A Case for the Staying Power of (Some) Cryptocurrencies

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What I’ve personally learned is that whatever I think about the potential negative aspects of the future of cryptos, whether that be impending doom from a possible and absolute legal embargo or governments coming to compete with their own centralized digital currencies doesn’t really matter. 

Today, many of these new assets have actual utility and, therefore, value. Further, each day, and with each new dollar committed, this new asset class builds more staying power. Without a massive regulatory headwind or a centralized government-backed “product” to compete with the existing crypto assets, I see no end in sight. Even then, as we see over and over again, creativity and capitalism tend to outrun regulators.

Are People Actually Using Cryptocurrencies to Buy and Sell?

To understand how cryptocurrencies are really gaining practical application, one should analyze the use of cryptos and see if people are actually transacting with them to make payments or are just using them in a speculative manner. 

While asset bubbles and valuation volatility are typically the focus when discussing cryptos, transaction counts show just how much cryptos have actually become an actual functioning medium of exchange (i.e., used as an actual currency). 

In just over five years, daily payment transactions using Bitcoin, Ethereum, and Litecoin have increased sixfold, from just 250,000 to more than 1.5 million transactions a day. Visual Capitalist did an excellent job of demonstrating this increasing utility:

Source

Across all the three crypto networks shown in the chart (Litecoin, Bitcoin and Ethereum), every day, approximately $12 billion is transferred in the form of payment for goods and services, with millions of people using cryptocurrency for these payments daily.

Ethereum, in particular, has become dominant as an actual currency for goods and services. Its popularity for buy and sell transactions in the NFT world, the video game industry and, frankly, for many payments related to digital assets, has helped fuel its climb. Ethereum is the only crypto currency that we currently accept at our video game and VFX production company, Polygonus, for payment for services because of its market acceptance for this purpose. 

To me, the most important metric to prove crypto currency staying power is to see owners actually using it in a manner that it was (we believe) designed for: to be used like a dollar bill, as a currency.   

The Market Interest for these Assets May Now Be Too Powerful to Regulate Away 

One of my good friends visited me last month from Kenya. We discussed the growth of the crypto markets. More specifically, the audience that is really driving those markets.  

We concluded that the emergence of the retail investor is here. Specifically, we discussed the growing investment base of younger investors – those below 40 years old. This group is demanding new financial products and the typical institutional players are not providing them.  

Despite their age, the under-40 investor often has, in many cases, well into six figures for investments of their choosing and they are not as traditionally risk-averse as their parents.  They also see little value in bonds that fall below inflation rates, nor, although to a lesser extent, real estate at the highest valuations in recent history.  Rather, they see value in investing in the future, a future that they see as much different than our present. Generalizing without overstating, they often have little to no faith in governments nor the politicians that lead them. This demographic invests in disruptive capitalism with eyes towards replacing traditional, inefficient systems and institutions. The asset class of choice for them has become cryptocurrencies and digital assets. 

By investing in cryptos, their sentiment is generally that they are doing more than just investing in something that makes them money (though that is a big driver). They are also giving the middle finger to the institutions of today and signaling a change desired for a new tomorrow.  

That tomorrow is intended to be less controlled by centralized mechanisms, whether that be governments or central banks. If this new wave of investors prevails, the world will be more digital, transparent and decentralized than ever.

The rise of cryptocurrencies is firmly based on a lack of trust – that won´t change.

There was an interesting piece recently in the Wall Street Journal titled “Rich Millennials to Financial Advisers: Thanks for the Golf Invite, but You Can’t Invest My Money.”  The article goes directly where you expect it to go: millionaire millennials have no interest in paying for financial advice from traditional banks or certified advisors.  Instead they prefer to invest directly into companies or assets of their choosing.  They are shying away from index funds, REITS, and other diversified vehicles (the commonplace financial vehicles of their parents) to cryptos, which they believe have the potential for a change in world order, not just a financial return. Simply put, millennials often don’t trust financial advisors, financial institutions nor governments. They view crypto currencies as a silver bullet to both make them money and snub off the status quo of the political and financial world.

As this generation gains more capital and influence and has a say in financial market regulation, is it likely that they take measures to eliminate the cryptocurrencies that they view as so necessary today or passively allow that to occur?  

Real Money and Influence Is Already in the Crypto Market

For readers who are not familiar with the heavy concentration of global family wealth, the concept of family offices may seem foreign to them. Simply stated, most of the wealthiest people in the world actually don’t go to the bank or a financial institution to get their financial advice, file their taxes, set up trust structures for their kids, etc.  Typically, when an entrepreneur (the vast majority of new, first generation wealth will be through an entrepreneurial endeavor) reaches a certain level of wealth – usually no less than $100 million, but more likely $250 million and above – it makes sense to fire all your old professional money managers, accountants, and lawyers and just bring them in-house.  They all work for you now, just to manage your own affairs. The rise of family offices has never been more prevalent in today’s age with the concentration of wealth in the hands of so few people.  Family offices hire the best and brightest.  Within my own circle, I have seen peers turn down jobs at investment banks, hedge funds and global professional services firms in favor of family offices because of one thing – they pay better.  As family offices often have staff on hand that are capable of running companies themselves, the talent quality is the highest it can be – they are not in the business of losing money.  The entire office of accountants, lawyers, bankers, etc. oftentimes works for one person with one goal: grow generational wealth (i.e., make money, never lose it).

What does this discussion have to do with the staying power of cryptos?

In a recent Forbes article, it was shown that billionaires now own 4% of all cryptocurrency through discrete family offices. The article went on to say that the average family office now has 1% of its portfolio invested in cryptocurrency, according to research by Campden Wealth.  Considering the average family office handles $1 billion in family-owned wealth, Forbes estimates that each family office owns approximately $11 million in cryptocurrency.  Campden Wealth estimated there were 7,300 single family offices in the world in 2019. If every one of those family offices owned $11 million in cryptocurrency they would own a combined total of $80.3 billion in crypto wealth.  To provide a bit of reference to the market, as of the day of writing this article, the market capitalization of only Bitcoin currently sits at over $900 billion.  For further reference, family offices are typically the most conservative of all investment houses – they don’t think of earning returns over a six-month period like a hedge fund would, rather they think about how their capital placement today will affect their unborn grandson’s fortune 50 years from now.  Holding periods on capital placements can be longer than one’s own lifetime, the need to make returns in the near or medium-term for many of these investment houses is non-existent. They don’t need a big exit in order to meet their own goals.  As such, as these family offices dabble into an asset class, they aren’t just signifying that the asset class has potential, they are signifying that it has long-term value. 

With this much capital into cryptos from powerful sources, how low can the value of an entire asset class actually go?

Crypto Enthusiasm Should Not Run Wild 

As the utility of cryptos grows, can they really compete with the world’s most-used currencies at any meaningful scale? Most likely not. 

I love reading about the history of the world, specifically the financial history of the world.  While I personally rest on the side of smaller governments, I do understand the mechanics of how centralized power is maintained and the desire for governments, i.e., politicians, to maintain that control.  Control over the financial movements of your citizens’ transactions is key to centralized power, arguably one of the most important aspects in today’s world.  

From a rational point of view, do you think the United States would ever allow a crypto currency to compete with their dominance as the global exchange currency?  My conclusion of course has always been: no way, it would be impossible.  The value of having a global exchange currency is on par with having a nuclear arsenal, it is a license to print money (literally) and control the world’s resources.  

Many investors have very short-term memories and by short-term I mean they only have knowledge of events that happened within their own lifetimes. This is understandable, but I would argue that governments throughout the history of the world (and by history I mean the entire recorded history of the world) have behaved and reacted with the same policies that can be seen today. Humans are the same, nothing has really changed besides the music and the footwear.

Many people today invest in bitcoin as an inflation hedge. Arguably the world’s most famous inflation hedge has always been gold, so a reference to the history of gold investing is as good as any to analyze crypto regulation.  

In terms of a total world history timeline, not too long ago the United States passed the Gold Reserve Act of January 30, 1934, which required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury. It prohibited the Treasury and financial institutions from redeeming dollar bills for gold, established the Exchange Stabilization Fund under control of the Treasury to control the dollar’s value without the assistance (or approval) of the Federal Reserve and authorized the president to establish the gold value of the dollar by proclamation.  A year prior, Franklin D. Roosevelt signed Executive Order 6102 “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” Executive Order 6102 made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector’s coins. It wasn’t until December 31, 1974 that the limitation on gold ownership in the United States was repealed after President Gerald Ford signed a bill that legalized private ownership of gold coins, bars and certificates. Simply put, investors were investing in gold instead of the US dollar. The US government didn’t like that.  

A rational crypto critic could easily say that the US government has made assets that compete with the US dollar illegal before, they could easily do it again with the swipe of a pen. While the trend in the U.S. appears to be, at least for now, towards regulation rather than prohibition, we should be careful to overstate the value of cryptocurrencies in light of the head-to-head with world reserve currencies it would have to win to reach its full potential. 

Conclusion and Author’s Final Words:

Some additional thoughts on today´s crypto discussions and their application in our digital world:

While I understand the arguments made by naysayers such as the Financial Times within their recent piece titled “Cryptocurrencies will be as useless in the metaverse as they are now”, I will counter this argument with the following:  We at Legacy Group are involved with metaverse construction projects as we speak.  These projects are into the millions of US dollars in value in direct billings alone and our portfolio company does allow for certain development payments to be made in Ethereum, which can be readily traded into dollars, euros, yen or any other currency of your choosing within an hour.  Maybe this won’t last forever.  Maybe someday we’ll look back and talk about how cryptocurrencies mimicked the Dutch Tulip market bubble of the 1600s, but today it buys goods and services. Today it has value, maybe tomorrow will tell a different story but don’t count on it quite yet.

Cryptocurrencies are the driving force behind monetizing the metaverse:  Within our own portfolio company, Polygonus, we have seen the use of Ethereum explode over the last year.  Forbes recently put out an article stating that “Crypto is the key to the metaverse”, and I couldn’t agree more. If a reader is interested in participating in the metaverse world, the NFT world or the digital arts world, we would consider that knowledge about how crypto functions and the uses of cryptos to be at the top of the list of “must-have” learning experiences a potential investor must be versed in. 

Crypto giant Grayscale (Grayscales runs the world’s largest crypto fund) has stated that the metaverse is a $1 trillion annual revenue opportunity, spreading across the worlds of advertising, digital events, e-commerce and hardware.  No matter what asset class you’re buying in this digital world, crypto is at the top of the list of the payment mechanisms to make these transactions happen. No one accepts checks in these new online environments, and we don’t foresee that changing in the future.  Here is just one example of today’s cryptocurrency utility. 

Expect that many cryptocurrencies will fail and become worthless one day:  A reader must understand that much of the value surrounding these crypto assets is based on the blue sky assumption that these assets will be used as some form of currency in the future via mass adoption. I don’t have a crystal ball and am not all-knowing, but I can tell any reader that out of the over 10,000 cryptocurrencies that existed as of the end of 2021, there’s no way that all of them will be adopted globally.  Expect that certain of these “bridge” cryptos like Litecoin, Bitcoin and Ethereum will win out in the end and only a few of these assets will actually prove valuable.  Also, remember that this world innovates on a daily basis, technology continually improves and the best minds in the world are looking to solve these problems. Six years has become six months in the world of technological advancement. It is entirely possible that none of the crypto assets of today will be the competitive currencies of tomorrow.  

About Legacy Group

Legacy Group is distinguished by a singular tradition of service to our portfolio partners; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable financial and legal talent across multiple disciplines and jurisdictions; and shared professional values that focus on client needs.

We provide experience and investment to a wide range of private companies spanning many industries, including real estate, hospitality, tourism, agriculture and technology. Contact us to learn more and to discuss current investment opportunities available to you in our portfolio companies.

*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.

Sources:

https://www.wsj.com/articles/rich-millennials-to-financial-advisers-thanks-for-the-golf-invite-but-you-cant-invest-my-money-11636367400

https://en.wikipedia.org/wiki/Gold_Reserve_Act

https://en.wikipedia.org/wiki/Executive_Order_6102

https://www.pwc.com/gx/en/news-room/press-releases/2021/pwc-global-annual-revenues-2021.html

https://www.pwc.com/gx/en/news-room/press-releases/2021/pwc-global-annual-revenues-2021.html

https://www.ft.com/content/c28799d4-88bf-42b9-8ad5-53ab5647ba60

https://ethereum.org/en/

https://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp

https://coinmarketcap.com/

https://www.forbes.com/sites/seansteinsmith/2021/11/08/crypto-is-the-key-to-the-metaverse/?sh=186c1ab31e94

https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/#:~:text=One%20reason%20for%20this%20is,communities%20of%20backers%20and%20investors.

Jesus Reyes

Vice President, Capital Raising

Economist by trade, spent 15 years working for HSBC in a multitude of capacities in its Private Wealth, Credit Risk Management and Investment Banking divisions. Furthermore, Jesus worked for the bank in multiple countries. Prior to leaving HSBC, Jesus was the Global Account Owner of the bank’s relationship with the world’s largest accounting and consulting firms.


Upon leaving Wall Street, Jesus joined a boutique Medical Group in Beverly Hills, as CEO, with the primary goal of leading the team through a process of corporate transformation from a small enterprise to a corporation able to navigate the terrain of bringing in Private Investors and expand into new markets: New York, Orange County, Chicago and San Diego.


In addition to extensive professional experience, Jesus holds degrees in Economics (BA – St Mary’s University, and MA – Fordham University) and Finance (MS – University of Rochester).

DUSTIN BALDWIN

Vice President, Business Development

After multiple combat tours with the U.S. Marine Corps Reserves and obtaining a Bachelor’s Degree in Finance and Real Estate from the University of Florida, Dustin took a position in corporate finance with Lockheed Martin, followed shortly by obtaining his Series 7 and 66 certifications as a Financial Advisor at Edward Jones. Looking for an opportunity to implement his leadership earned in the Marine Corps and entrepreneurial desire, Dustin decided to leave the corporate environment and joined a family-owned private prisoner transportation start-up, while also investing in real estate. Over the next several years, Dustin became a partner in the company, moved into the role of Executive Director and helped grow the company through strategic relationships, winning large government contracts, and helping foster several mergers, ultimately getting the business to a successful sale. After obtaining his MBA in Real Estate from Florida State University in 2020, Dustin continued to invest in real estate, taking a specific interest in land acquisition and development to create equity and cash flow opportunities. Additionally, he was involved with several start-ups and became one of the largest investors in The Green Coffee Company, a Legacy Group portfolio company. After getting boots-on-the-ground with his Green Coffee Company investment in Colombia, Dustin saw an opportunity to become more than just a passive shareholder and joined Legacy Group as the VP of Business Development in June 2022.

 

Dustin has earned a reputation for his genuine leadership style, adaptive problem-solving skills, ability to forge authentic relationships, and being a fast-moving action-taker across multiple industries. His fluidity and adaptive results-oriented mindset makes Dustin an excellent addition to Legacy Group as our VP of Business Development.

 

Dustin lives in St. Petersburg, Florida with his wife Jenny and their German Shepherd, Kimber. Going on 18-years in the USMC, Dustin will retire after 20 years and continue to focus on adding value to Legacy Group Stakeholders.