Crypto Catches it’s Breath; Governance

December 8, 2020

Well, November was quite a month.  Not only did the crypto markets run, they sprinted and in doing so garnered massive attention as bitcoin reached a new all-time high (ATH).  With a run that fast and hard it’s no surprise that a pause would occur which could be thought of as an opportunity for the crypto markets to “catch their breath.”

Keep Running!

We’ve been asked many times whether this is the end and, while we have no perfect crystal ball, we still believe this is just the beginning.  Other financial managers like Cathie Wood, who is responsible for four of the best performing ETFs in 2020, think the same. Recently she came out with a prediction that bitcoin will hit $500,000. She is just one of many who are beating the drum and the message is getting louder.  Supply is constrained and institutional demand is growing –  that’s a tried and true scenario for asset appreciation.

No Government Ban

This is exciting, but I do know that some have voiced concern regarding government regulation.  Well, if you recall back in April, Brian Brooks began his five-year term and is serving as Acting Comptroller of the Currency for the United States.  He is actually the human accountable for regulations regarding money here in the US, so he has something to say about this topic.  Just last week and he came out with a very strong statement affirming, “Nobody is going to ban bitcoin… We’re very focused on not killing this.”  This is directly from the man who is on the top of this particular totem pole.  It is a strong endorsement crypto assets, clarity of the government’s position, and hopefully sets some concerns at ease for those who have been… well… concerned about this topic.

Governance Tokens

As noted in previous blogs, with all of the attention on bitcoin, it’s easy to forget that there’s a whole basket of different types of crypto assets. In this vein, since we are discussing government, it seems fitting that we actually take a quick look at another asset class in the world of crypto, and that is governance tokens.

Governance tokens allow the holders – analogous to voting shareholders in a company – to vote on initiatives for the project.  Governance tokens are a unique construct in the world of blockchain because there is no central governing entity who makes decisions for the good of the project. If you think about it, it’s the purest form of democracy there can be, as those who have invested in the effort (and hold the tokens) have a chance to influence the rules.

Governance tokens can be seen in many areas however they are very commonly used in the world of DeFi (Decentralized Finance) initiatives such as Yearn.Finance. Yearn is a product that does many things but, at its core, it allows users to deposit funds with the goal of generating a return (think of it as interest) and it will automatically, via a smart contract, determine what lender or project is offering the highest returns in the market, 24/7 and invest in them. (For those deep into the crypto world yes, it’s much more complex than that, but let’s keep the example simple for now).

In the course of this effort, there are often decisions that need to be made, such as how often the system gets rebalanced, which investment strategies should be used, etc.  These decisions can be put to vote and – you guessed it – the holders of the Yearn.Finance governance token (YFI) are the ones that get to vote.

So, in summary, a governance token for any project allows the holders of that token to be a part of the decision making for that project and, accordingly, as a project grows in value the governance tokens do as well.  This is why we believe that governance tokens have the potential to be so valuable in the future.

In Closing

Money and profits aside, governance tokens are just one of the ways that crypto assets are changing the world in which we live by creating systems that allow active participation in how the system works!  This blog was meant as an intro and really just scratches the surface, however to truly dive deeper into this world might I suggest Crypto Asset Investing in the Age of Autonomy, written by our CIO, Jake Ryan, which hits the shelves on December 22.

With regards to the crypto run that has begun, we wouldn’t be surprised to see a jump in the markets should a new stimulus package pass this week or after December 14th, once presidential electorates have been cast.  These events continue to pull uncertainty out of the markets and clear the way for the expected growth that so many are predicting. The real risk to watch right now is the coronavirus.

As always, this is just the tip of the iceberg, but this was a lot so it’s time to stop and take our own breath for a moment.  We will continue the conversation next blog and until then, be well, stay safe, and we’ll continue to Decrypt: Crypto for you!

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.