Everyone knows that the run-up in cryptocurrencies during 2016 and 2017 made many investors very wealthy, but far fewer people realize that long-term holding was the path to success. Investing just 2,000 euros in Ethereum in August of 2015 would have been enough to make you a millionaire in 2018. Those opportunities have passed, but the lessons learned can still be applied to the cryptocurrency securities of today.
How the Great Fortunes Were Made
In many ways, the development of the cryptocurrency market mirrors the early development of stock markets around the world. Before 1950, stocks had a very dubious reputation. The American Dow Jones stock index soared over 400% during the 1920s and then lost more than 80% of its value during the Great Depression. Most people assumed that trading in and out of the market was the only way to profit. A recent working paper on international asset returns entitled “The Rate of Return on Everything, 1870-2015 ” paints a different picture. Stocks in 16 developed countries averaged a real return of 6.89% per year while bonds only averaged 2.5% per year. The way to get those returns was long run holding.
The early history of Bitcoin was also full of dramatic price swings, and few thought that it was a sensible investment. Bitcoin went up 1,000% in the second half of 2013 and then fell 80% over the next year and a half. Bitcoin then shot up a staggering 10,000% between the middle of 2015 and the end of 2017 before falling 70% in the first half of 2018. Bitcoin has shown an average annual return of about 125% a year over the last five years, so it proved to be an excellent investment after all. However, the time for speculating on cryptocurrencies has passed. The cryptocurrency security investors of tomorrow will not be able to make so much so fast, but they will be able to capture a larger share of every upward movement. More importantly, they will be able to keep it for the long run.
The New Opportunities
The examples above focused on Bitcoin because it is so well known. What is not so well known among the general public is that small-cap companies as an asset class have outperformed larger companies in the stock market over the long run. Small-cap outperformance has also been a feature of cryptocurrency markets. Bitcoin began 2017 with more than 85% of the cryptocurrency market according to coinmarketcap.com. Bitcoin’s market share was little more than 40% by the middle of 2018. At the same time, cryptocurrencies outside the top ten went from 4% to 21% of the market during 2017.
The outperformance by other cryptocurrencies was not merely an artifact of the bull market. The market share of other cryptocurrencies has increased to 23% after about six months of a cryptocurrency bear market. Some of the growth of “others” comes from the rise of cryptocurrency securities, which are more like traditional stocks and sometimes even pay dividends.
Many of the best investment opportunities come during bear markets. PayPal and Netflix both had their IPOs during the Dotcom Crash of 2000-2002. Bitcoin itself was partly a product of the 2008 financial crisis. Today’s tokenized securities offer similar potential for long run gains. However, these new opportunities bring new challenges.
A Maturing Market
Investors and exchanges have become more aware of the unique risks associated with long-term crypto holdings and have learned to manage them better. The rise of cold storage has allowed individuals and exchanges to secure their holdings against hackers. What is more, some of the major exchanges have even obtained insurance to protect themselves and their customers.
Businesses offering security tokens need a way to keep up with the increasing sophistication of investors. Launching a new security token is only the beginning. Companies need a platform like Tokeny to pay dividends to investors, report earnings, and make other announcements. By increasing accountability and transparency, firms can be part of the movement to a sustainable future for the ICO industry.
As the cryptocurrency market matures, the natural advantages of tokenized securities will become more important. Security tokens are part of the long-term trend toward disintermediation in the economy. Tokenized securities allow investors to increase ROI (return on investment) by investing directly in smaller firms, which have historically been more profitable.
As Respectable as the Rockefellers
For many years, the legal status of cryptocurrencies was very unclear. However, the dramatic growth of the total cryptocurrency market from less than 7 billion euros at the beginning of 2016 to more than 500 billion euros at the end of 2017 made that untenable. A gray market of 500 billion euros simply attracts too much attention to remain a gray area, so countries have either accepted cryptocurrencies or tried to ban them outright. The result is that Bitcoin, Ethereum, and most major cryptocurrencies are now clearly legal in the EU, the UK, the US, and other developed markets. That in itself makes the market much more stable, respectable, and attractive to investors.
The 2016-2017 bull market dramatically raised the profile of cryptocurrencies, but the current bear market is drawing long-term investors to cryptocurrency securities. Venrock, the venture capital fund of the Rockefeller family, entered the market in April of this year. Venrock Partner David Pakman explained the move to Fortune Magazine, “There are a lot of crypto traders in the market … This is different. In fact, to us, it looks a little bit more like venture capital.”
The Rise of Tokenized Security Investors
The speculators who propelled the crypto bull market continue to leave, so it is increasingly important to attract long-term security token investors. The days when speculators would flock to any company that announced a cryptocurrency are gone forever. Only true investors are willing to buy into bear markets, and sustainable long-term business practices are the best way to earn their trust.