived yet, but maybe it’s time to start preparing …

Author: Demelza Hays

The article was featured in our April edition 2019 „money“.

Demelza Hays is one of the "30 Under 30" alumni of 2018.

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