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Crypto investments: how niche opportunities become mainstream

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Banks need to start reporting crypto derivatives before it's too late

By Rhian Lewis, author of The Cryptocurrency Revolution

February 2021 marked some key moments in the evolution of Bitcoin. Tesla’s SEC filing on February 8 stating that it had bought $1.5 billion worth of Bitcoin and planned to begin accepting Bitcoin for its products marked the beginning of a busy week for the virtual currency, during which America’s oldest bank, BNY Mellon, announced plans to institute a custodial service. And that’s without mentioning the fact that February also marked the month that Bitcoin’s price rose above $50,000 for the first time ever.

Never mind the fact that only five per cent of finance executives say they would buy Bitcoin: this feels like a seismic shift in the cryptosphere. The mainstream media may be surprised, but for those who have followed the progress of Bitcoin since the beginning, this felt inevitable. Few analysts outside the crypto echo chamber would have predicted in 2010 – or even 2015 – that by 2021 assets such as Bitcoin (or even Dogecoin, Bitcoin’s meme-inspired baby brother) would have become mainstream, or that terms such as ‘mining’, ‘halving’ or ‘hash power’ would be referenced in non-specialist publications.

Perhaps it is worth stepping back and wondering which crypto products or opportunities that seem impossibly niche now will be hitting the mainstream in ten or even five years’ time.

Staking rewards and interest-bearing crypto accounts

One of the criticisms that many analysts have aimed at cryptocurrencies is that they offer no return, other than the speculative possibility that their price will increase. They do not return a dividend or interest.

Rhian Lewis

Rhian Lewis

This has begun to change, and investors with an appetite for some risk are now able to gain returns of around 8% APY. By committing your cryptocurrencies to a lending platform such as BlockFi or its many competitors, generous returns are possible. The down side, of course, is that the holder is making a choice to trade off security (holding their cryptocurrency themselves) against trusting a third party, which may or may not be regulated or insured, depending on the company and the jurisdiction.

Another way of making your cryptocurrency work for you is via a process known as ‘staking’. While various tokens offer rewards via this process, the big story around staking over the last couple of months has been about Ethereum, the best-known cryptocurrency after Bitcoin. While Bitcoin and Ethereum currently rely on the expenditure of computer processing power to record and validate transactions on their networks, a change to Ethereum’s software means that validation will be done in a different way. This update means that Ethereum 2.0 will use a process known as Proof of Stake, which requires the computers that run the software to lock up a certain amount of Ether to prove they have skin in the game.

While the sum required for this is offputting for many retail investors, at more than $60,000, some wallet providers and exchanges now allow investors to pool their deposits and stake smaller amounts. Interest rates can fluctuate but are expected to be around 7%.

Expect the word ‘staking’ to start popping up regularly in the personal finance pages of the mainstream press..

NFT Collectibles and Art

Collectibles such as trading cards have long attracted high prices at auction. A digital reproduction of an image – the 21st-century version of a trading card – in the past had zero intrinsic value, as it could easily be copied.

However, the technology behind Bitcoin that stops the same payment being made twice (the so-called ‘double spend problem’) can also be leveraged to register the ownership of a digital asset, and thus ensure that there is only one original, whose provenance can be verified.

These non-fungible tokens are most often registered on the Ethereum blockchain, and come in many different forms. CryptoKitties, a game in which collectors bred and sold virtual cats, was the first to take off in any meaningful sense, but has now been superseded by various others, including CryptoPunks. The most expensive CryptoPunks – tiny pixelated graphics – have sold for hundreds of thousands of dollars, surprising even seasoned crypto investors.

While some of these niche NFT products might be assumed to be in bubble territory, the idea of tokenized digital art has been quietly moving into the mainstream, and this month Christie’s will become the first major auction house to offer a digital work in this format (an artwork by Beeple).

Virtual real estate

Non-fungible cryptoassets come in all shapes and sizes, and while a traditional investment portfolio might contain land or commercial property, certain forward-thinking investors are snapping up land parcels that exist only in virtual spaces. This is not as strange as it sounds. The Covid pandemic has hastened the adoption of virtual-reality technology for workspaces, training, gaming and social networking, and in shared gaming and social experiences, virtual real estate in prime locations is becoming as attractive as property in the physical world, as businesses vie to set up shop in places where our digital presences will congregate.

Decentralized worlds such as Decentraland, Somnium Space and The Sandbox are attracting as much interest from investors and gamers, and prime land parcels such as those in Decentraland’s Genesis Plaza have sold for tens of thousands of dollars. It is worth noting that because these ‘land’ assets are registered on public blockchains as non-fungible tokens, they can be traded freely without the permission of a gaming company, which was not the case for the earlier generation of world-building games, such as Second Life.

Nothing is impossible

There are many other examples of areas where cryptoassets and blockchain technology are pushing the boundaries of financial products and investment. The whole area of decentralized finance ‘DeFi’, where users can create and participate in disintermediated financial services such as collateralized debt positions and swaps, would take many more thousands of words to explain.

As recent developments in the Bitcoin ecosystem have shown, investments that seem impossibly niche and fanciful now have a habit of gaining mainstream acceptance. Perhaps you would not pay thousands of dollars for a jpeg right now (neither would I), but it would not be wholly surprising if this becomes entirely normalized behaviour in the medium term.

Gartner source: https://www.gartner.com/en/newsroom/press-releases/2020-02-16-gartner-survey-suggests-most-finance-executives-not-planning-to-hold-bitcoin-as-a-corporate-asset

https://www.coindesk.com/here-comes-the-virtual-real-estate-boom

https://www.christies.com/features/Monumental-collage-by-Beeple-is-first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx

https://www.nasdaq.com/articles/early-cryptopunk-digital-collectible-sells-for-%24762k-in-ether-2021-01-23

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