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Jonathan Poland
Jonathan Poland
Articles (248)  | Author's Website |

Equity vs Tokens

Bitcoin (XBT) is now traded on the public markets

December 11, 2017 | About:

There are these new things in the world called crypto-currencies. You've probably heard about them.

The most famous and valuable of them (at least right now) is bitcoin. As a collective they are very dangerous. In fact, on the back of this newly found popularity and price, there has been an abundance of scams perpetrated on buyers caught up in hype and sizzle.

However, this is exactly why investors should take flight. Because as much criticism as there has been going around the world of finance about Bitcoin, if you got in at $5, $50 or even $500, you’re very happy right now with that decision, regardless of whether or not it’s speculation and mania.

Just yesterday, Bitcoin Futures began trading on the CBOE, which is somewhat of a double-edged sword. Having Bitcoin tokens listed at the CBOE definitely adds validity to that single digital asset, probably ensuring its long-term survival. Yet, it could also mean a self-imposed cap on the price appreciation potential.

Sure, the Winklevosses and many Bitcoin funds are calling for BTC $100,000, but that would put the total market value over $2 trillion dollars. Sure, that might happen eventually, but is the value of our dollar that worthless that a figment of the imagination of a guy who no one knows can be that valuable?

Tokens takeover

Some pundits have even gone so far to suggest that coins could replace equity as the denomination of value for individual companies. Of course, legally speaking, equity is still the tie that binds ownership value. You could have a million coins issued and one share that you control and all the owners of the coins would still get squat in a sale of the business.

This is what really troubles me about ICO or initial coin offerings.

An ICO is an unregulated means to raise funds for a new venture by issuing cryptocurrency. Startups are issuing ICOs mainly to bypass the rigorous and regulated capital-raising process required by governments, venture capitalists and banks.

In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for (and this is important) venture created cryptocurrencies. So again, a new company forms and raises capital by issuing coins (or tokens) that it creates and sells itself or through intermediaries.

Does anyone else see this as a big problem? In fact, yes. The Securities and Exchange Commission does. Here in Washington, D.C., the government entity has a task force specifically targeting ICOs and cryptocurrencies.

Being an unregulated asset isn’t the problem. It’s how that asset is being used to represent the value of another asset, namely company value and whether the coin/token is an instrument for equity. And, if people are buying it at the start of a company, regardless of what that company does, then it probably can be construed as equity.

Calling cryptocurrency money automatically makes it fraudulent and like China has done, it should be banned. As outlined in the Constitution, only the government has the authority to coin money. Then in 1819, a Supreme Court Ruling (McCulloch vs. Maryland) essentially allowed the U.S. to print paper money, still prohibiting individual states from doing it.

Calling cryptocurrencies a digital asset makes it a more likely viable long-term option. However, if the SEC or other regulatory bodies find that many companies are using these assets to sell interests in the underlying organization, the gig is up and the house of cards will fall before any foundation is placed under it, leaving the only real asset associated with this whole thing in the first place -- the blockchain technology.

There are thousands of cryptos: Ethereum. Ripple. Litecoin. Dash. NEM. Monero. Zcash. And, the creators and founders have made lots of dollars because of the massive shift to using decentralized currency. All are running on the blockchain thesis, but there are other forms of IP that will emerge as more valuable than the lot of fraudulent money.

In fact, the best part about the CBOE deal is that people can now make money when (not if) Bitcoin implodes. It’s also a way for the exchange to make a little money for itself on this market and if it does become a viable market long-term, it will be the leader.

Equity remains

While the potential for blockchain technology invading every part of our lives is very real, I do not think that we’ll be converting dollars to digital tokens (bitcoin or other) to buy everyday goods. Don’t forget that “mining” for bitcoin happens virtually, on the cloud, in the network of computers created by man. It’s not a resource any more than Microsoft Windows 3.5 was. It will have its day, people will get rich and hopefully it won’t hurt too many.

Sure, equity is also a made-up instrument. Yet, it’s a legally binding contract in most cases, and while we’re still a nation of laws (thankfully) where equity will remain the best path to long-term prosperity.

Maybe I’m wrong, and only time will tell how this turns out. But now that the general public is getting a big whiff of Bitcoin’s explosive price appreciation, it’s only a matter of time before there are government rulings one way or another.

Disclosure: I do not own any crypto-currency.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher who has helped investors produce market beating results for more than 15 years.

Visit Jonathan Poland's Website


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