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A New Kind Of Trans-Pacific Partnership?

Brian Kelly, Portfolio Manager

South Korea and China Warming To Crypto-Blockchain

Asian market could be huge drivers of crypto1-blockchain2 adoption in the coming years, if recent events are any indication.

First, take South Korea, a burgeoning hub of activity: about 30% of salaried workers are crypto investors; the country accounted for one-third of ether-based transactions3 just last summer; and by the fall it had surpassed China in overall crypto trading. Then regulators cracked down: banning securities firms from handling bitcoin futures, imposing new capital controls on crypto-exchanges, and banning anonymous accounts. Rumors even swirled about banning initial coin offerings4 (ICOs). Crypto market tumbled on the news.

But an enormous popular backlash forced the government into a u-turn. Now it seeks to “normalize” cryptocurrencies and is even proposing a taxation scheme to begin in 2019. Two of South Korea’s largest commercial banks have each launched partnerships aimed at building crypto-based payments systems.

Second, consider China, where top mining pools control more than half the global hashrate5 for bitcoin. Despite its crackdown on crypto markets, the government recently announced its backing for a $1.6 billion blockchain development fund. Chinese tech giants Tencent, Alibaba, and Baidu are battling to lead in the blockchain space. And while central bank governor Yi Gang remains skeptical about cryptocurrencies, he is “exploring a better way for digital currency to play a more active role in service to the real economy.” And just this month the bank affirmed that cryptocurrency R&D was a “top priority.”

It’s hard to imagine China, given its competitive nature, ceding crypto markets to regional leaders Korea and Japan. A more likely scenario is that China finds some sort of regulatory scheme that enables crypto-adoption, but with strict government control.

Macro Factors Supportive for Crypto Growth

Negative Sentiment Potentially Creates Opportunity For Investors

The trends taking shape across Asia point to the early stages of a mass adoption trend—among billions of potential users around the world.

What does that mean for valuations? JPMorgan seems to think it’s a bad thing, telling investors they should be worried, for example, that 20% of chipmaker AMD’s revenue could be driven by crypto markets. (Cryptocurrency “miners” rely almost exclusively on graphics cards made by AMD and its key competitors.)

Since when does leading an enormous potential growth market translate into a negative? When the market believes that the growth is unsustainable. That’s JPMorgan’s view, and that pessimism may be weighing on AMD’s stock price.

Yet, mass adoption trends are only looking stronger as time goes on. The danger here is that investors betting against crypto-driven earnings growth could get caught wrong-footed when sentiment reverses, as I believe it will once mass adoption gains even more steam.

Here is a back-of-the envelope calculation of what mass adoption could look like for cryptocurrencies. Back in April, Tim Draper forecast a bitcoin price of $250,000, and while that may sound outrageous, consider6:

  • From a macro viewpoint, a currency’s market cap generally grows to whatever size is required to support the underlying economy.
  • The most compelling use case for cryptocurrencies is that they become the de-facto monetary standard for the rapidly developing Internet of Things (IoT).
  • How big, potentially, is the IoT? John Chambers estimated that the market could be as large as $19 trillion. Roughly the same size as the entire U.S. economy.
  • If we look at the monetary base supporting America’s current GDP of $18.6 trillion, it’s about $3 trillion.
  • Using that as a baseline market cap for bitcoin, one could back into a figure in the mid-$200,000s6.


If you are an investor, you generally fall into one of two categories. You invest in things that don’t change, or you invest in things that do. (Sometimes both.)

Famed value investor Warren Buffett recently called cryptocurrencies “rat poison.” But consider his frame of reference. To quote Buffett himself: “[My] approach is very much profiting from lack of change rather than from change.” He buys established companies with slow, steady growth that may compound over the long term, things like: Wrigley’s Chewing Gum, GEICO insurance, Seas Candies, Southwest Airlines, etc.

That’s why he hates crypto-assets.

By contrast, I’m a macro investor who invests in things that do change. And I have found that, when those things are misunderstood, that’s where investors may find the highest potential returns. Don’t forget that just a year ago Buffett admitted he “blew it” by not investing in Google and Amazon during their early days.

So in conclusion, let’s consider another Buffett quote: “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

My view is that Mr. Buffett is obsessed with the scoreboard of speculation—i.e., what the hot money is doing in the crypto-blockchain space. That’s not what I’m focused on at all.

I’m focused on the playing field: a nascent digital IoT marketplace, potentially worth $19 trillion or more, which is in the midst of creating a new type of monetary standard. This diverse, digital ecosystem is showing signs of rapid growth. And many different types of coins may have a place in this ecosystem, with overall cryptocurrency growth supported by interoperability among all of them.

It is not a winner-take-all scenario, in my view. Bitcoin probably won’t be the only winner. There could be plenty of winners as this new world unfolds—among cryptocurrencies, hardware makers, and businesses that learn to capitalize on the blockchain.

It’s only “rat poison” if your investment philosophy is based on optimizing the status quo. For those of us who invest in change, it’s called “opportunity.”

This blog is intended for information purposes only and does not constitute investment advice. The blog contains the opinions of Brian Kelly.

Sources that inspired this entry:






1 A cryptocurrency (crypto) is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.

2 Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.

3 Ether-based transactions are transfers of the ‘Ether’ cryptocurrency on the Ethereum network. The Ethereum network is a decentralized platform built on blockchain technology. For more information visit: www.ethereum.org.

4 An Initial Coin Offering (or ICO) is similar to an Initial Public Offering of a stock, where a specific cryptocurrency is offered to the public for the first time.

5 Hashrate refers to the total computing power thrown at a particular cryptocurrency network. For example, the more computing power dedicated to mining for Bitcoin, the higher the Bitcoin network’s hashrate.

6 Neither REX Shares nor Brian Kelly are endorsing this specific price target or methodology for valuing cryptocurrencies, instead these are discussion topics brought up by others. The BKC fund does not directly invest in Bitcoin at this time, however it may be subject to some of the risks associated with price movements of cryptocurrencies. Please review the prospectus for further disclosures of risk.


Brian Kelly, Portfolio Manager

In a potential tectonic shift, industry heavyweights form a blockchain alliance

Last week, four of the world’s largest automakers (Ford, GM, BMW and Renault) launched a blockchain1 alliance that could represent a tectonic shift, not just in the adoption of blockchain tech, but also in the race to lead the next iteration of the “automobile” industry.

The short version is that the new working group—called the Mobility Open Blockchain Initiative (MOBI)—is aiming to put blockchain tech into your car, for use cases as diverse as vehicle identity and ownership, ridesharing, payments, navigation, insurance, and many others. But while the group was founded by four automakers, it’s also open to energy companies, infrastructure providers, and public transportation providers, potentially expanding the connectivity of automobile-based blockchains to a much larger transit network.

Another important development is that MOBI is looking to create standards for data to have property rights. Legacy tech players like Apple and Google are vying to get the data you produce in your car so that they can aggregate and monetize it—never mind their efforts to actually design and build the next generation of cars. MOBI potentially represents an end-run around the programs of legacy tech leaders, making customers’ data self-sovereign and giving consumers control over data property rights associated with transportation.

Why is this potentially a tectonic shift? Because it has the potential to disrupt the growth plans of legacy tech into the auto sector.

A New Cornerstone Laid in Fin-Serv?

Crypto-Custody Solutions on the Horizon for Institutions

The New York Times reported last week that Intercontinental Exchange (ICE), parent company of the New York Stock Exchange, is planning to open a digital currency exchange where institutional investors can buy, trade and hold bitcoins. Included in the plan would be one-day swaps2 contracts that “end with the customer owning Bitcoin the next day — with the backing and security of the exchange.”

Why is this another potential tectonic shift in the crypto-blockchain space? Because any program that enables institutions to hold digital tokens has to include a custody solution, a challenge that has until now eluded the industry.

One of the key roadblocks to institutional participation in trading and owning crypto3-assets has been the lack of custody solutions—which, for institutional fiduciaries, would run afoul of all kinds of investment, risk management and compliance mandates. Putting a viable custody solution in place would bring institutions one giant step closer to being able to trade crypto-assets in client accounts.

Where will the next shoe drop? Well, investors should be keeping an eye on the biggest players in the custody business—BNY Mellon, State Street and JPMorgan being the mightiest of them all. (It was revealed last week that, despite Jamie Dimon’s public disdain for Bitcoin, JPMorgan filed a patent for a blockchain-based settlement technology. Could his resistance to crypto be wavering?)

If one of the big custody players were to announce a comprehensive custody solution for crypto-assets, that would be another tectonic shift. Stay tuned.


One has to think about the adoption of these new technologies in geologic terms. As the tectonic plates of a new continent begin to form, cool, and shift into place, there will be moments when things potentially change in a big way, very fast. That’s how I look at the MOBI and ICE developments.

Resistance, however, is still firm among many legacy players. Last week, the well-known research company Gartner Group published the results of a Chief Information Officer (CIO) survey, showing that only 22% of CIOs plan on using blockchain technology. Gartner concluded that the technology is “massively hyped.”

For investors this is potentially good news, as it may actually support today’s crypto-blockchain investment thesis. One of the biggest mistakes an investor can make is to wait for a change in sentiment, and for the skeptical herd to suddenly pile into a new market. That’s when investors are most at risk of buying at the top.

It makes me think of a quote from the President of Michigan Savings Bank when asked about investing in Ford Motor Corp. in 1903: "The horse is here to stay, but the automobile is only a novelty, a fad." Blockchain and crypto skeptics are ignoring a technology potentially even more revolutionary than the automobile was in 1903.

And yet, that skepticism is predictable. When you ask legacy providers about bleeding-edge new tech, you get a legacy point of view, defending a legacy business model. The most telling quote of the Gartner press release says: “[Blockchain] therefore implies that traditional lines of business and organization silos can no longer operate under their historical structures.”

Exactly. That’s the opportunity MOBI and ICE are pursuing. That is the evolving world just now taking shape. And who knows what kinds of vibrant ecosystems will be built atop these new continents?

Currently, the skeptical herd is still looking back over its shoulder—believing that “historical structures” will last forever. I believe that forward-thinking investors would be wise not to make that same mistake.

This blog is intended for information purposes only and does not constitute investment advice.

1 Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.

2 A swap contract is an agreement between two parties to exchange financial instruments at specified periods of time. Most swaps involve cash flows based on a notional principal amount based on a benchmark rate or index price. For example one party may swap cash for an asset with promise to swap back at a later time at a specified price or a floating price based on an index.

3 A cryptocurrency is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.


Brian Kelly, Portfolio Manager

Skeptics miss the big story: Adoption of blockchain technology is happening faster and more broadly than most people realize

A few weeks ago, a Walmart executive in charge of food safety told an MIT conference that he’d had a “religious conversion” on blockchain technology. It was a watershed moment—or should have been—for people who still believe that blockchain is something to worry about for the future. The thinking goes: “Gee isn’t it neat that people will be able to use this someday to do great things.”

Well, blockchain is not some future tech we have to wait for. It’s happening right now, even in Middle America. Companies are using it to reshape their businesses: Walmart is pushing food suppliers to get on the blockchain train, to “help reduce waste, better manage contamination cases, and improve transparency,” according to Bloomberg.

At the same time, some companies are making moves toward blockchain but missing the point of it—accidentally, or maybe on purpose. Sony filed a patent application for cloud-based locker technology, looking to solve its digital rights management challenges. Problem is, Sony’s approach was not borne of the open-source mantra underpinning the technology. The whole point of blockchain is that users don’t need a centralized third party to run things.

Sony’s new approach may be a way to defend their brand and revenue model—and still reap the lion’s share of money generated by creative content. But it still represents the old way of doing things. A truly decentralized platform would allow artists to post new work to a global network, while independently tracking their rights and revenue all the way through the system. In a truly blockchain-driven world, artists wouldn’t need Sony any more. (They might not even need copyrights, but that’s a topic for a future post.)

Laggards and skeptics beware: Blockchain is coming. It’s happening fast. Infrastructure plays and applications (like Walmart’s) may offer the most promise for businesses and investors. On the other hand, if you’re using blockchain to defend your position as a middleman in a fracturing world, it likely won’t work very long, if at all.


Volume is Growing as Adoption Ramps Up

Within about 12 months from now, 20% of the financial services clients on Thompson Reuters’ data and trading platforms will likely have implemented crypto trading programs—according to a company survey. That’s just a small example of the growing appetite for cryptocurrencies from established fin-serv players.

As another example, take Goldman Sachs, a leader and innovator in many investment markets. Goldman is ramping up its crypto capabilities by hiring a dedicated trader. It’s a move that, in my view, will spark interest, and activity, among many big players on “The Street.” Why? Two years ago Goldman backed the crypto-exchange start-up Circle Financial when very few big firms would consider touching it. Then suddenly, after Goldman moved, everybody wanted in. This new move puts establishment types on notice that not only is crypto here to stay, it’s an opportunity to be taken seriously.

There’s also evidence of crypto’s momentum in the explosion of activity on crypto exchanges big and small. Bitcoin futures quintupled in volume over the course of April. Seattle-based Bittrex, one of the world’s largest alt-coin exchanges, reopened in April 2018 after being shut to new investors for about four months due to high demand—except that upon reopening, demand was so high it had to hit pause again, after less than 24 hours!

A new app—Robinhood—a stock investing app for millennials, launched crypto-investing capabilities with great fanfare and built a waitlist of 1 million potential customers, within 4 days! If big players in the advisory/trading/custody business (think: Schwab, E-Trade, Merrill) are not looking at this technology, they may be losing out on engaging and attracting the next generation of investors.


Skeptics continue to bash blockchain, and especially digital currencies, as a “bubble already popping.” But in truth, both represent brand new technologies that solve a lot of problems: they are finding new applications every day; they continue to expand their reach, justify their economic value, and find new customers.

Now, one thing they certainly don’t do is eliminate human fear and greed, which can play a big role in market behavior.

Just as with any new market, these technologies may go through booms and busts as they gain their footing and create new economic niches. (As of this writing, Bitcoin is on the march again, breaking through a technical resistance point of $9,000 at the end of April.1 And when prices rallied, short sellers got crushed.) In the end, I believe these technologies have the potential to serve as global hub for all kinds of financial activity, and we have not even scratched the surface of their potential.

It’s far too early to call this game.

1 Bitcoin performance does not represent the Fund. The Fund does not invest directly in Bitcoin. The Fund may invest in Bitcoin indirectly by investing in the Bitcoin Investment Trust ("GBTC").

This blog is intended for information purposes only and does not constitute investment advice.

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© REX Shares LLC 2018


Exchange Traded Concepts, LLC serves as the investment advisor and Vident Investment Advisory & BKCM Funds, LLC serve as sub advisors to the fund. The Funds are distributed by Foreside Fund Services, LLC., which is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. REX NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid-Point between the Bid and Ask price as of the close of exchange. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. In emerging markets, these risks are heightened, and lower trading volumes may occur. Investments in smaller companies typically exhibit higher volatility.

Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' summary and full prospectuses, which may be obtained by calling 1-844-REX-1414. Read the prospectus carefully before investing.

Cryptocurrency Risk. By virtue of the Fund’s investment in stocks that derive revenue from cryptocurrency-related activities, shareholders may be exposed indirectly to the risks of cryptocurrencies. Cryptocurrencies are extremely new and nontraditional assets and a potential shareholder’s ability to evaluate the performance of cryptocurrencies be limited. Digital assets, represented on a decentralized public transaction ledger that is maintained by an open source protocol, are substantively different from traditional assets and investments. Because if the complex nature of cryptocurrency, an investor in the Fund may face numerous material risks that may not be present in other investments. Current IRS guidance indicates that digital assets such as cryptocurrencies should be treated and taxed as property, and that transactions involving the payment of cryptocurrency for goods and services should be treated as barter transactions. This treatment may create a potential tax reporting requirement in any circumstance where the ownership of a cryptocurrency passes from one person to another.

Blockchain Technology Risk. The stocks in which the Fund will invest will be subject to the risks associated with blockchain technology, which is a new and relatively untested technology. The risks associated with blockchain technology may not emerge until the technology is widely used. Blockchain systems could be vulnerable to fraud, particularly if a significant minority of participants colluded to defraud the rest. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility.

An investment in the Fund in is subject to risks including loss of principal. There can be no assurance the Fund will achieve it's investment objectives. The Fund can be more volatile than broad market averages. Additional risks for the Fund include: emerging markets risk, foreign securities risk, geographic risk, geopolitical risk, liquidity risk, non-diversification risk, technology risk, and valuation risk. For a complete description of these risk please read the prospectus carefully.