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|Today’s Featured Topic
Summary: While cryptocurrencies have created a sensation over the past couple of years, it is the underlying blockchain technology that’s creating disruptive opportunities for businesses, central bankers and governments around the world.
When the creator(s) of Bitcoin devised a mechanism to issue and track ownership of digital money entirely through computer code running on a distributed network of computers, they introduced the notion that facts, such as monetary ownership and proof of purchase, could be digitally recorded and seamlessly trusted onto a computer network run by the people of the world without the need for large intermediaries.
While cryptocurrencies have created most of the sensation over the past couple of years, it is blockchain – the technology underlying cryptocurrencies – that has firmly captured the imagination of cryptonerds, programmers, researchers, board rooms, central bankers as well as politicians.
Blockchain technology allows for a recorded incorruptible decentralized digital ledger of all kinds of transactions to be distributed on a network. Rather than being stored in any single location, the information in the blockchain is copied across a network of computers and other devices, hence the decentralized aspect. Given this type of infrastructure, records on the blockchain are public, verifiable and accessible by anyone who has internet. They are also tamper proof.
Every day, new tangible applications leveraging blockchain technology are being rolled out to solve some real world-world problems. New businesses and business models are emerging in the process. Here are some examples of how blockchain applicability is evolving.
Platforms such as Ethereum allow for the creation of smart contracts; digital entities with ingrained computer code that can execute contractual agreements based on future events. That notion itself could revolutionize asset issuance and ownership in various domains such as land ownership, currencies, and financial instruments.
Consider, for example, the case of a municipal government that wants to raise money through a bond issuance. It could do so by deploying a bond issuance smart contract on the Ethereum platform. Investors would send in their payment through a cryptocurrency to the municipal government. The Ethereum smart contract would issue tokens representing the bond to each of the investors. Each investor holding such bonds would be able to directly withdraw their coupon payments and the principal at maturity from the smart contract itself. They would also have the ability to trade these digital token bonds with other prospective investors, as seamlessly as Bitcoin holders transfer ownership of their coin with another person or entity. And all this would happen with minimal human intervention.
TOKENIZATION OF ASSETS
Asset tokenization is one of the most prominent use cases of blockchain technology. In art, for example, a digital token representing ownership in an expensive Van Gogh work would make investments in art ownership a lot more liquid than they are today where most paintings can only be traded through the secondary markets such as art auction houses.
Recently, Andy Warhol’s multi-million dollar two-meter high painting, 14 Small Electric Chairs, was tokenized and sold on blockchain-based art investment platform Maecenas to 100 participants. Approximately US$1.7 million was raised in the cryptocurrency auction for a 31.5% stake of the artwork whose total valuation was US$5.6 million. More than 800 bidders signed up for the auction which was conducted entirely using a smart contract. Crypto auctions can democratize and broaden the market by bringing new types of buyers into art and luxury, traditionally a preserve of the elite.
Governments around the world are seeing enormous potential in enterprise blockchain applications. Proposed initiatives now run the gamut, with objectives as diverse as preventing corruption in public sector finance (Italy), streamlining land registries (Netherlands) and managing customs controls (South Korea).
Meanwhile, “interoperability” (i.e., convertibility) is helping to drive growth, affecting even areas such as consumer loyalty programs. American Express (AMEX), for example, has built a blockchain application that lets its merchants develop bespoke Amex rewards points programs, allowing customers to spend their points any way they like. So, just as you might get airline points for booking a rental car, now you might be able to get Amex points for buying a cup of coffee, or a sale item that a retailer wants to move off the shelf.
Mastercard (MA), meanwhile, has patented a system that puts coupons on the blockchain; EZ Rent-A-Car is piloting a program to let rewards members exchange their points for bitcoin; and Japanese ecommerce giant, Rakuten, is talking about converting up to $9 billion worth in rewards outstanding to a loyalty “coin” that is convertible to fiat currency.
These programs signal that the ecosystem for digital reward tokens — useable within a closed ecosystem built by each company — may be getting larger, potentially even approaching the utility of cash.
As for cryptocurrencies, they continue to have a terrible year. After soaring 1,200% in 2017 to a high of $19,700 in December, the price of Bitcoin has plummeted almost 70% since then. This week’s slump followed reports that Goldman Sachs had ditched near-term plans to open a digital currency trading desk. This comes as some cryptocurrency exchanges are caving in to regulatory crackdowns. Meanwhile, the SEC has yet to approve a cryptocurrency-based ETF, having rejected a total of nine applications to list and trade various bitcoin ETFs from three different applicants.
There is some good news for the industry. New data from cryptocurrency trading technology firm, SFOX, shows there has been a drop-off in price variations on cryptocurrency exchanges in 2018. That trend is tied to the entrance of large Wall Street firms into the market, which makes it more stable. Prior to Wall Street participation, the price of a cryptocurrency could differ by 5% or more on different exchanges. These days, price differences are closer to 1/10th of 1%.
Some experts believe this development will extend beyond price spreads and onto price fluctuations, bringing more stability to the industry. Less price fluctuation means more merchants would feel comfortable accepting digital assets for payment, which in turn could lead to broader adoption. For now, a few stablecoins are attempting to tackle the volatility problem by pegging themselves to the US dollar or another type of index.
In the shift from cryptocurrencies to blockchain, people are trying to invest in the protocols themselves, which are the set of rules, the mechanics, and the code associated with a type of application. New ETFs are being launched to capitalize on the increased adoption and utilization of blockchain technology.
Blockchain ETFs are funds that meet at least one of the following two criteria: (1) They are funds that invest in companies involved with the transformation of business applications though development and use of blockchain technology. (2) They are funds that track the performance of Bitcoin or other cryptocurrencies through futures contracts or by holding the underlying crypto-assets.
Five thematic blockchain ETFs have come to market this year:
While none of them yet capture pure-play blockchain exposure, they provide a way for investors to gain exposure to the rise of blockchain technology.
We’ve also summarized the following articles related to this topic in the Finance section of today’s report.
|Chart: Blockchain (BLOK vs LEGR) vs FinTech (FINX) vs Bitcoin (BTC-USD) [Right Axis] vs S&P 500 (SPY)
|Other Disruptive Change
|Joe Mac’s Market Viewpoint||Top ↑|
|U.S. Markets at Midyear
The U.S. capital markets had a challenging time in the first half of 2018. While the brouhaha about trade wars has been cited by experts as the cause of this year’s rise in volatility, MRP believes otherwise. Extended valuations, investor sentiment, portfolio leverage, an ageing bull market, inflation, and a Fed tightening cycle are all headwinds. In short, several large forces are at play and they will continue to pressure both equity and bond prices in the second half of this year.
Other Viewpoint Reports
|Current MRP Themes||Top ↑|
|Major Data Points||Top ↑|
|US Stocks Close Mixed amid Tech Sell-off
Wall Street closed mixed on Wednesday 5 September 2018, as trade policy uncertainty and emerging market volatility triggered a selloff in tech shares. The Dow Jones edged up 23 points or 0.1% to 25975. The S&P 500 lost 8 points or 0.3% to 2889. The Nasdaq plunged 96 points or 1.2% to 7995. TE
|2.||ISM New York Index at New 2006-High
The ISM New York Current Business Conditions index in the United States rose to 76.5 in August, from 75 in July and reaching a new high since November of 2006. The Six-Month Outlook rose to an 8-month high of 79.9 from 77.8 in July. TE
|US Trade: Trade Gap at 5-Month High; Imports Hit Record High; Exports Fall 1% MoM
The US trade deficit widened by 9.5% to USD 50.1 billion in July from a downwardly revised USD 45.7 billion in June. It is the highest trade gap in five months as imports hit a new record high and exports declined 1% as shipments of soybeans and civilian aircraft fell sharply. TE
Imports to the United States were USD 261.2 billion in July of 2018, hitting a record high and USD 2.2 billion higher than in June. Petroleum imports were the highest since December 2014 (USD 20.3 billion), due to higher cost of oil. Shipments also increased for capital goods (USD 0.7 billion), namely computers (USD 0.5 billion), computer accessories (USD 0.3 billion) and other goods (USD 0.7 billion). Imports of services increased by USD 0.3 billion to USD 47.2 billion, mostly due to travel and other business services. TE
Exports from the United States were USD 211.1 billion in July of 2018, 1 percent or USD 2.1 billion less than in June. Sales declined mainly due to capital goods (USD 0.9 billion); civilian aircraft (USD 1.6 billion); foods, feeds, and beverages (USD 0.9 billion), namely soybeans (USD 0.7 billion) and other goods (USD 0.5 billion). Meanwhile, exports of services increased by USD 0.2 billion to USD 70.3 billion, mostly due to charges for the use of intellectual property (USD 0.1 billion) and other business services, which includes research and development services; professional and management services; and technical, trade-related, and other services (USD 0.1 billion). TE
|4.||US Mortgage Applications Fall Slightly in Latest Week: MBA
Mortgage applications in the United States edged down 0.1 percent in the week ended August 31st 2018, following a 1.7 percent drop in the previous week, data from the Mortgage Bankers Association showed. Refinance applications decreased 1.4 percent while applications to purchase a home went up 0.6 percent. The average fixed 30-year mortgage rate increased by 2bps to 4.8 percent. TE
|5.||European Shares Close Lower on Wednesday
Main European stocks closed in the red on Wednesday, with tech shares among the worst performers amid rating downgrades and as social media companies Twitter and Facebook testified in front of the Congress about misinformation. Also, escalating international trade tensions weighed on sentiment. TE
|Other Disruptive Change||Top ↑|