Cryptocurrencies have exploded onto the scene but the industry's growth is having unintended consequences. So far this year more than 1,000 digital tokens have launched, creating complexity and confusion among investors and consumers as to which ones are legitimate and, perhaps more importantly, sustainable.
While the total market capitalization of all cryptocurrencies now stand at one-quarter of a trillion dollars, some smaller coins have died, burning their investors cash on their way to oblivion. One hedge manager estimates that there could be at least $10 billion of capital currently sitting on the sidelines waiting for this digital Wild West to implement better investing protocols that make it easier for institutional and retail investors to park their wealth.
In other words, there could actually be more interest in cryptos than what the current market cap suggests, but with the lack of regulations and infrastructure many don’t know where to start. To bring in institutional money, analysts say there needs to be professionalized custodianship and assurance.
Recently, CME announced it would start trading futures of Bitcoins with a view to creating an Exchange Traded Fund (ETF) specifically for cryptocurrencies. That's one way to mimic the professionalized approach that already exists in traditional finance. Futures, options and similar initiatives are to be expected. Because anytime big money gets involved, there's an expectation of doing things the right way, and to avoid unnecessary risk.
One startup, Aggregated Coin (AGRE), is launching an initial coin offering (ICO) on December 1st to enable investors to consolidate their leading crypto holdings all in one place. The platform allows users to buy a token that is the aggregate of the top six cryptos in the world: namely, Bitcoin, Ethereum, Bitcoin Cash, Ripple, Litecoin and Dash. Essentially, it works like an index fund, buying a broad swathe of purchases so that over-performing coins can balance underperformers. Except in this case, all six coins have performed superbly well — up nearly a combined 800 percent since October 2016.
Similarly, the same venture is launching Upstart1K (UP1K), also on December 1st, which combines 130 tokens, 130 coins and various ICOs for people hoping to gain more with upswings in smaller coin valuations.
According to Aggregated Coin's founders, a coin bought on November 13, 2017 would have a particular weight against each six of those currencies. During the week following that date, AGRE would have increased in value by 21 percent — when during that same week, Bitcoin reduced in value by 15 percent.
Their main thesis is that investors should consider the crypto market more generally, rather than peg their financial interest to one specific coin. If more cryptocurrencies succeed then Aggregated Coin succeeds as well.
Similarly, the concept is designed to shield investors from massive downturns. For instance, Bitcoin's market cap represents nearly 56 percent of the entire crypto market. As the old saying goes, you shouldn't put all your eggs in one basket. Dramatic price fluctuations are common with cryptos. For instance, the total market cap of all cryptocurrencies fell by 49 percent after some rumblings in China.
Financial institutions are now looking for ways to invest. Understandably, large investors are also wary of the risk and volatility. Index funds based on the S&P500 have traditionally returned 7 percent annually after inflation due to diversification.
According to AGRE's founders, the six currencies built into the coin could change over time, depending on trading volume, market cap and other factors. Will this pave the way for investors to take part in various top coins? Perhaps. There are probably plenty of investors who seek a value investing-based approach instead of speculation. An approach that focuses on sustainability and spreading risk.