Deergha Sahni


Crypto Conservative: Old-time Investing in a Brave New World

Source: Aurica Assets, Numismatic Coins

Crypto is the Wild West of investing. Where Silicon valley meets Walls Street, mafia kingpins and Snap-obsessed Generation Zers, all come together alike. Crypto has emerged as an asset class sported by (self-proclaimed) crypto-fanatics — with blind faith in an alternate future — and investors with large appetites for risk.

The key idea behind Diversification is to increase exposure to a diverse set of asset classes, that are preferably uncorrelated.

Diversification, on the other hand, is the strategy deployed to offset risk. Diversification’s primetime avatar is the index fund — that allows investing in the market as a whole, spread across stocks in the top funds — and provides resilience against the sways of individual stock. The key idea behind diversification is to increase exposure to a diverse set of asset classes and scenarios, that are preferably uncorrelated e.g. don’t invest in steel and automobiles simultaneously, invest in oil and clean energy at the same time to bet on competing outcomes, etc. A few bad choices don’t wipe out your net worth, and you have tempered exposure to wins across markets. The idea is simple and yet so sound that the likes of Warren Buffett and Tony Robbins are vocal advocates.

Source: Money Master the Game by Tony Robbins

What if there was a way to combine these — the Wild West of modern monies, and the Conservative Pragmatism of the Grandfather of Investing?

Crypto achieves it’s great victory when it hits the mainstream. When it is accepted by everybody from Neiman Marcus to your local newspaper stand. Yes, I said crypto and newspaper stand in the same breath. Outside technology and regulation, one of the barriers to this are the relative obscurity of the space — the masses view money traditionally, as coins and notes, preferably in piles conducive to wading.

Illustration by lobosolitario1983

The shift in the idea of money from a wadable-entity to a stream of bits and bytes moving through a complex, shadowy web of digital ledgers and mining operations has been treated by the public with the sort of skepticism reserved for drug-dealers and con-artists. Given the massive volatility in the space — this is not entirely without basis.

The barrier to invest fully in Crypto markets is high.

In addition to the intrinsic risk and constant redistricting of crypto markets — 100's of new currencies emerging and dying daily, investing in Digital currencies is also somewhat hindered by the tight coupling of smaller currencies to certain larger currencies like Bitcoin. E.g. You cannot convert dollars to top-10 coins such as Stellar, without first buying Bitcoin. The barrier to invest fully in crypto markets is high — with levels of indirection and technical expertise required. That said, the space is evolving rapidly, not just in currencies flooding in and out, but also in tools that democratize access to it. Tools that bring decades of learned expertise about financial investment and portfolio optimization.

Complete custody is like using a fund manager to manage your wealth without ever handing your assets to them.

One such tool is Ember Fund. Ember Fund is run in an incubator off of Venice Beach by a group of ad-tech veterans. It takes the very simple idea of Diversification and applies it to crypto. Hoping to tame some of those crazy peaks and valleys we saw last December. It’s power is in simplicity — it exists as an iPhone app, and grants users complete custody of their assets — this is the equivalent of using a fund manager to manage your wealth — without ever handing over your assets to them.

Why Diversify your Crypto Portfolios?

Uncle Brigadier Bakshi retired from the army in 2014 and now ardently invests in stocks. He tracks his investments like a hawk, employing the niftiest of tools. His most recent question was, “Should I invest in bitcoin? Is the buzz real?”.

It is easy to get lost in the Bitcoin legend and miss the true innovation happening under the hood.

Bitcoin has captured the attention of millions. Like most compelling stories it is appealing in its dramatic stealing of the spotlight. Like most compelling stories, it carries an air of fiction. Except that it is not story and it is not fiction. It is easy to get lost in the Bitcoin legend, it’s vicissitudes and miss the innovation happening under the hood. The true potential for Blockchain technologies to irrevocably disturb the status quo, in a way that cross cuts industries and doesn’t restrain itself to finance.

The percentage of Crypto that is Bitcoin has dropped, this despite it’s own intrinsic net rise.

Research into the larger eco-system indicates that Crypto is growing, exponentially.

Source: Evolutionary dynamics of the cryptocurrency market

At the same time the percentage of this market that is Bitcoin has dropped, despite it’s own net rise.

Source: Evolutionary dynamics of the cryptocurrency market
Since January 1st 2017, Bitcoin’s market cap has fallen from 85% to 50%. While still demonstrating 62% net positive growth.
Source: CoinMarketCap

Barring it’s inherent volatility and reduction in Market Cap Bitcoin has demonstrated staggering net positive growth — 62% over the past year, 900+% over the past two, and that increases as we go further back.

The reduction in Bitcoin’s market cap as a percent of the larger Crypto space, and it’s simultaneous gross increase in value over the years is indicative of how much the space is growing. Outgrowing the confines of it’s genitor, Bitcoin, newer coins have appeared for new applications and use cases.

The Altcoin Opportunity

New incumbents are vital in hedging against Bitcoin volatility.

While Market Caps are telling, they are not the only indicators of value. On other indicators such as liquidity, growth, ecosystem and utility, several incumbents have emerged — Ethereum for smart contracts(market cap 21b, as of this writing), Ripple that enables cross-border payments(18b) and Monero and DASH that add layers of privacy and anonymity to established blockchain protocols(1.7b and 1.3b). As these gain dominance they become vital tools in hedging against Bitcoin volatility, while simultaneously creating exposure to larger Crypto-markets.

These players do not cannibalize current incombents, but instead shepherd the constructs of first-principles decentralization to several industries stuck in limbo.

Then there are the rising stars, coins such as 0x(443m) that powers decentralized exchange across asset classes — futures, stocks, derivatives, cats, you name it, BAT(243m) for advertisers, ENJ(37m), a gaming platform, and many others. These new players do not cannibalize current incumbents, but instead shepherd the constructs of blockchain and first-principles decentralization to old-world-orders of several industries stuck in limbo.

Ad-tech is a 272 billion dollar industry. If BAT can bring disruption to an industry with massive technological investment, imagine the potential for innovation in less tech-enabled areas.

One example of such an industry is Ad-tech. Ad-tech has suffered from click-bait, fraud and a congestion of players fighting for the same set of inventory since the time Google search launched Paid Per Click ads in the early 2000s. Present day Ad-tech uses its hold over technology and ad-inventory to run high-margin ad-campaigns, with a lack of visibility into their effectiveness in driving conversions. This creates an ecosystem where advertisers are overcharged for disengaged audiences. And audiences are served ads that are irrelevant at best and fraudulent at worst.

Wrong BAT. Source

Enter BAT. Besides being the masked crusader protecting Gotham city in the dark of night, BAT is also an alt-coin. BAT or Basic Attention Token quite literally pays audiences to watch ads. As absurd as this sounds, it leads to behaviors such as users being more invested in watching ads, thereby incentivizing ad-relevance. It also pays content creators and publishers for their content, proportional to how well it performs. BAT is paid for by advertisers and delivers higher ROIs per dollar spent. It does this by cutting out the middleman and connecting them to more invested publishers and audiences.

Ad-tech is a 272 billion dollar industry with multiple opportunities for innovation and disruption. Even if BAT doesn’t have all the answers, it is a concrete example of how we can start to bring fairness and transparency. It is the start of something that will grow and evolve. If something like a BAT through the blockchain can bring disruption to an industry that is already one of the largest areas of technological investment today, imagine the potential for innovation in less tech-enabled areas.

So crypto is promising. So it is the confluence of the smartest minds of our time. So diversification is our chance to win. But like any new new thing, it has a low signal to noise ratio — remember the dot-com bubble? Currencies are easy to create, and the industry is littered with fraudulent ICOs due to lack of regulation. How does one make sense of it? How does one pick the princes from the frogs? The diamonds from the rocks.. You get the drift.

Princes from the Frogs

Crypto-Investing is made harder by rapid flux and the need for deep expertise.

As inevitable as it is, Crypto is in rapid technical flux. New blockchain protocols emerge periodically that make what was a breakthrough last year, the blockchain version of MS DOS today. Investing is made harder by the need for deep expertise — How do transaction approval frequencies affect your ability to trade? What are the differences between private, public and federated blockchains? How do these translate to scalability, security, adoption and value? etc. For the investor, there is a need to respond quickly to changes as these develop.

Ember’s funds are designed to maximize returns without the need to track every nuance of the ecosystem. It does this by hosting the most credible minds to curate legitimate, high-return portfolios. One such mind is Marius Kramer, a top Quora Bitcoin writer, viewed over 3 million times. Marius is an expert in the technology, history and trends in Blockchain technologies. Ember provides Marius5, a managed fund that is rebalanced weekly by Marius. Through Marius’s counsel Ember helps you diversify your holdings to not just the top alt-coins such as Ethereum, Litecoin, Ripple etc., it also gives you exposure to rising stars as BAT, Binance, ENJ etc. As users stay on Ember, Marius5 continues to react to changes in the markets by rebalancing their holdings to stay on top.

Portfolio rebalancing, principles such as buying low and selling high have been applied to traditional fund management for decades.

Portfolio rebalancing and the application of principles such as buying low and selling high are not unique to Ember and have been applied to traditional fund management for decades. What is unique is their application to Crypto, accessibility through a cell phone application giving users real-time responsiveness to market changes, the access to premium fund managers whose returns are tied to yours, and at the core of it, granting the user complete control of their assets.

Coinbase owns and takes custody of your assets, creating situations where you could be locked out of funds. Given market-volatility, this has made people nervous.

Support for diversification in Crypto has been around for a while. Coinbase launched Bundles that allow you to buy mixes of the top 5 currencies weighted by market capitalization. Their offering makes the mechanics of buying easier but is not catered toward returns. Further, being on Coinbase means Coinbase owns and takes custody of your assets, creating situations where you could be locked out of funds. Given the volatility of the market, this has made people nervous. There have been instances of Coinbase holding and not releasing funds — even if these are few and far between, it is indicative of flaws in the holdings model.

Then there is San Francisco-based Bitwise, started by Silicon Valley and Walls Street bigwigs. Bitwise is an index fund that is managed, caters to high investment floors and also custodial — it takes control of both assets and all investment decisions.

Exchanges get hacked. Mt. Gox was a 400 million dollar hack, and Coincheck was at 530 million. Ember circumvents that by giving you full control of your assets.

Ember works with your wallet, while Coinbase and Bitwise are custodians. Exchanges get hacked, Mt. Gox was a 400 million dollar hack, and Coincheck was at 530 million. Ember circumvents that by giving you full control of your assets and is impervious to attack. Granting you high-value indexes and hedging without loss of control.

From a team and technology perspective Ember has some of the sharpest minds in the space. They are a young and upcoming venture, incentivized to give users the best returns possible. Marius himself manages high value funds with minimums of 200k. Using Ember takes the minimums away and gives practically free access to a premium product. From an investment perspective it’s a no-brainer.

In conclusion

Blockchain and the disruption of Financial technology is a future you want to be part of.

Coming back to Warren Buffett — “Diversification is protection against ignorance, it makes little sense when you know what you are doing”. As a corollary, diversification makes a lot of sense when the ecosystem moves at the speed of light and you rarely know what you are doing — as is the case with Crypto.

And what is my answer to Uncle Bakshi’s question about BTC? Even if you’re unsure about Bitcoin, there is a wave of disruption in financial and Blockchain technologies — it is a future and you want to be part of it. Go slow, learn as you invest and hedge your bets. How?

In the words of your favorite millennial — “There’s probably an app for it”.

*all Market Caps and statistics are as of this writing.

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