Are Cryptocurrencies a Good Investment?

Are Cryptocurrencies a Good Investment?

Jim Cunha Senior Vice President of Bank Administration Federal Reserve Bank of Boston

Š 2018 Federal Reserve Banks. Materials are not to be used without consent.

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What do Some of the Experts Think in General ?

"The individual investor should act consistently as an investor and not as a speculator." - Ben Graham “Buy not on optimism, but on arithmetic.” – Ben Graham “Risk comes from not knowing what you’re doing.” – Warren Buffett

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.” – Warren Buffett “Behind every stock is a company. Find out what it’s doing.” – Peter Lynch [well not always - me] © 2018 Federal Reserve Banks. Materials are not to be used without consent.

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What Topics Matter Regarding Risks?

• • • • • •

Price Volatility Performance/Costs of Transactions ICO’s Thefts, “Hacks” DAO Hack, “There’s no finality in a democracy” Hard Forks – Ethereum Classic, Bitcoin Cash

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Bitcoin Price Index

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Bitcoin Price Index

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Bitcoin Transaction Fee/Latency

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What About Initial Coin Offerings ?

ICO’s: • $4 billion raised in 2017, $1 billion in 2018 (Jan/Feb) • 10% of ICO funds, have been stolen • Above statistics: David Yermack – NYU Stern.

• 92% have a website • 80% have a white paper • 56% have a budget • 43% have source code posted on Github • 46 % of 902 ICOs have already failed (Jon Fingas, @jonfingas) • Significant regulatory risk exists with ICO’s © 2018 Federal Reserve Banks. Materials are not to be used without consent.

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High Profile Cryptocurrency Hacks Feb 2014 $450M

Dec 2014 $1.8M

Jan 2018 $530M

Jul 2017 $7M

DAO Jun 2016 $50M

Jul 2017 $8M

Dec 2017 $80M

Jan 2015 $5M

Aug 2016 $70M

Jul 2017 $32M Nov 2017 $32M Š 2018 Federal Reserve Banks. Materials are not to be used without consent.

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High Profile Cryptocurrency Hacks ($ values as of January 31, 2018) Feb 2014 $7.5B

Dec 2014 $50M

Jan 2018 $530M

Jul 2017 $49M

DAO Jun 2016 $4B

Jul 2017 $42M

Dec 2017 $47M

Jan 2015 $190M

Aug 2016 $1.2B

Jul 2017 $173M Nov 2017 $32M Š 2018 Federal Reserve Banks. Materials are not to be used without consent.

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The DAO, Lessons Galore • The DAO (Distributed Autonomous Organization) – Ethereum smart contract based investment fund – Get tokens, which allows you to vote on what to invest in – Can cash in tokens when you want • Amassed $150 million in a couple of months in early 2016 • Someone exploited code bugs and features and “stole” $50 million, but could not liquidate it for 45 days • Ethereum community (a democratic group) voted to unwind the transaction • DAO fund liquidated 10

The DAO, Lessons Galore What should we learn • Smart Contracts, are neither • “Code is Law” is wrong, “Law is Law” • Code has bugs • Due diligence on smart contracts means you need to read the code • Governance matters • “Immutable” does not mean immutable in a democracy

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The Fate of Crypto Hedge Funds Posted on February 7, 2018 by Flipside Team 2017 saw the rapid rise and fall of public perception of ICOs: What started as an innovative cryptocurrency launch strategy became a misused get-rich-quick investment strategy.

By 2019, Crypto Hedge Funds will follow a similar pattern. Massive saturation will hit faster than anyone imagines, the cool factor will fade and capital inflows for non-sophisticated vehicles will dry up fast.

Crypto Fund Managers will become ultra-aware and over-burdened by one major painful oversight: operations. The process of buying and storing cryptocurrency is not for the light hearted. Expect a wave of 3rd party resources to service the funds that stay in business.

The 2/20 ratio and lockups will fall out of favor. Investors will want the same democratization and flexibility that cryptocurrency itself promises. Someone sitting in the middle taking an outsized portion of returns, while holding money hostage, seems awfully, sarcastically oxymoronic.

A lack of competitive distinction, fundraising ability — and necessary investing acumen — will lead to massive amounts of consolidation and, of course, outright failure. © 2018 Federal Reserve Banks. Materials are not to be used without consent.

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What does the Former Fed Chair Think ?

“And then you asked about bitcoin, and there I would simply say that bitcoin at this time plays a very small role in the payment system.

It is not a stable source of—store of value, and it doesn’t constitute legal tender.

It is a highly speculative asset, and the Fed doesn’t really play any role—any regulatory role with respect to bitcoin other than assuring that banking organizations that we do supervise are attentive, that they’re appropriately managing any interactions they have with participants in that market and appropriately monitoring anti-money laundering Bank Secrecy Act, you know, responsibilities that they have.”

In response to a question from CNBC's Steve Liesman about bitcoin. © 2018 Federal Reserve Banks. Materials are not to be used without consent.

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