Cryptocurrency analyst. Founder and editor at btcpeers.com
There are several narratives identified as the propelling factors for the increasing demand for crypto assets. However, the most potent is the “store of value” narrative that has established crypto, most especially bitcoin, as the go-to-asset for investors looking to hedge against inflation. This sentiment trails what experts term as a critical period in human history borne by an unrelenting health crisis and a myriad of flawed economic policies designed to suppress its impact. According to a report by the Economic Policy Institute, over 17 million Americans will permanently lose their jobs because of the coronavirus pandemic.
With all this going on, it comes as no surprise that individuals, corporations, and investors are looking out for effective means to allocate funds to assets immune to political or economic factors. And since crypto assets naturally fall into such a category of investment vehicles, it has come under scrutiny amid fears that its digital nature exposes investors to added security risks and requires more sophisticated tools. It is no more news that security is one of the main challenges limiting the mainstream adoption of cryptocurrency. Another hurdle is the present business framework of the crypto exchange landscape. The fragmentation of the crypto exchange sector makes it difficult to accurately track crypto metrics, which, in turn, enables market conditions susceptible to manipulation.
Fortunately, we have begun to see the influx of products tailored to resolve recurring issues associated with the storing, trading, and transferring of crypto assets. Already, crypto custodial solutions are developing improved ways to guarantee the safety of digital assets. This industry experienced a boost in its effort to enable secure infrastructures for digital assets when the Office of the Comptroller of the Currency (OCC) announced that federally chartered banks can now provide crypto custodial services. In addition to this, the influx of blockchain-focused companies that are looking to systematically improve and simplify the processes involved in accessing cryptocurrencies and blockchain networks has spurred a rise in the adoption of crypto assets.
One of such companies targeting the blockchain landscape and introducing financial systems compatible with cryptocurrency is BTCS. Recently, BTCS announced that it has expanded its digital asset position by over 130% and increased the fair market value of its holdings by 285% in Q2 of 2020. I decided to interview Charles Allen, CEO of BTCS. We discussed the factors propelling mainstream adoption, the hurdles impeding growth, the BTCS’s blockchain and crypto investment model.
Andrey Sergeenkov: Do you think that the recent crypto rally is predominantly fueled by crypto assets’ unique capability to resist the effects of political or economic crisis?
Charles Allen: 100% agree, moreover in our opinion, the effects of COVID on the world economy are still yet to be seen. We expect continued government bailouts further devaluing fiat currencies around the world. As such we believe investors will seek scarce assets such as Bitcoin and Ethereum as a store of value. Over time this should drive more mainstream adoption of certain digital assets likely resulting in substantial price appreciation.
Andrey Sergeenkov: Apart from inflation hedging features, what other reasons should spur investors and companies to adopt blockchain and crypto technologies?
Charles Allen: While the internet allowed for the digitization and global sharing of information, which has fundamentally changed the world, Blockchains, by contrast, allow for the digitization and global transfer of assets without intermediaries. Blockchain technologies provide a solution for almost every industry in existence, capable of lowering fees and improving efficiency and security. However, unlike the internet, which was completely new when introduced, Blockchains are designed to replace existing systems which in many cases have been refined over decades, as such we believe adoption will be extremely slow for certain use cases. Investors and companies should only implement solutions that benefit operations or result in substantial cost improvements and avoid the industry hype and pressure.
Andrey Sergeenkov: Can you please introduce BTCS and explain the modalities of its offerings?
Charles Allen: BTCS Inc. (OTCQB: BTCS) is one of the first U.S. publicly traded companies focused on digital assets and blockchain technologies. We’re engaged in the following three lines of business: 1) building a portfolio of digital assets with a keen focus on highly disruptive verticals, 2) actively looking at acquisitions in the blockchain space, and 3) developing a digital asset data analytics platform aimed at providing crucial information to users, enabling the tracking of multiple digital asset exchanges and wallets to aggregate portfolio holdings into a single platform to view and analyze performance and risk metrics.
Andrey Sergeenkov: Your company has been in operation for six years now. What has motivated you and your team to continue to devise ways to expose investors to crypto and blockchain investments despite the ups and downs record in this timeframe?
Charles Allen: We’ve been motivated by the belief that crypto and blockchain technologies can fundamentally change the world in a profound way and want to provide the general public investment exposure through our public company.
The last 6 years have indeed been a rough ride, over that time we’ve had exposure in one way or another to almost every aspect of the crypto space, including ecommerce, mining, wallets, payment processing and ATMs to name a few. Through these experiences and candidly some failures we’ve really dialed in what we believe to be an exceptional business model for a public crypto focused company. We have an extremely low burn compared to our public peers and aren’t burdened by all the operational risks of mining or other costly pre-revenue beyond the horizon endeavors.
Though what truly sets us apart is the perseverance and dedication of our team, a desire to win, and doing right by our shareholders. There’ve been numerous micro-cap crypto companies that have come and gone over the last 6 years and we’ve survived and believe we’re well positioned to thrive in the future.
Andrey Sergeenkov: The core impediments as regards crypto adoption are recurring security issues and the fact that it entails complicated processes. How critical are these limitations to the growth of blockchain and crypto?
Charles Allen: This is a major issue for crypto adoption, however, we believe many of the security issues are related to securing coins rather than vulnerabilities in a blockchain. In the short run we believe the most viable solution is for users to use established institutions with strong balance sheets to secure their crypto, however, while using a “trusted 3rd party” adds convenience it simply shifts the security risk. Alternatively, investors can gain exposure to crypto currencies through companies like BTCS. In the long run as main-stream adoption advances, we believe there will be a shift towards more users holding their own private keys through more advanced and user-friendly solutions.
Andrey Sergeenkov: Have stakeholders managed to develop solutions good enough to tackle some of the downsides of blockchain or crypto-based assets?
Charles Allen: There are still downsides to blockchain based solutions which haven’t been tackled. Transaction times and costs can often be substantially higher than with non-blockchain centralized solutions. Using blockchain just for the sake of using blockchain isn’t a good idea. The age-old saying, “if it isn’t broken, don’t fix it” truly applies here. For example, I would love to see voting move to a blockchain based solution, in my opinion it’s a very broken process, who had heard of the expression “hanging chad” before 2000. There are however lots of companies with reliable centralized processes trying to move to blockchain based solutions and I’m left scratching my head as to why.
Andrey Sergeenkov: How difficult is it to provide crypto custodial services to investors, given that it is arguably the most critical component for establishing an investment model for institutional investors?
Charles Allen: For larger institutions I think it’s more an issue of risk. If you’re trying to launch a pure crypto ETF and clear a S1 registration statement with the SEC, it’s extremely challenging and hasn’t been done yet. With respect to BTCS we’re not an investment company so providing custodial services isn’t a priority or issue for us.
Andrey Sergeenkov: What do you think of OCC’s new policy? Does it help companies like BTCS in their quest to normalize crypto investment?
Charles Allen: This is great news for BTCS, a rising tide lifts all ships. As crypto becomes more mainstream, our business model moves away from the fringes and should be more attractive to a wider audience. In addition, our business plan is diversified and should add value beyond what a bank could offer the average Joe, so we don’t see it as a competition risk.
Andrey Sergeenkov: Following the introduction of this policy, blockchain stakeholders have begun to push for the incorporation of blockchain-enabled solutions in the banking sector. Do you think that the traditional financial system in the US is ready for such a transformation?
Charles Allen: More forward-thinking institutions in the banking sector are embracing it while others are sitting on the sidelines with a more wait and see approach. However, I think everyone is keeping tabs on the tech for fear of being left behind. Overall, I believe the road to transformation will be slow as many larger institutions are deeply engrained with legacy systems or are very risk adverse.
Andrey Sergeenkov: I read that the recent crypto boom spurred BTCS to expand its digital asset portfolio? Can you give more detail about the growth recorded in the second quarter?
Charles Allen: In the first six months of 2020 we raised over $1 million USD which enabled us to drastically increase our Bitcoin and Ethereum holdings and our timing has really paid off. As of August 5, 2020, the fair market value of our digital assets increased to over $1.5 million a 50% increase from our cost basis.
Andrey Sergeenkov: From your explanation, I noticed that BTCS is currently limiting its involvement in the crypto market to BTC and ETH. Do you and your team plan on adding more assets? If so, which cryptocurrencies are you considering?
Charles Allen: We definitely plan on expanding our digital asset portfolio beyond BTC and ETH but are being very cautious at the moment due to economic uncertainty. Our plan is to focus on digital assets in highly disruptive verticals such as cryptocurrencies, smart contracts, IoT, computing and data storage and at the protocol layer where possible. Some tokens we like but don’t own are Monero, EOS, FOAM, Golem, Basic Attention Token, and Filecoin to name a few.
Andrey Sergeenkov: As a regulated company, BTCS tries as much as possible to avoid digital assets classified as securities. Does your team have a system in place to ensure this?
Charles Allen: First off, the reason we avoid digital assets which may be classified as securities is to ensure we don’t inadvertently become an investment company as defined by the Investment Company Act of 1940 (the “40 Act”). It’s very clear in the 40 Act what is and isn’t an investment company, however, we spent almost a year and a half wrestling with the SEC through numerous S1 filings and comment letters around the question of if bitcoin and ethereum are securities. What finally helped break the log jam with respect to this question and our review process is when Jay Clayton the Chairman of the SEC testified in front of congress stating that bitcoin and ethereum were not believed to be securities.
Our system involves evaluating any token we’re considering using the Howey Test. Further, even if we determine that a token is not a security pursuant to the Howey Test, we anticipate keeping the aggregate value of new tokens to less than 40% of our assets excluding cash. Under the 40 Act if a company holds securities which comprise more than 40% of its assets excluding cash then it’s an investment company.
Andrey Sergeenkov: BTCS recently announced its plan to launch a crypto data analytics platform in the second half of 2020. How important is this project?
Charles Allen: This project is very important to us, though, as a result of COVID I anticipate delays in launching. The project if successful may provide us with a revenue stream and valuable data for our own digital asset portfolio.
Andrey Sergeenkov: BTCS is also looking to acquire controlling interests in blockchain industries. How is this plan coming along?
Charles Allen: A lot of smaller companies that would typically be interested in doing a deal with BTCS are struggling and not attractive to us. While we’ve been actively searching for a target, the value of our crypto holdings has grown to over $1.5 million, therefore we plan to be very selective with potential transactions we consider.
Andrey Sergeenkov: What are your expectations for Bitcoin in the coming months? Do you expect the digital asset to maintain its current momentum?
Charles Allen: We’re very bullish on both Bitcoin and Ethereum in the coming months and are optimistic both will maintain their current momentum. However, we’re wary of smaller project tokens, as those projects may feel the effects of the economic downturn and may not benefit from being a viable inflationary hedge.