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Trends Watch: April 12, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks to Michael Conn, CEO, Ether Capital.

What is your perspective on the crypto marketplace and why do you feel that the Ethereum platform specifically is an attractive investment area?

The crypto landscape has evolved over the last several years to the extent where you have close to 1500 cryptocurrencies as of the beginning of 2018, with close to 40 of them having market caps north of $1 billion.  The market has experienced a bit of a correction recently, but the overall trend has been towards appreciation. 

If you believe that the value of fiat currency is typically based upon the perceived value of the underlying economy, its economics, politics and policies etc., and if you accept that cryptocurrencies represent a store of value not unlike fiat currency, one should look at the underlying ecosystem of the cryptocurrency to ascertain its true value.  Looking at the two largest cryptocurrencies, specifically Bitcoin and Ether, you have a dichotomy of value in my opinion. 

Bitcoin, being the first cryptocurrency, has attracted the most attention over time, but the blockchain protocol underlying Bitcoin has not experienced significant development in terms of the creation of decentralized applications (Dapps) and other network enhancements.  I believe that Bitcoin, which has a limited quantity that can be created through mining, has scarcity value.  This makes its value most closely equated to a commodity, not unlike gold, albeit with much greater volatility.

The Ethereum platform on the other hand, which is the protocol layer underlying Ether, creates and validates smart contracts that execute according to the customizable rules in each contract without an intermediary, effectively decentralizing these activities.  Ethereum is currently where over 90% of the Dapps are being developed and there are already over 900 Dapps in operation using smart contract functionality on the platform.  This is a core reason why Ethereum is such an attractive investment area.  We believe that Ether’s demand and price will strengthen as Ethereum utilization expands, since Ether is the strategic fuel needed to access the Ethereum network.  We also believe that the value of Ether and the Ethereum platform is driven by actual underlying value and the functionality of its technology that has been built to support an integrated and interoperable network; this can be directly juxtaposed with the speculative nature of other cryptoassets that have been designed to replace traditional currencies.  With so much of the global Dapp development taking place on Ethereum, it becomes a natural source for attractive investments.

What is your outlook for alternative investments?

In recent years institutional, and to some lesser degree, retail investors have allocated heavily to alternatives, driven by their search for diversification and improved returns in a low-yield environment.  Most institutional investors and their retail cousins have actuarial bogeys that they are unable to hit with fixed income alone.  The equity markets have performed well in the last year, but they remain volatile as well.  The general sentiment with respect to alternatives remains positive as performance has been generally good from more liquid strategies such as hedge funds, through more illiquid strategies such as private equity and other PE-like closed-end, lending-driven credit funds.  That said, investors have genuine concerns around the amount of dry powder that has been raised in recent years that is still sitting on the sidelines waiting for the right opportunities.  The fear of course is that these funds will end up paying high multiples for assets which means that they will have a more challenging time generating high returns.  Concerns around high fees and overall performance continue to be a drag on hedge funds.  In addition to these potential headwinds, the strong possibility of interest rate increases in the near-term and global unwinding of central bank stimuli will likely impact the low-yield environment that has helped fuel the flow into the alternative space.  All that being said, I expect alternatives to continue to be a meaningful component of investor’s portfolios and that they will likely continue to grow as a percentage of their investments over time.  The point I am most curious about on a go-forward basis is how the alternative investment market will continue to innovate and in what way it will be able to leverage blockchains, Ethereum or otherwise, to help decentralize meaningful alpha generating investments and investing businesses.

What keeps you up at night?

Amidst and despite recent seismic events such as Brexit and the cessation of quantitative easing, the global economy has been largely humming along and I’ve been able to sleep generally well.  What keeps me up at night these days is that this will likely change as 2018 progresses.  I’m genuinely concerned that the weakened dollar coupled with a brewing trade war between the U.S. and China will have ripple effects across the globe.  The tit-for-tat, beggar-thy-neighbor policies that are currently being put in place will surely impact the middle-class consumers in developed countries such as the U.S. the hardest, as well as the poorest people in emerging/developing countries such as China and the other BRICs. The effect of the onslaught of tariffs is that the prices for everyday goods will shift higher, all while incomes remain relatively flat.  The diminished disposable income will likely lead to a decrease in consumer spending on non-essentials and travel, which would impact business spending in turn as businesses begin to become impacted by the trickle-up effects of the tariffs. With trade and tariffs effectively intertwined on a global basis due to broad trade pacts and most-favored nation status agreements, this global reduction in spending ability will impact both domestic U.S. and foreign businesses.  The broadest concern I have is that this potential trade war, with real world economic consequences for both consumers and businesses, develops into the nightmare scenario of a cold war-esque détente between the U.S., China and their spheres of influence.  My hope is that calmer and cooler heads will prevail, and more economically sound policy will be put into place, sooner rather than later, so that I can get back to sleeping soundly.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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