Democratizing data science.
From the birth of Bitcoin in 2008 to late 2017, crypto experienced a meteoric rise, likened by some to the Tulip mania of the 1600s. After all, stories of assets rising a thousand-fold are far and few between in the traditional financial industry, rather than a regular occurrence like in the crypto space.
Two years later, blockchain and crypto are no longer in the limelight, but that may be about to change, as the industry has matured into creating meaningful, real-world solutions like tokenized funds. For the masses to adopt a technology like blockchain, it needs to be competitive with the products and services they’re used to.
For the first decade of blockchain, issues from poor useability to lack of tangible benefits made serious adoption impossible, but we’re now seeing highly competitive products on the market.
The early blockchain industry was undoubtedly characterized by unchecked dreams and ambitions. With the emergence of Initial Coin Offerings in 2017, the combination of these forces led to a myriad of scam projects and billions of dollars funneled into “white paper” projects without any traction to show for themselves.
One needs to look no further than the EOS project raising $4 billion without a live product.
Today, however, the story is very different, and it’s no longer much easier to raise money in the blockchain space than any other industry, if at all. As reported by Daicore, Initial Coin Offerings in “the first half of 2019 only managed to get to 5% out of the funds raised during the same period in 2018.”
The outlook isn’t looking much brighter for 2020. While this may be bad news for speculators, it’s great news for real adoption, because it puts the focus on product innovation rather than capital raising.
One lively area of product innovation is tokenized funds. “Tokenization” means representing an asset as a share on a blockchain, so a “tokenized fund” simply means that shares in a fund can be freely traded on a distributed ledger.
Of course, blockchain isn’t always the solution, so we need to carefully scrutinize whether this is a worthy application.
If we look at traditional investment funds, we’ll find that they suffer from a lack of liquidity, opacity, and high barriers to entry — like large investment minimums. Tokenized funds aren’t just poised to solve these problems, as there are already several on the market currently open for investors. Indeed, tokenized funds check all the boxes for being a solid blockchain use-case.
The first tokenized crypto index fund was CRYPTO20, which was released in 2017. It aimed to solve many of the problems just mentioned — opacity, illiquidity, and barriers to entry — and has succeeded in doing so.
With no broker fees, exit fees, or minimum investment, the fund reduces barriers to entry, while enabling investors to see the inner workings of the fund through transparent “smart contracts” — or code on the blockchain.
Mechanically, the fund uses algorithms to dynamically re-balance a portfolio of the top 20 crypto assets, offering simple diversification to investors. What’s more important than the mechanics are the benefits: The raw ease-of-use eliminates friction for entering the blockchain ecosystem, a long-standing problem that has prevented the adoption of countless other applications.
While CRYPTO20 was the first, it was far from last, with other funds emerging soon after. The Hyperion fund was the world’s first tokenized Venture Capital fund, pioneered by the same investment specialists, Invictus Capital. In the same vein as CRYPTO20, Hyperion aims to democratize access to previously exclusive investment opportunities.
However, the path ahead won’t be all sunshine and rainbows for tokenized funds, as questions of Blockchain’s scalability, regulatory concerns, and waning public interest all pose non-trivial hurdles.
Blockchain’s long-standing scaling problem is a serious concern, as tokenized funds will need to prove to investors that they can scale up their offering if they receive the funding they need. Without a clear path to mass-adoption-level scalability, then mass adoption won’t be possible.
This is both a technical challenge and a marketing one. For certain funds, the needed scalability is already there, and all that’s needed is communicating the facts in the right way.
Another challenge is regulatory concerns. There’s a lack of a central governing authority for blockchain services like tokenized funds, creating questions around liability. If a tokenized fund fails to follow through on its promises, is it subject to the same securities laws as traditional funds?
How can investors be assured that the fund will be held accountable? Investors and funds need to navigate oft-confusing laws and regulations for tokenized funds to reach mass adoption.
Finally, it’s clear that public interest in crypto and blockchain has wained since the 2017 crash. Without sufficient buzz around tokenized funds, they won’t manage to on-board enough investors for the funds to become profitable, preventing mass adoption.
Given the myriad benefits we’ve discussed, it stands to reason that it’s just a matter of time before these funds take the limelight. However, it is a bit of a race against time, as current tokenized funds have to reach meaningful profitability for new fund managers to see a reason to enter the space.
Given that interest in blockchain as a whole has diminished, although specific applications like tokenized funds justify investor attention, it’s critical for the blockchain industry to raise awareness.
Fortunately, the Blockchain industry is nothing short of world-class in generating awareness, as demonstrated by the 2017 hype cycle. While the exact same strategies can’t be replicated for tokenized funds, some learnings can be used.
Further, we now have advantages that the industry didn’t have two years ago, namely that there are live, active products on the market, like the aforementioned CRYPTO20 and Hyperion funds.
Blockchain experts will need to be willing to provide assistance along the way to tokenized funds, which are often run by financial experts rather than blockchain-natives, as a diverse set of skills is needed to bring tokenized funds to mass adoption.
Successful product marketing is all about positioning, and tokenized funds are no different. In order for tokenized funds to be taken seriously in 2020 by retail and institutional investors alike, they need to be positioned as a viable, professional, and most importantly superior alternative to traditional investment funds.
Given the various unique benefits of tokenized funds, this shouldn’t pose any particularly great difficulty, but fund managers need to keep in mind that many traditional investors are completely new to Blockchain. They don’t have a reason to care about a fund being “trustless” or “decentralized,” and the practical benefits need to be clearly spelled out.
Keeping these points in mind will help tokenized funds achieve the adoption they deserve. Nonetheless, one shouldn’t expect these funds to take off immediately, and understand that the barriers we’ve mentioned won’t be surpassed right away. Ultimately, tokenized funds haven’t fully taken off, but they’re well on their way to doing so.
(Disclaimer: The author is a consultant at Invictus Capital)