There are quite a few use cases, the biggest and clearest and easiest to understand, is as a store of value that can't be censored and is resistant to seizure. And so, the really clear example of demand for this is, the offshore banking system which is roughly $20 trillion dollar today. And its not just people trying to dodge taxes, Apple, Amazon, every billionaire on the planet has wealth stored there.
And firms like J.P. Morgan Chase collect fees to offshore law-abiding citizens wealth. People want to store their wealth securely in a way that no single judge could freeze all of their assets. Amazon doesn't want their entire global business operation to be shut down by one judge in Brussels. They want to be able to go through a lengthy appeals process and keep their business operating.
So cryptocurrency performs that same task of the offshore banking, of keeping wealth secure an order of magnitude better. So there's massive real fundamental demand for this use case. There's a huge distinction between the money use case, store of value, and the blockchain use case, for other assets and it's useful to separate those.
A blockchain makes a ton of sense to record in real-time legal title. An example in finance, that anyone whose traded treasuries is familiar with is: failure to deliver. So Goldman Sachs will sell a bond to Credit Suisse who borrows it from JPMorgan, and the same bond in a day, might trade across 12 banks. And if one back office fails, they fail to make delivery of that bond, you get what's called a cascading failure to deliver. Because no one knows who actually owns the bond. And that can take weeks to fix. So imagine if you just have a shared database, a database that each of those banks held, that was kept accurate in real time and that no one could maliciously change or manipulate.
You would know who owns what bonds and you might be able to eliminate half of the existing back office in big banks. So a massive cost savings. A really useful idea – a blockchain I just a type of database. It's a distributed ledger that in some use cases, like for a banking back office, is kind of like a database upgrade. So massive improvements in efficiency, but probably not that transformative or disruptive.
When you take a blockchain and you make it public and decentralized, and then you add money to that – you add a cryptocurrency – then you're looking at something that is that first use case, that offshore banking system, that is fundamentally disruptive and disruptive financially, economically, and even potentially politically. There has been this really clear path of adoption, the earliest adopters were engineers, self-described cypherpunks, then you had a wave of kind of Sillicon Valley tech elites, people who would have a successful exit, who had a high risk tolerance, and who liked taking risk on new technology. Then you had kind of a early wave of maybe people who have more of a Wall Street background, as well as high net worth individuals, who are a little bit risk-tolerant.
What you're seeing right now is a shift from small family offices to big. Venture capital firms are basically all-in, so most of the famous venture capitalist firms, not only have they been in the space for a few years, they're now directly investing in new cryptocurrencies.
And of the 10 largest family offices in the country, at least 7 of them own cryptocurrencies. Maybe more, but 7 is sure of. So the next wave – is kind of the institutionalization of this space – there's a huge number of entrants who want to invest cryptocurrency but they cant, for security reasons, operational reasons, regulatory, but they can easily buy a future, that's on the CME or CBOE.
So that opens the door to groups like endowments and pensions. So far, endowments and pensions own 0 cryptocurrency. You have an asset that has been the highest returning asset class over the last 8 years and is uncorrelated to everything else, and while there's certainly debate over the future prospects, it lines up as the holy grail for a portfolio, in the sense that, if you size it appropriately, if you size small, the risks are idiosyncratic. It actually reduces the risk of a portfolio. So endowments and pensions, as they get comfortable with the space in all aspects regulatory, compliance, as well as underwriting investment risk. They're going to get involved and that's a massive wall of money coming into a relatively small asset class.
September 19, 2018
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