Cryptocracy has positive long-term implications
The collapse in cryptocurrency values in recent months has been extremely painful for investors, but while many market participants are licking their wounds, others are positive about the shakeout.
Du Jun, co-founder of Huobi – a Singapore-based cryptocurrency trading platform founded in 2013 – believes that the collapse in the value of cryptocurrencies, triggered by the failure of the algorithmic stablecoin Terra, will make the market stronger in the long run.
At the end of May, a wave of withdrawals taxed Terra’s ability to maintain its bond, and investors lost confidence and flocked to the exits, leading to an old-fashioned bank run. To defend its bond to the dollar, Terra began selling bitcoin to raise the money to settle its obligations to redeem investors. The sale began to push down the cryptocurrency values so quickly that large institutional players were exposed to margin requirements and forced closure of their security.
In total, the market value of cryptocurrencies reached around $ 815 billion, down from $ 2.1 billion just three months earlier. It has just recovered, swinging around $ 920 billion in early July.
At an OMFIF Wealth Strategy Institute event, Du Jun said the collapse would have two consequences. “First, regulators are more vigilant and will implement stricter rules,” he said.
In fact, there are already indications that regulators are sharpening their attitudes. The Monetary Authority of Singapore is implementing a new crypto-licensing process, which Chief Fintech Officer Sopnendu Mohanty called ‘painfully slow’ and ‘extremely draconian’.
A bill proposed in the U.S. Senate by Senators Cynthia Lummis and Kirsten Gillibrand in late May would do much to mitigate threats from less well-designed digital assets.
Du Jun believed that investors as well as regulators would take the risk in the cryptocurrency market more seriously, and thought that the crash would counteract ruthlessness. “When other players start coming in, they will be more careful. That’s a good thing for the market. Stricter regulations and less blind trust in tokens will enable more prudent investments in the future. ‘
With the risk of investing in the nascent asset class of cryptocurrency thrown into sharp relief, Du Jun provided some guidance to those considering taking a position. Despite being concerned about seeing the digital asset ecosystem grow, Du Jun warned investors against over-allocating digital assets, suggesting that 5-10% of a portfolio is an appropriate level of exposure for such a risky asset class.
He pointed out that there are established frameworks for valuing shares – price / earnings, price / book conditions and so on – that can guide investors to a valuation. “Bitcoin and Ethereum are mature assets and have indicators like this,” he said. “But for newer digital assets, the average investor cannot rely on value indicators, so they should not be a core part of their portfolio.”
Therefore, for new investors, he recommended sticking to relatively established and proven assets including bitcoin and Ethereum. While the potential for growth is lower, they are stable compared to newer cryptocurrencies.
But for those who want to venture beyond the big two, Du Jun had three important recommendations. The first was to treat the valuation of a cryptocurrency in a similar way to venture capitalists’ valuation of equities. “First we look at whether the team is reliable,” he said. «Are they successful series founders? Do they have a viable business model? What is your track record, educational and technical background? ‘
He also stressed that it is important to examine the way the project token is distributed, since the supply of cryptocurrency tokens can be controlled by the founding team, which adds a layer of concentration risk and possible moral hazard.
Du Jun also warned that the performance of the token is not the only risk to which cryptocurrency investors are exposed. The security of the trading platform is also relevant to the risk profile of an investment in the cryptocurrency world where hacks and exploits often lead to investors losing their money.
Lewis McLellan is the editor of OMFIF’s Digital Monetary Institute.
