In the last decade, bitcoin has emerged from an experimental digital currency into a global asset class. As Martin Baumann, co-founder and managing partner at CMCC Global, the first blockchain technology-focused venture capital fund in Hong Kong tells International Finance in an exclusive interview, it is a phenomenal invention, Bitcoin has no borders, it is run by a decentralised network and effectively governed by a computing algorithm. And in a declining global economy, it might become the new gold—the last safe-haven asset for global investors.
By mid-March 2020, when the US Fed cut interest rates to 0 percent and announced a quantitative easing programme, bitcoin traded around $5,400. It started the year 2019 at $3,717 and surpassed $11,000, trading at $11,815.04 on August 7.
In January 2018, bitcoin was priced well over $13,343.71. The overall market cap of cryptocurrencies now stands at $154.7 billion and bitcoin’s dominance rate is 63.9%. It must be noted that bitcoin’s price rose 87 percent in 2019.
After taking into account the persisting complexities of a bitcoin investment such as purchasing and safekeeping, CMCC Global has launched Asia’s first bitcoin mutual fund, the Liberty Bitcoin Fund, which is accessible only to accredited investors.
Martin tells us how bitcoin investors can benefit from the fund’s provision of institutional-grade access to bitcoin.
Also, a Hong Kong Stock Exchange-listed custodian protects all bitcoins in the Liberty Bitcoin Fund and assets are fully covered by insurance. Martin speaks about the value proposition of a bitcoin mutual fund, the short term and long term bitcoin price outlooks, why bitcoin as just a store of value might itself be a good thing, and the optimal approach governments and regulators can take toward bitcoin.
International Finance: For an investor is the fact that bitcoin prices are not correlated to other assets an advantage?
Martin Baumann: Generally, investors are in search of uncorrelated assets that can hedge their existing portfolio. Bitcoin is often perceived as an emerging digital version of gold. Certainly, bitcoin prices not being correlated to other assets is an advantage for investors based on the belief that the current global financial system is not sustainable and healthy. The last major financial crisis of 2007-08 has been largely fixed through quantitative easing, that is central banks printing additional money.
In fact, looking at an M3 money supply growth curve shows an exponential function that is steeper than the bitcoin price chart. Investors globally are worried about the next financial crisis — and they are looking for assets that are uncorrelated with existing assets in their portfolio.
Considering empirical data from the past 10 years, Bitcoin has been largely uncorrelated with equities, fixed income and oil. The thesis is that bitcoin is a hedge against a declining global economy. Only time will tell how much bitcoin will remain uncorrelated in a global financial meltdown, but the nature of it, being a truly decentralised asset, only run by code and not governed by any government or central bank, combined with the empirical data of the past 10 years, points towards a credible hedge against a declining global economy.
What is the typical profile of the investors for whom you created the bitcoin mutual fund?
The Liberty Bitcoin Fund is accessible only for professional investors. Mainly large family offices globally, but specifically since the outbreak of the Coronavirus, we are seeing stronger inbound interest also from large institutional investors who are exploring to add bitcoin exposure to their portfolio mix.
The launch of the Liberty Bitcoin Fund was a demand-driven decision that stemmed from our existing limited partnership investors of prior funds of CMCC Global. We have launched Hong Kong’s first fund to take on external capital specifically for blockchain investments back in 2016. Over the years, our existing investors had approached us various times asking how to gain exposure to bitcoin as well. Before we launched the Liberty Bitcoin Fund, there was no such passive tracker of bitcoin available in Asia. All assets of the Liberty Bitcoin Fund are kept in professional custody and covered by insurance.
Family offices tend to think in very long time horizons. For them, it is about preserving capital for generations. Often they still hold meaningful stakes in operating companies. They understand that disruptive technologies, like the internet when it started to take off during the past 20 years, or in the coming 20 years blockchain technology as the next iteration of the internet (Web 3.0), will have a material impact on their core businesses and they tend to get some skin in the game early on to be on top of such new technological evolutions.
What are the advantages of investing in bitcoin through a mutual fund as opposed to direct investment?
There are three key advantages. Firstly, investing through a mutual fund is a structure that professional investors are familiar with and therefore eases the decision making process. Secondly, all our assets are fully covered by insurance. They are kept in professional custody through OSL Custody, a Hong Kong-listed custody provider who itself is backed by Fidelity. Getting insurance coverage for bitcoin is a tough task and a major differentiator for an investor who would otherwise self-custody their bitcoin. Lastly, we provide our investors with monthly NAV statements that can be used for their accounting and tax reporting.
What are your long-term and short-term predictions for bitcoin?
There are specific short and long term drivers for the demand and price of bitcoin that we foresee.
In terms of short term drivers in the next 12 to 18 months, as part of the algorithm in the bitcoin protocol, block rewards for miners are reduced every four years by 50 percent, ending with the last bitcoin ever to be minted in the year 2140. This year in May, another halving event will take place and will result in a reduction from 12.5 BTC/block to 6.25 BTC/block (or at today’s bitcoin price of around 9,000 USD/BTC, from $112.5K down to $56.25K USD per minted block every ten minutes). This reduced additional supply will lead to upwards price pressure, assuming that the demand for bitcoin continues to grow.
The first time such a having event took place, in November 2012, the price of bitcoin multiplied by 79 times within a little over a year. The second time a halving event took place, in July 2016, the price of bitcoin multiplied by 30 times within less than 1.5 years. It is widely expected within the blockchain community that this upcoming bitcoin halving event will also result in an upward price movement within the 12 to 18 months following the halving. In anticipation of the upcoming halving event, the bitcoin price has already seen momentum since the beginning of the year.
Longer-term user statistics are looking promising: there are currently around 42 million wallets with a non-zero BTC balance in existence. According to a study conducted by the Global Blockchain Council already around 5 percent of Americans hold bitcoin. These numbers have been growing steadily, with total wallets increasing 70 percent a year since 2016.
Investors seem to like bitcoin because it is a phenomenal invention: it is the first time that a unique digital asset has ever been created, it has a finite supply, is being stored and governed in a decentralised manner, and it is not dependent on any federal banking system, government or country. Bitcoin is effectively a digital version of gold that is accessible from any country globally — it is a borderless asset. It is being perceived by many investors as a hedge against a declining global economy.
Bitcoin critics say that it serves no purpose other than a store of value. Is this criticism valid?
Being a store of value in today’s uncertain world is a worthy attribute. However, I would consider bitcoin not yet as a store of value, but rather as an emerging store of value. As of today, it is still too volatile. Bitcoin today is more like gold in the early days when it was first listed on exchanges around a hundred years ago and its price back then could easily swing up or down 10 percent to 20 percent on a given day. Price volatility of bitcoin will come down as the asset matures. Then, however, very likely the unit price will be substantially higher than it is today.
Because of its price volatility, Bitcoin is certainly not yet suitable as a currency, however, it could absolutely get there in the next decades. A bitcoin can be divided down to eight decimal places, the eighth digit behind the comma of a full bitcoin unit is called Satoshi. Many people believe that bitcoin will be used as ecash for daily commerce, once a Satoshi unit is valued at 1 US dollar — that would translate into the value of a full bitcoin unit of $1 million. So holding a bitcoin would make the owner some form of a digital millionaire should that scenario play out.
What are the implications for Asia’s institutional investors in having a regulated bonafide bitcoin fund?
The Liberty Bitcoin Fund appeals to professional investors globally. It is a safe, secure and regulated gateway to access this new asset class and get exposure. The fund is not an actively traded fund but a passive tracker of bitcoin. It buys and holds bitcoin for its investors and is kept in professional custody and covered by insurance.
Do you think that institutions are the primary investors in bitcoin now?
The question is how do you define institutions? I for one believe that institutional investors are, for example, the big asset managers like Blackrock and Fidelity. All those big institutions already have dedicated blockchain teams. For example, JP Morgan has a very strong blockchain team and develops its own blockchain Quorum.
Fidelity is doing active investments in this space. In fact, they recently invested in the holding entity of our custody company, BC Group, which is listed on the Hong Kong stock exchange. So institutional investors are getting into space but their investment focus today is more centred around equity of companies as opposed to direct investments into digital assets.
CMCC Global, provides professional investors exposure to different areas within the blockchain space. We have three active digital asset focussed funds that invest into the core technical network infrastructure of the blockchain ecosystem, the Liberty Bitcoin Fund, and we are currently in the process of launching our flagship fund, the Titan Fund.
The Titan Fund will provide investors access to growth opportunities within the blockchain ecosystem through a traditional equity venture capital investment strategy. It will invest primarily in seed and Series A stage equity opportunities of blockchain companies and focuses on both, crypto-related and non-crypto related blockchain companies, such as enterprise solutions, as we believe both areas will see substantial growth in the coming decades.
As of now, institutions are more focused on getting equity exposure in blockchain companies because they are simply more familiar with those types of investments as opposed to investments into digital assets.
What is your advice for institutional investors in Asia who might be thinking of investing in bitcoin, but are wary of the volatility?
Bitcoin is a frontier technology. Investors will not be able to learn about it unless they actively invest in it. Our existing investors invest a small amount of their overall portfolio mix for two main reasons: Firstly, to have some skin in the game in order to familiarise with the technology and its developing applications and secondly, if bitcoin really plays out as expected it may well be the best performing asset class in the coming decade. So having a small allocation in it as part of a portfolio mix may make sense.
Regulators across different jurisdiction have taken vastly different approaches to bitcoin from outright hostility to welcoming it. What is the most appropriate path for regulators in their approach to bitcoin to preserve investor interests?
A functional regulatory framework for bitcoin is important to further evolve in the future. Bitcoin is a new asset class, it is merely 10 years in existence. As of today, regulators around the world are spinning their heads around how to regulate it appropriately to protect investor interest, without hindering innovation.
As with every new disruptive technology, there are good and bad actors in the playing field making use of new features provided by those new technologies. That was the case with the first mobile phones or internet accessibility and is now the case with blockchain technology.
I think we all agree, that for example mobile phones or the accessibility and use of the internet have benefitted society massively, despite the fact that some of the first users of both of those new technologies were drug traffickers and bad actors. A robust set of regulations can ensure to protect investors from sketchy activities and bad actors. We are in favour of regulators building a framework to protect from bad actors, but at the same time, it needs to be balanced in order not to hinder the disruptive potential for the society that this new technology brings — for example, financial inclusion of the unbanked population in the world.