BK2Cents

Regulate Me Please! Blockchain and Cryptocurrency Execs Beg U.S. for Regulatory Clarity

Brian Kelly, Portfolio Manager

Regulation Gap In U.S. Pushing Innovation Overseas

Creating East-West Divide With Fastest Adoption in Asia

Opportunities Weighted To Non-U.S. Markets As Long As Regulation Gap Persists

Regulation Gap Creating An Innovation Gap As Companies Increasingly Move Overseas

Last week, we finally saw some significant movement on Capitol Hill around cryptocurrency1 regulation, with a hearing chaired by Rep. Warren Davidson. Even if it was only a big meeting, in a big room, with lots of important people, we shouldn’t look a gift horse in the mouth.

The U.S. desperately needs clarity from regulators. Why the need for urgency? Because this space moves in what’s affectionately called “Bitcoin time,” a reference to the blistering pace of innovation where game-changing developments are announced seemingly every month, week, or sometimes even every day. For innovators working in this space, waiting is not an option.

To find regulatory clarity, and have confidence in their own compliance, they are moving overseas to places like South Korea, Japan, and even Switzerland. A big reason why those markets are seeing rapid cryptocurrency adoption is that regulators have moved (often in fits and starts, but at least moved) to create clear, workable regulatory regimes—i.e., how cryptocurrencies may or may not be subject to securities regulation, fiduciary rules, and tax guidelines.

We have addressed this issue before on the BK2Cents blog, most recently back in July. We have also talked about it as the “East-West Divide” in our monthly webinars. The BKC portfolio is weighted toward opportunities in Asia because that’s where the adoption is happening. Research and development may be happening in the U.S., but the companies actually rolling out the technology for broad use are almost all overseas where regulators are providing clear rules and direction.

In the U.S., by contrast, we have little guidance from regulators on what constitutes a “security” and what doesn’t. We have almost no guidance on whether cryptocurrencies will be regulated by the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). Congress is listening now to innovators in this space, but they have yet to even draft legislation.

In short, while the rest of the world is forging head and delivering ever more clarity on cryptocurrency issues. The U.S. is still having meetings.

Unlike a fiat currency, a cryptocurrency is by nature stateless. It has no official domicile. Likewise, it operates around the clock, around the globe, rendering time zones and physical locations irrelevant.

What U.S. regulators need to understand is this: Innovation won’t stop and wait for them to get their act together. It will just move. Already it is moving.

What that means for investors is that as long as the regulatory gap persists, so will the innovation gap… and so will the opportunity gap. Blockchain2 and cryptocurrency investment opportunities will continue to be weighted toward non-U.S. markets as long as that’s where these businesses find the most mature and reliable regulatory climate—because that’s where one will continue to find the leading edge of adoption.

It’s an open question how long such a trend might continue. But if U.S. regulators don’t act soon, and decisively, they risk driving an expansion in the U.S. innovation gap: from small to large, and from temporary to permanent.

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This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

1A 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.

2Blockchain 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.

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.

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.

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The Enterprise Blockchain Land Grab: A Highly Competitive Growth Opportunity

Brian Kelly, Portfolio Manager

With all the hype surrounding blockchain1 and cryptocurrencies2, sometimes it’s tough to see where we are in overall development arc of this new technology. But doing so is important, because it may tell us a great deal about where the opportunities are right now for investors.

So, where are we? And what does it say about investment opportunity? Today, with blockchain and cryptocurrency technologies in their nascent state, I believe some of the biggest investment opportunities can be found in the enterprise application sector—one of four “pillars” of my approach to this space and a major component of my BKC ETF strategy. (The other three are crypto miners and exchanges, Wall Street disruptors, and decentralized internet builders.)

To set expectations, one analogy I use quite a bit is the intranet/internet comparison. In the early days of the web, much of the focus of large corporations was on internal networks—i.e., intranets. Web technology was new, and the public internet was neither well developed, nor particularly useful. But businesses did see huge potential in improving their ability to share information across their own private networks. Getting comfortable with internal networks first also set them up for a big push into public networks when those became technologically and commercially viable.

During the early- and mid-1990s we saw all kinds of innovations for corporate networking applications, from proprietary groupware like Lotus Notes, to local area networking (LAN) technology: the Xerox/IBM “battle of the titans” of Ethernet versus TokenRing technology was the tech equivalent of Coke versus Pepsi, with Xerox eventually coming out on top.

The introduction of the Netscape graphical interface in 1994 was a game changer, and in an interesting historical note, Martin Whitem, of the consulting firm IntranetFocus, observes that in 1996, “over 70% of Netscape [revenues] were from corporate intranet [sales].” According to Steve Tellen, inventor of the term “intranet,” when he worked at Amdahl Corporation in 1994, internally their intranet offering had always been called “Enterprise-Wide Web.”

Thus, the birth of our public internet came only after a maturation in private enterprise (i.e., intranet) technology.

Enterprise Blockchain: Step One Toward A Fully Decentralized Web

Fast forward to 2018. What do we see? We are watching the launch of a brand-new, nascent technology that could offer equal, or perhaps greater, revolutionary power than the original internet. Right now, however, blockchain’s greatest potential is to streamline internal business system and functions—because the public blockchain ecosystem is neither well developed, nor particularly useful. Thus we are seeing a rapid push toward decentralized applications of all kinds for business.

If I were to continue to intranet/internet comparison, I’d say we are late-1980s, well before even the age of Netscape. The foundational protocols are just being developed. Enterprise systems are just being built and tested. The immediate focus of business is on the utility of internal blockchain applications, versus open-source public blockchain applications.

And so we take this into account when we consider the investment implications. Consider a company like IBM, once more at the center of a global tech revolution. IBM’s Martin Schroeter, who recently appeared on CNBC’s Mad Money, told Cramer, “We have more blockchains running today in the world than anybody else.”

What are those blockchains doing? Enterprise management.

IBM is working with Walmart to launch internal blockchain applications to manage the grocery supply chain. IBM is working with the governments of Australia and Saudi Arabia to apply enterprise blockchain to government functions. IBM is working with software developer Hyperledger and the giant foreign exchange firm CLS (which settles more than $5 trillion in daily payments, globally) to launch a blockchain development platform for banks—with Barclays and Citigroup recently announcing they will participate.

In a tease about the future potential of blockchain, IBM is building enterprise-level applications on the Stellar cryptocurrency platform—in one initiative, it is showcasing how private and public blockchains can be integrated, specifically in cross-border settlements.

Not to be outdone, Microsoft has launched its Azure Blockchain Workbench service, while Oracle has launched its own Blockchain Cloud Service. Microsoft is working with Campbell Soup Company, and the government of Taiwan, and the giant consulting firm EY—all on enterprise projects. Oracle’s blockchain platform has attracted solar equipment suppliers, logistics firms, and the Nigerian customs service.

To sum up this giant opportunity, executive vice president of Oracle’s cloud unit, Amit Zavery, told Fortune magazine: “Anywhere there’s data transfer and information flow, blockchain has a potential application.”

The Immediate Land Grab: Next-Level Database Technology

What we are seeing here parallels early intranet development. Enterprise blockchain companies are getting big business comfortable with a brand new technology and preparing them for the day when open networks on public blockchains become the new core the internet.

It’s a bit of a land grab at the moment, with clear leaders, but no clear winners. Overall, however, I believe enterprise developers represent one of the strongest immediate growth opportunities for investors seeking to capitalize on the secular trend toward a decentralized internet. That final endgame—an Internet of Things, an Internet of Money, and sound Money of the Internet—will not be possible until the kinks are worked out and we achieve a fast, efficient, safe, public distributed ledger technology.

And that’s what we’re seeing right now: businesses kicking the tires, working out the kinks, and proving the use cases internally first. Therefore, I believe enterprise-focused tech companies that design blockchain systems, provide implementation tools, and offer strategic guidance have an enormous addressable market in front of them.

It won’t last forever, in my view. But it’s a necessary and viable intermediate goal—a foundational technology on the way to building a truly decentralized internet. That’s why I see enterprise blockchain not just as a pillar of the internet to come, but a growth opportunity for right now.

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This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

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.

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.

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Answering Your Questions: A Conversation with Brian Kelly

Brian Kelly, Portfolio Manager

This week, we are inaugurating a new feature for the BK2Cents blog: a Q&A with advisors. We regularly get questions from readers, as well as from viewers of our monthly webinars. For those who missed the August webinar on asset allocation, the follow-up discussion included some varied and insightful questions from viewers. Below we expand our answers to some of the most topical questions we received.

We hope to make Q&A’s at least a quarterly feature on the blog. So if you have questions week-by-week as you’re reading, or if you just have questions about news and developments in this space, feel free to send them along to info@rexshares.com We will do our best to provide answers and address the most interesting and pressing issues of the day.

Question: “With crypto markets selling off recently, are you still bullish on blockchain?”

Answer: The short answer is, Yes. But I offer that with the caveat that you should be wary of asking a barber if you need a haircut. Most of the time he’s going to tell you that you do.

The longer answers is that I’ve made a deliberate shift in my career, based on the belief that this technology is going to be at least as impactful as the internet. That’s my view. And so yes, I am as bullish as I’ve ever been on this technology.

As for cryptocurrency prices, those are a function of markets—and human fear and greed. That’s not unique to Bitcoin or cryptocurrencies or blockchain. It happens in every single asset class. It’s a normal part of the growth of any asset, and so recent price weakness has not deterred me one bit. Obviously, I feel a lot better when Bitcoin is at $20,000 than when it’s at $6,000. But in terms of entry points, I feel more comfortable getting into a brand-new, fast-growing ecosystem that has sold off 70%—there may be more value there than one would find in the same technology after it’s gone up 100% or 200%. So yes, I’m still very positive on this sector.

Question: “Do you still think 90% of Initial Coin Offerings (ICO’s) will go to zero? Do you believe the ICO market is dead?”

Answer: I’ve said publicly that I believe 90% of ICOs will go to zero, and I think that’s a fair estimation. But to be clear: that is not a knock on ICOs. It’s just simple math from venture capital. I view ICO’s as start-ups—very early stage start-ups, or even seed-stage. Some ICOs may only have a white paper behind them, which merely outlines a concept.

In the venture capital world, 90% of the ideas don’t work out, and even if they may be good ideas, they might be too early, or management can’t execute. A 90% failure rate is a very normal venture capital type of ratio. So yes, I still stand by that.

As to the second question, Is the ICO space dead? Before I answer I have to point out that we do not have any ICOs in the BKC portfolio, because they are not equities. So they don’t qualify. But to answer the question as directly as possible: No, the space is in no way “dead.”

ICOs are an incredibly innovative way to raise capital for an early-stage company. We have certainly seen a lot of froth in that particular area. Initially, venture capitalists saw a disruptive threat on the horizon with this ICO phenomenon. Many of them opened funds and said, “We want in on the game.” There was a rush of money coming into the space, and certainly some of the returns we saw in 2017 got people excited. But there has just been an awful lot of money flowing into that space and valuations have become bloated. So we’ve got to work that off. But overall, the ICO space very much reminds me of the cryptocurrency and Bitcoin space in December 2017 where we had this frothy, foamy excitement out there and it’s going to take some time to work through it.

Question: “How is BKC exposed to crypto miners and traders without any of the exchanges being public companies?”

Answer: There actually are quite a few public companies that either operate exchanges or own shares in an exchange. For example, GMO Internet operates the GMO Coin exchange; Monex Group owns Coincheck, a bitcoin wallet and exchange; the Korean firm, Nexon, recently acquired a 65% stake in the Korbit exchange. So while there may not be many “pure play” opportunities to own shares of the exchange itself, investors can get exposure to exchanges through their operating companies, or firms that hold an ownership stake in an exchange.

Another way to gain exposure to this space is through chip companies like AMD, Taiwan Semiconductor and Micron Technology. One of the things you might have heard me talk about on Fast Money is the new seven-nanometer chips coming out. What these new wafers allow you to do is run a mining operation much more efficiently—with a lot less electricity. Power consumption is one of the biggest cost inputs to any mining operation, and new, more efficient chips should see strong demand from the mining companies that keep these ecosystems running.

Finally, I would point to some of the financial companies, like Metropolitan Bank Holdings (MCB) or Shin Hung Financial. They provide services to cryptocurrency exchanges—so that is another way to gain exposure to potential growth in the mining and exchange space. Metropolitan Bank, in particular, provides wire transfer, deposit and other services to users of the Coinbase exchange, and MCB’s Shift debit card can directly link to a Coinbase account.

So there are many different ways to access opportunities in the mining/exchange sector, especially if you take a “picks and shovels” approach—i.e., investing in the businesses that service the ecosystem.

Question: “What is your impression of Bakkt’s potential impact on the industry?”

Answer: I think it’s very big news. But just to review, let’s remind folks what Bakkt is and who’s launching it: it’s a project of the Intercontinental Exchange, parent company of the New York Stock Exchange. So right off the bat, you have to understand that securities industry heavyweights are behind it. Other participants include Microsoft, and the management consulting giant Boston Consulting Group. Starbucks will also be a participant—not accepting cryptocurrency in its stores, but working on the convertibility of cryptocurrency to fiat currency… which can be spent in their stores. (In my mind, once you can convert cryptocurrency to dollars inside an app, it’s only a very small step to actually being able to spend the cryptocurrency itself.)

Bakkt is a global platform designed for buying, selling, storing and spending digital assets. But the biggest development with Bakkt is its ability to address a concern that U.S. Securities and Exchange Commission has had for a long time: it will be a U.S.-regulated exchange, and will maintain a licensed warehouse (just another name for custody) that can handle physical settlement of bitcoin futures contracts.

To me, this is game-changing type of stuff. It may allow regulated institutional investors to gain entry into a sector where they have been unable to have meaningful participation. That could mean a substantial influx in liquidity into cryptocurrency ecosystems. And it’s not even 90 days away now—as they are talking about being up and running by November 1, I believe.

Question: “Are we on the cusp of institutional acceptance [for cryptocurrencies]?”

Answer: From my own experience, I believe that is the case. Institutional interest slowed down after the entire cryptocurrency market experienced a retreat in prices. But within the last few months, the number of inquiries and discussions we have had with institutional investors has been rising. They seem to be further along than I originally had anticipated. So I feel more confident than I did earlier this year that institutions have an appetite to enter this market.

The other thing that I would say is that we, sitting here in the U.S., tend to focus on U.S. institutions. But it’s entirely likely—maybe even more probable—that Asian institutions could be the first big institutions to enter this space in a meaningful way. South Korea and Japan are the biggest countries for cryptocurrency trading, and banks there are already piloting programs using cryptocurrency platforms for cross-border payments, letters or credit, and those sorts of financial applications. It wouldn’t surprise me one bit if a Japanese pension fund or endowment or life insurance company made the first meaningful allocation to this space.

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Next webinar 9/26 at 3pm EST Sign up here: WebinarSignup
Info@rexshares.com

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This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page

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 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.

3 For description of acronyms and departments visit the U.S. Emerging Citizen Technology Atlas webpage: https://emerging.digital.gov/blockchain-programs

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.

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.

Show More

A Blockchain Rallying Cry: Free The Hostages!

Brian Kelly, Portfolio Manager

Blockchain Growth Driven By Tech Obsolescence. Many Organizations Held Captive By Legacy Technology May Be Set Free By Blockchain

For those seeking a rationale for making an allocation to blockchain and cryptocurrency technology, the simplest argument may be this: it’s an “idiosyncratic” growth story.

That is, the secular forces driving growth in blockchain—like the secular forces that drove internet growth before it—are endemic to the technology and independent of ebbs and flows of the business cycle. Therefore, I believe blockchain’s growth can, and will, persist independent of what’s happening in the economy overall. Adoption will continue apace, in my view, because blockchain is supplanting outmoded technology infrastructure that, in many cases, is in desperate need of replacement.

Consider just one use case and you will see what I mean:

In America’s banking industry, 43% of mainframe systems run on a programming language called COBOL, which was invented in the 1950s as a data processing program by the Department of Defense. This antiquated language handles 80% of in-person banking transactions and 95% of ATM swipes. According to an article in Computer World magazine, Bank of New York Mellon alone is operating 112,500 separate COBOL programs, with 343 million lines of code.

A recent Reuters report estimated that there are 220 billion lines of COBOL in use today across almost every major sector of the economy. And yet, the average age of expert COBOL programmers is between 45 and 55 years old—about 10 years away from a mass migration into retirement. The banking industry, among others, is hard-pressed to find people who can program in COBOL, assuming that their systems are even stable enough to handle changes to the code. Many such systems are so old and inflexible that the coding has to be left completely alone, lest the entire system collapse.

A recent Computer World survey of IT professionals found that while COBOL is still running on many corporate mainframes (because of its superior batch processing speeds), IT professionals view it as an inferior, outdated language that is increasingly irrelevant in an age of non-mainframe computing.

To be sure, there are adherents who say that COBOL will never go away. They argue that it’s still superior in terms of reliability, stability and speed. Perhaps that’s true for the moment. There is also one Blockbuster store remaining in America. It serves a small but loyal population, delivering all they need in terms of VHS and DVD entertainment. It’s also a great attraction for people who want to take selfies with a dinosaur. But it’s hardly indicative of the overall viability of VHS and DVD technology in an age of streaming.

Legacy Database Technologies: An Anchor Soon To Be Cut Loose?

If you think the banking industry is facing a slog to upgrade their systems, consider the federal government. According to a 2016 GAO study:

  • Pentagon personnel and accounting records function on COBOL systems
  • The Social Security Administration’s benefits-eligibility system operates partially on COBOL code
  • The Department of Justice inmate records operate mostly on COBOL
  • The Department of Homeland Security tracks hiring using COBOL systems
  • Veterans’ benefits claims are tracked with a COBOL system
  • The U.S. Department of Agriculture’s Farm Service Agency processes $25 billion in farm loans and other programs using COBOL-based systems

Facing the limitations of such legacy systems, many organizations are choosing to make a switch—to blockchain. In government, blockchain initiatives span an alphabet soup of agencies3: USAID, CDC, DOD, FDA, GSA, HHS, DHS, and the Department of State. The Office of Personnel Management, which oversees more than two million civilian workers, launched a blockchain-based digital records initiative last November—which is performing “better than expected.”

As another example, take the state of Delaware, the legal domicile of more than 50% of U.S. corporations, 66% of Fortune 500 companies, 85% of U.S. initial public offerings. Delaware is moving corporate recordkeeping to blockchain-based systems. Andrea Tinianow, the state’s “blockchain czarina,” told Fortune magazine last fall that Delaware’s new platforms, “will serve to replace our current system of corporate record-keeping—in which documents are stored in disparate places online and off—with a unified and secure ledger.”

John Zeberkiewicz, a corporate attorney told Fortune: “Think about what a corporation is—on some level, a corporation is its records. Ultimately, just about every corporate document and transaction could be recorded on the blockchain, creating an immutable record of all corporate acts.”

What Does My 2Cents Add Up To?

My view is that blockchain represents an “idiosyncratic” growth opportunity: it's a business business that I believe could grow at above-average rates, regardless of what the overall economy does. The reason? Much of today’s technology infrastructure is outdated and inferior, compared to the potential offered by blockchain-based development platforms.

For companies held hostage to outmoded systems (old programming languages and centralized hardware), I believe the question isn’t if, but when they will begin the conversion to blockchain.

Think of this as a next-generation internet infrastructure play. The next generation of the internet – with an Internet of Things (IoT), Internet of Money (IoM) and Money of the Internet (MoI) – is finding it increasingly difficult to function on the aging infrastructure we have now. We need an upgrade, which is why RBC Capital Markets said in a recent report:

“We continue to believe that the Internet is at the embryonic stages of a potential massive paradigm shift powered by decentralized computing on public Blockchains.”

What do we know about such paradigm shifts? They can drive solid long-term growth independent of variations in the business cycle. They tend to be long lasting; I see this is a multi-decade process. But they can also be fickle in how winners are selected: based on past experience, we should expect that change could be relentless and leadership may be fleeting (just ask Sun Microsystems).

But the overall assessment, I believe is sound. Blockchain is an attractive growth story for its endemic momentum—driven by the need to replace en entire economy’s worth of 20th Century database and networking technology. If you need a sound investment thesis for allocating to blockchain, I can’t think of a better one than that.

Source that inspired this entry:

“The Cobol Brain Drain”, Robert L. Mitchell, Computerworld 5/21/2012

“COBOL blues” Reuters Graphix, Travis Hartman

“OPM takes first step toward employee digital records with blockchain”, David Thornton, Federal News Radio 5/25/2018

“Governor Markell Launches Delaware Blockchain Initiative” Delaware Office of the Governor 5/2/2016

“Companies Can Put Shareholders on a Blockchain Starting Today”, Jeff John Roberts, Fortune 8/1/2017

------------------------------

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

3 For description of acronyms and departments visit the U.S. Emerging Citizen Technology Atlas webpage: https://emerging.digital.gov/blockchain-programs

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.

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.

Show More

Journey to a Global DataBank: Piecing Together The Puzzle

Brian Kelly, Portfolio Manager

Understanding The Endgame Helps Investors Make Sense Of Seemingly Random Developments In Cryptocurrencies And Blockchain

Over the past few weeks, we have been talking about the core principles behind the unfolding cryptocurrency1 and blockchain2 revolution. And while understanding this big picture is essential for its own sake, it’s also important because it helps us put today’s developments in perspective. It gives us a framework for interpreting headlines and making sense of the barrage of news—good, bad, and in between—coming at us every day.

Let’s consider three key issues, and related headlines, and then we can address how to interpret the headlines in a larger context:

1) Institutionalization: The endgame for this whole Internet of Money, and Money of the Internet, is for an emerging asset class to become mainstream—to become integral to the functioning of the global economy. That cannot happen, however, if large global financial institutions cannot participate in these markets.

Why is institutional participation important? First, because such institutions hold the majority of global financial assets. Second, because institutional participation could bring trillions of dollars of liquidity into the crypto ecosystem, helping to address a range of adoption issues, not the least of which is market volatility. Third, solving key problems faced by institutions (trade-ability, security, transparency, speed, efficiency, etc.) should also help solve some of the challenges to broader retail adoption.

In particular, one of the biggest stumbling blocks for institutions has been custody—i.e., a lack of vehicles that highly regulated institutional investors can use to hold blockchain-based digital assets. That is changing, and very quickly.

We got earth-shaking news last week when Intercontinental Exchange (ICE), the world’s largest stock exchange operator (owner of the New York Stock Exchange) announced the launch of Bakkt, a subsidiary aimed at creating “an open and regulated, global ecosystem for digital assets.” The offering will include federally regulated markets and warehousing along with merchant and consumer applications, according to the company.

This combination of a licensed exchange and licensed custody solves two of the major hurdles to institutional investment. And it drastically increases the possibility, in my view, that we will soon see a bitcoin ETF—a long-elusive goal of many investors and fund managers.

In fact, there are myriad custody solutions coming to market: from the crypto exchange Coinbase; from the crypto wallet firm, Blockchain; from the French crypto-wallet and custody start-up, Ledger; and from the Goldman Sachs-backed start-up Circle.

2) Interoperability: Think back to the early days of the internet. Before open public networks, we had a series of closed networks. If I had an email account on one network (say, AOL), and you had an email on a different network (say, CompuServe), I couldn’t send you an email. These independent networks had an “interoperability” problem.

But then in 1980, a brilliant computer scientist by the name of Jonathan Postel proposed something called Simple Mail Transfer Protocol (SMTP), which solved the interoperability issue and allowed users of different networks to send data to each other.

Just shy of 30 years later, in 2017, the Palo Alto-based technology research firm Radicati Group estimated global email traffic at 269 billion emails per day, among more than 3.7 billion email users. That’s an example of the kind of the rapid growth that can be unleashed when interoperability problems are solved effectively.

Today, interoperability solutions for cryptocurrencies are on the horizon—pointing to a day, perhaps soon, when you may be able to spend and convert them however you wish.

I said the news from ICE was earth shaking because its reverberations will be enormous, immediate and far-reaching. Case in point: Just hours after the ICE announcement, Starbucks announced that it had signed on to the Bakkt initiative, with a goal of advancing digital currency technology and the convertibility of cryptocurrency into fiat currency.

3) Scaling: A third obstacle to wide-scale adoption has been the speed of crypto networks. But transaction speeds, measured in transactions per second, are rising. The market is also seeing new approaches to solving the scalability problem. One approach, moves data among multiple blockchains. In theory, using such a system you would ramp up transaction speeds by having an infinite number of blockchains all operating in parallel, rather than a few giant blockchains running independently.

Again, it’s too soon to know which technical solution is going be the winner, or if there is even one killer app that solves the scaling problem—it may be many killer apps working in harmony.

And it’s jumping the gun to assume any of the approaches in development today will solve the problem, because none of them have been tested in the real world. And history tells us that the best tech doesn’t always win. Sometimes the better user interface prevails—e.g., there are plenty of phone with better tech than the iPhone, but the iPhone solves a range of challenges in unique user-friendly ways.

But computer scientists and engineers are working all due haste to get the scalability issue worked out. And I believe we will see major leaps in this area in the next year or two.

What Does My 2Cents Add Up To?

When trying to make sense of an avalanche of daily headlines, it helps to keep in mind the overall journey—where it’s taking us, and where we are in that process. I believe we are headed toward a full-scale Internet of Money (IoM), toward a “sound” Money of the Internet (MoI), and toward a user-controlled global Databank. But…

  • You cannot have a global databank unless you have a way to hold your fungible digital assets: that is, custody.
  • You cannot expect trillions of dollars of regulated capital to flow into these digital assets, and reap the liquidity benefits, unless you have a secure way to store that value: again, custody.
  • You cannot have an IoM if you don’t have a way to measure and translate value from one owner to another: that is, interoperability.
  • You cannot have a MoI if you don’t have scalability: i.e., you need to be able to support billions of people conducting possibly trillions of transactions as they go about their daily lives.

What do we see in the headlines? On the custody front, we see a range of workable solutions being put in place, with many more coming. I believe that institutionalization, the first plank in wide scale adoption, is very close to being a solved problem as new blockchain-based systems come on line to address the regulatory, risk, and compliance constraints placed on institutional fiduciaries.

As headlines unfold over the next six months to a year, I am also keeping my eye on the other two main roadblocks: interoperability and scalability. But rather than looking at each new headline as a disconnected news items, I will be viewing them as singular pieces of a larger puzzle.

Over the past few weeks, I have tried to explain how all those puzzle pieces come together, and where we may eventually end up once they form a more complete picture. As an investor, I believe that such a macro perspective is essential to understanding what drives investment opportunity in the cryptocurrency and blockchain space.

It’s something to keep in mind as we parse the headlines week by week, with an eye on measuring progress toward the endgame.

Source that inspired this entry:

Kate Rooney, CNBC, 6/25/2018. Goldman Sachs-backed Circle sees boom in crypto demand from institutional investors, despite bear market

Olga Kharif and Sonali Basak, Bloomberg, Regulated Crypto Custody Is (Almost) Here. It’s a Game Changer. 6/18/18.

Lubomir Tassev Bitcoin.com The Daily: Crypto Vault in Hong Kong, ‘Herd of Institutional Investors’ in Crypto 7/24/18

Radicati Group press release 4/20/2018

------------------------------

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

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.

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.

Show More

Web 3.0: From Global Database to Global Databank

Brian Kelly, Portfolio Manager

How Cryptocurrencies and Blockchain Could Transform the Internet

For the past two weeks we have been talking about money: not just the Internet of Money (IoM), but also the Money of the Internet (MoI). This week, I’d like to take a step back and talk about a more important idea, one that animates this entire revolution of the IoM/MoI, blockchain1, and cryptocurrencies2.

That core, animating idea is: “value.”

Going back to the concept of Andreas Antonopolous—i.e., money is a language we use to communicate value—ask yourself the following: What’s the most valuable thing on the internet? Answer: data. The value of this data is so large, in fact, that it has spawned its own meme: “Big Data.” The term is shorthand for the incalculable value of all the mountains of data stored and accessible across the World Wide Web. So much data that it takes an almost incomprehensible amount of computing power to manage and analyze it.

Now imagine that every single piece of data on the internet was its own unit of value: own-able, trade-able, buy-able and sell-able—owned and controlled not by centralized data hubs (e.g., Google, Facebook), but by individual users. I believe that’s where we are headed with blockchain and cryptocurrency technology.

In my view, all the data pouring into this giant database we call the internet, will one day be part of a single giant data “bank,” where every single bit of data could be held securely and monetized by its creator. It will be built upon the “embryonic” blockchain and cryptocurrency technologies of today.

This quote is from the well-respected firm RBC Capital Markets, from a report issued after the recent TechCrunch conference:

"We continue to believe that the Internet is at the embryonic stages of a potential massive paradigm shift powered by decentralized computing on public Blockchains... We increasingly believe it is a question of when this shift happens and not if... We believe that smart contract platforms backed by Crypto & Blockchain promise to create a layer of trust across all digital participants, while greatly improving the efficiency of transactions and the security of data in our increasingly digital world."

Web 1.0 to 2.0: A Simple Data Archive Evolves Into A Global Data “Bank”

First, we had what you could call an Internet Data Archive, or Web 1.0. Between the early 1970s and late 1980s, inventors and developers built most of the basic functionality and infrastructure we now know as the internet—i.e., hardware, software, network architectures and protocols, etc. That radical invention made raw data available everywhere, shareable all over the world, and searchable in a giant open archive. Web 1.0 was a global library where you could find a news article or a scientific paper, share a song or a photo, or send a written message (email) to anyone, anywhere.

Second, during the 1990s and 2000s (leading up to the tech bubble and beyond), people figured out how to organize and manipulate all this data—and the race was on among companies aiming to monetize it. You could call this stage the Internet of Information, or Web 2.0. (“Data” being raw unorganized facts, while “information” is data that has been processed, organized and structured.) Users could buy goods and services, and trade things of value. Pretty soon value was flying around the internet literally at the speed of light, with few toll booths and no brakes, spelling disaster for some (e.g., music, book, and newspaper publishers), but untold riches for others (e.g., social networking companies, data aggregators).

Two things happened here that changed the world forever: Anyone could create and publish content; and data aggregators figured out how to package and sell access to this growing database of user content. In a few short years, we saw rapid centralization of data on networks owned by the Goliaths of the internet. These companies made, and still make, billions of dollars annually from an advertising-based revenue model that sells your data to their customers: You publish. They profit.

And by “publish” I’m referring to all the data you create on the internet: from Facebook posts, to your driving routes captured by Google maps, to your purchase history on Amazon.

The Data “Bank”: You Publish. You Profit. Aggregators Become Utilities.

So where are we headed now? Web 1.0 was a kind of Global Library—it took a world of existing information and put it into one big open archive. Web 2.0 was akin to a Global Publishing Machine—anyone could produce content and store it in centralized databases, with all that information monetized by database owners.

Web 3.0 turns the Global Database into what I call a Global DataBank, as depicted in this graphic.

Web 3.0

No longer is the internet a bucket full or raw data. No longer will it be it a centralized database to be managed and monetized aggregators. With blockchain and crypto currency technologies, it’s is fast becoming a decentralized bank of data, where content can be securely stored by its creators. And those creators can exchange data with billions of other creators over open, public networks.

Imagine that. In this new world, individuals would have a choice about how, when, and where, to monetize their data—and for how much.

Your Twitter feed is currently monetized by Twitter. You Tweet, and they get paid. You use Google maps to find the best route to your favorite restaurants. Google gets paid. But what if you got paid? What if your Twitter feed, or your Facebook feed, or even the image of your face, or your list of favorite local eateries, or the power generated by your solar panels, was monetizable by you!

You might be able to monetize it in a cryptocurrency format (e.g., bitcoin, ether, ripple). But you might also be able to monetize in other forms: imagine 25 Facebook posts being worth 100 Tweets, or 0.005 airline reward points, or .025 Starbucks lattes, or 3 minutes of electricity from your neighbor’s solar array.

The big take-away: With blockchain and cryptocurrency technology it’s value that matters.

When each piece of data on the internet is its own unit of value, there is no limit to how many different ways that value can be exchanged or redeemed. I believe this is the world we’re headed for. And in such a system, cryptocurrencies would be the most appropriate vehicle for translating value among billions of creators all over the world. Which makes advances in cryptocurrency technology good news for creators—basically all of us who use the internet.

On the other hand, it’s not such great news for aggregators and businesses profiting from “Big Data.” The upshot being that their data hegemony may be coming to an end, as decentralized networks blossom and the era of peak centralization begins to fade. It’s far too soon to predict the death of companies like Google. Although Wall Street Journal columnist Andy Kessler considered just such a possibility in his recent article: Will Bitcoin Save Us From Google? But in a world where I own and control all my own data, companies like Google would become just pipes and wires, almost like utilities. Or a glorified library card catalogue.

Now, that radical future may seem unbelievable to you. And such a future would be still many decades away. But some of the brightest minds in the world are working furiously to make this vision a reality. Yes there have been, and will likely continue to be, some spectacular failures on the path to success. But every day leading innovators are reporting success after success in building out every aspect of this new digital monetary world—in hardware design, software design, payments technologies, custody technologies, networking technologies, speed, reliability, security, transparency, efficiency, etc.

As an investor, I would be very wary of betting against them, which is essentially the position skeptics are arguing for. It’s something to consider until next week.

Consider it my 2Cents, for now.

Source that inspired this entry:

Andy Kessler, WSJ.com. Will Bitcoin Save Us From Google? July 15, 2018

------------------------------

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

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.

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.

Show More

Money Is A Human Invention, And It’s Being Reinvented Before Our Eyes

Brian Kelly, Portfolio Manager

Professional critics of cryptocurrencies need to re-learn their history

One of the most absurd statements I’ve ever heard about cryptocurrencies1 came from one of the world’s foremost bankers. The head of the Bank of International Settlements, Agustín Carstens, was quoted as saying: “Young people should use their many talents and skills for innovation, not reinventing money. It's a fallacy to think money can be created from nothing.”

Now that’s rich, coming from a guy whose job it was, as a central banker, to create money from nothing every day. In fact money is, and always has been, created from nothing! Money is a human invention. Its value exists only in our imagination. It dates back more than two thousand years, but did not exist before people invented it. It was not handed down from on high, on stone tablets.

So, if money was invented by people, it can be reinvented by people.

This is a key point, because the idea of paper money being sacrosanct underlies so much of the criticism of cryptocurrencies. In fact, paper money is not sacrosanct. I like the way Bitcoin advocate Andreas Antonopulous puts it: Money is a language that we use to communicate value.

Way back in 1997, ten years before the advent of Bitcoin, and when the world was still using dial-up modems, anthropologist Jack Weatherford foresaw the rise of digital money in his book, The History of Money. He traces the history of money in three epochs:

“commodity” money (e.g., bags of grain, cowrie shells, etc.) was the first epoch;

“cash/paper” money, (i.e., fiat currencies issued by governments and managed by banks) is the second;

“electronic” money (e.g., bitcoin, litecoin, ripple, etc.) is the third era we are entering now.

Listen to his extremely prescient words, from two decades ago:

Each of the two initial types of money created its own unique culture that differed markedly from all earlier ones. Now, at the opening of the 21st Century, the world is entering the third stage of its monetary history—the era of electronic money and the rise of the virtual economy. The rise of electronic money will produce changes in society as radical as far-reaching as the two earlier monetary revolutions caused in their own eras. The new money will make sweeping changes in the political systems, in the organization of commercial enterprises, and in the nature of class organization. Virtual money promises to make its own version of civilization that will be as different from the modern world as from the world of the Aztecs or the Vikings.

Get Over It: Our Built-In Bias Toward Cash Money

Last week we talked about the Internet of Money. This week, I want to build on that idea by turning the concept on its head, and talking about the Money of the Internet.

Our built-in bias toward paper money systems is one of the biggest obstacles to embracing this idea. It leads critics to overemphasize the flaws in emerging digital money systems, rather than seeing those flaws as growing pains.

Yes, our emerging money language is rudimentary, so far. Cryptocurrencies have trouble meeting three key tests for “money”: a store of value (hampered by volatility); a medium of exchange (you can’t yet spend it everywhere); and a unit of account (nothing priced in crypto, except other crypto). Also, it only bears some of the hallmarks of “sound” money—i.e., being fungible, divisible, secure, portable, etc.

But all those kinks are being worked out as we speak. In this blog we’ve talked about how you can access cryptocurrencies at ATMs in Switzerland; you can use can them at every vendor in the Brisbane airport in Australia; and rewards points issuers like Amex are inching toward making their points programs more cash-like by putting them on a blockchain2.

The Lightning Network is growing by leaps and bounds, helping to address scalability issues that have slowed the adoption of bitcoin for retail transactions. The crypto exchange Coinbase, and crypto wallet firm Blockchain, have both launched custody solutions for institutional investors. IBM is leading a consortium of banks toward blockchain-based cross-border payments in Asia, using the Stellar cryptocurrency network. The crypto exchange Binance accounced recently that its user base quadrupled from 2 million to 10 million in less than a year, and the firm expects to make a profit of $500M to $1B this year.

Today, the infrastructure of an Internet of Money is being built. The medium of exchange, in that world, is the Money of the Internet.

Looking at the world this way, it’s quite easy to define bitcoin as a language we can use to communicate value over open networks, like the internet. It’s also now very easy to see how money can be created: if we create a useful language that communicates value, then we have created money. The more people use this language, the more important the language becomes.

WHAT DOES MY 2CENTS ADD UP TO?

To appreciate the importance of the changes we’re living through, right now, one has to give up the belief that paper money systems are sacrosanct. They are not. A dollar bill has about as much intrinsic value as a cowrie shell and much less intrinsic value than a bushel of grain. And to directly address Agustín Carstens’s point: there is hardly anything more innovative that young people can do today than reinvent money.

That reinvention is happening. The technology is gaining ground. Bankers at the center of today’s global financial order, who cannot imagine themselves being displaced, cannot will it away through denial.

In my view, bitcoin is likely to serve as the monetary base of the internet. That would make bitcoin both The Internet of Money and The Money of the Internet. If you are looking only one side of this coin, then I suggest that you’re not seeing the full picture.

As cryptocurrency ecosystems grow and become more institutionalized, I believe that derivatives and other modern financial tools will eventually help reduce volatility to a level we’d expect from traditional currency markets. Greater retail adoption would follow from stable markets for “sound” digital money, with cheap, efficient payments channels built on top. Pricing of goods and services in these now-stable cryptocurrencies would become easier and more standardized.

But here’s the rub. If you’re an investor waiting for the day when the Money of the Internet looks like the cash money of today, then you will have waited too long, in my view. Once these systems are fully developed and in use everywhere, all that past growth will have been priced in already. There will certainly be incremental investment opportunities, but they are likely to be a lot less interesting.

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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.

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.

Sources that inspired this entry:

News Team, Bitcoin Exchange Guide. BTC’s Lightning Network Growth Updates and Bitcoin’s Blockchain Future. July 8, 2018

Joseph Young, Cryptoslate. With Coinbase Custody, Institutional Investors Can Now Invest Billions in Crypto. July 2, 2018

Mark Emem,CNN.com. Crypto Firm Blockchain has a New Product for Institutional Investors. July 1, 2018

Lubomir Tassev, Bitcoin.com. Crypto Exchange Binance Expects up to $1 Billion Profit in 2018. July 8, 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.

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The Real Power of Blockchain? Enabling The Internet of Money

Brian Kelly, Portfolio Manager

Cryptocurrencies and Blockchain Work Hand in Hand To Create Powerful New Economic Systems

A friend asked me the other day if the price of bitcoin dropped further did that mean the fad was over? I was stunned. Not because he had asked the question, but because I had failed. As a self-proclaimed cryptocurrency1 and blockchain2 evangelist and money manager, I had failed to explain cryptocurrencies in a way that my friend could understand it as more than a fad. I had failed to explain that cryptocurrencies and blockchain technology was powering the next big Internet revolution: the Internet of Money.

The Internet of Money revolution is unfolding before our eyes. It is being built by an army of coders and is following a similar path to the original internet: the Internet of Information, which disrupted entire industries, while creating entirely new ones. It empowered the ”little guy,” while setting off epic battles for dominance among some of the world’s biggest digital players.

And just like the Internet of Information, I believe the Internet of Money will become the status quo. Value will have been created, leaders will be established, and there will surely be investment opportunities, but not like the ones we are seeing today.

Let’s back it up just a bit: In the old analog world, information used to be stored in libraries. Today, free and easy access to information, through digital channels, has changed the world in ways we could not have imagined.

Likewise, in the analog days of finance, money has been stored in banks. But fast approaching is the day when easy access to money—using digital stores of value—may disrupt the financial services sector in the same way that the Internet disrupted our information-based economy.

Today, Internet protocols communicate information across open networks. Tomorrow, Blockchain protocols will communicate value across open networks—essentially, an Internet of Money.

Where are we in the process of developing a true Internet of Money? I believe we are in the early stages—akin to the era of private intranets, the tremor before the earthquake that was the Internet. For example, IBM has just launched a new private blockchain development platform. According to Forbes, the goal is to help developers “build blockchain proof-of-concepts quickly and affordably,” and the platform includes an “end-to-end blockchain development experience: a secure test environment, a suite of education tools and modules and one-click network provisioning.”

As I’ve said before, I believe that private blockchain ecosystems are a necessary halfway point toward a truly open-source blockchain economy. Just like intranets were a necessary halfway point for companies trying to get comfortable with a new technology and work out the kinks before embracing a fully public Internet.

The Next Big Step: Linking Public and Private Ecosystems

Meanwhile, the open-source cryptocurrency network, Stellar, is reportedly in talks to buy the San Francisco-based Chain blockchain platform. Two of the most interesting and portentous parts of this deal are:

the potential for Stellar to get into the emerging “Blockchain as a Service” (BaaS) business; and

the potential boost it gives Stellar’s agreement with IBM—the deal where IBM and a consortium of banks will use Stellar’s cryptocurrency platform to facilitate cross-border payments in Asia.

According to Fortune, IBM’s banking network “includes ‘12 currency corridors’ that encompass Australia and New Zealand, as well as smaller countries like Fiji and Tonga. It will reportedly process up to 60 percent of all cross-border payments in the South Pacific’s retail foreign exchange corridors by early next year.”

By leveraging Stellar’s crypto platform, IBM and its banking partners will be able to offer real-time, immediate transfers of value across national borders—transactions that used to take days. Instead of the cumbersome process of converting and sending fiat currencies, users of the new system will can simply trade a token.

In addition, Stellar’s acquisition of Chain would be the first foray of an open-source crypto platform into the BaaS business. It will be competing against the likes of IBM and Amazon—the latter is partnering with Ethereum-based Kaleido, a blockchain cloud service from ConsenSys.

WHAT DOES MY 2CENTS ADD UP TO?

Here we see an entire new industry taking shape before our eyes. Private ecosystems (e.g., IBM, Amazon) and public ecosystems (e.g., Stellar), are slowly building links that allow private stores of value to be transferred over public networks. In this brand new world, storing and transferring value are done using cryptocurrency platforms that are global, frictionless, decentralized, and cheap to use.

The impact will hit almost all sectors of the global economy. And that’s why I believe investors should not be looking at cryptocurrency and blockchain as two separate macro trends. They are two sides of the same (crypto) coin, so to speak.

Blockchain alone is just a gigantic ledger—a way of recording and storing data. For example, Walmart is interested in blockchain technology because it may help manage inventory, speed deliveries, improve quality control, and the like. And there may be big benefits in such an approach, but the benefits of a private Walmart blockchain accrue to Walmart alone.

The real power is in public blockchains that don’t just record and store value, but also enable users to pass that value across open networks, from individual to individual, or from one private ecosystem to another. This new technology can fundamentally change how we access money and communicate value globally. But to do that, you need some kind of transaction medium, a cryptocurrency. And for that reason, Blockchain and cryptocurrency go hand in hand, they are inseparable. To get big economic efficiencies, you need both.

Now, if you were a believer in the original Internet (i.e., the Internet of Information), or you see potential in the nascent Internet of Things, or if you are allocating to the Internet “whales” as a growth strategy, then the current blockchain and cryptocurrency opportunity should not be much of a mystery.

One day we’re all going to wake up and the Internet of Money is going to be a thing—we are seeing it built before our eyes. The question for investors is whether to invest now in the early growth stage, or later after it reaches maturity. Because, eventually, I believe it will be as conventional and essential an allocation as Internet stocks have become over the past two decades.

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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.

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.

Sources that inspired this entry:

IBM Launches Starter Kit For Blockchain Developers. Forbes, Tom Groenfeldt, Contributor Jun 28, 2018

Stellar In Talks to Acquire Blockchain Startup “Chain”. Fortune, Polina Marinova. June 20, 2018

IBM and Stellar Are Launching Blockchain Banking Across Multiple Countries. Fortune, Jeff John Roberts October 16, 2017

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.

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FOLLOW THE LEADER: A FEW KEY REGIONS POINT THE WAY TOWARD A BLOCKCHAIN FUTURE

Brian Kelly, Portfolio Manager

Follow the Leader and Laggards Stand Side-By-Side—Can You Tell Them Apart?

Back in January, I was in Switzerland for a crypto conference. It was an interesting event from this standpoint: it wasn’t a tech conference and it was not the kind of event where everybody and their cousin is pitching the next big ICO (Initial Coin Offering).

The Swiss conference was made up mostly of old-school, monied Swiss business people— bankers, investment bankers, insurance executives, industrialists, and the like. There were, by crypto-conference standards, very few crypto people there.

What did I hear from the crème-de-la-crème of Swiss business elite? One person from the seven-member Federal Council told me that, essentially, Switzerland is going after the blockchain space, and going after it hard, especially in banking. It makes sense, right? Switzerland is a leading destination for global banking: from commercial banking, to private banking, to investment banking, wealth management and all aspects of institutional asset management.

Switzerland’s sales pitch is: we’re global, secure, powerful, and secret. It attracts boatloads of wealth from abroad. According to the Swiss Banking Association: about half (48%) of all assets under management at Swiss institutions come from abroad; and about 25% of all cross-border assets managed globally are managed in Switzerland. If that were your franchise you’d want to protect it too, especially if an emerging technology offering privacy, security, and global scale —at low cost—could disrupt more than 10% of your national economy ( i.e. , banking + insurance).

So, it should be no surprise that just a couple of weeks ago, Cointelegraph quoted a member of the Federal Council saying that, “Hardly anyone still doubts that blockchain will penetrate our entire economy.”

But wait! On the very same day, a Swiss central banker was quoted as saying that blockchain, in its current form, was a “useless innovation” and “too primitive” to serve as the basis for a national digital currency.

Here we have, side-by-side, in one of the most advanced financial markets in the world, two diametrically opposed viewpoints on blockchain’s potential. It poses a kind of Rorschach test3. Whom do you believe: people doing the hard work of building and piloting a transformational new technology, with the aim of solidifying their global industry leadership; or those pooh-poohing it because it’s not yet ready for prime time?

My money, literally, is on the former.

Sometimes Leadership Means Tapping The Brakes

Here is another ink-blot, of sorts: In the last week of June, Bitcoin was down 5% on the news that Japan’s Financial Services Agency issued a “business improvement” order to the country’s six licensed cryptocurrency exchanges.

What few people know is that Japan is one of the world’s biggest hubs for bitcoin trading. On any given day Japan can account for 40% to 50% of bitcoin trading volume. So Japanese regulators cracking down is a big deal. And in response, Japan’s largest exchange, Bitflyer, halted on-boarding new clients.

It was a short-term blow to crypto markets, which some saw as a prognosticator of doom. Others, myself included, saw it as a painful but necessary step in the maturation process of this asset class.

Japan’s regulators have been at the vanguard of regulation these markets. They were one of the first to regulate crypto exchanges. One of the first to recognize bitcoin as a legal form of currency. In many ways, Japan points the way toward a crypto-blockchain future. So, while this news may have temporarily interrupted the flow of new capital, I believe it ultimately points the way toward safer crypto markets for everyone, including both institutional and retail investors.

Here’s a third ink-blot to mull over: $32m was stolen from the top Korean exchange Bithumb. For a time, all withdrawals were haled. Negative news for sure.

But here is a very important point that most people missed: the exchange will cover losses out of cash reserves. This is the first time we are seeing an exchange using its ample reserves to act as a backstop and support the value of cryptocurrency. The positive development here is that quick action by the exchange stopped the price decline of bitcoin, keeping it to a $200 loss on that day. That constitutes the most bullish price action I’ve seen after a major hack.

WHAT DOES MY 2CENTS ADD UP TO?

Sometimes, making sense of the cryptocurrency and blockchain space can feel like a Rorschach test, but the advancement of this technology is not a subjective thing: there is an underlying reality, and in sorting it all out I pay attention to three key issues:

1) The first point we hammer on all the time in this blog, and will continue to do so: these are emerging technologies. As such, there will be bumps and bruises along the way toward maturation, and I believe that a lot of “negative” news skeptics gravitate to are simply growing pains.

2) Maturation involves more than quantitative improvements (i.e., higher trading volume and prices). It also includes qualitative improvements in how well the ecosystem operates—i.e., how safe, efficient, and well-regulated they are. Sometimes those two things are at odds, but in my mind, qualitative improvements are often a good thing, even if they come with a short-term cost on the quantitative front.

A safer crypto market could bring investors with trillions of dollars in capital off the sidelines. For example, the influential venture frim Andreessen Horowitz just announced that it’s launching its first crypto fund— based on one of the firm’s three global megatrends. And you cannot have a megatrend without a strong infrastructure to support those markets.

3) To see where this is all headed, I believe you have to watch the leaders, not the laggards. Pay attention to the adopters, not just the developers. The leaders in adoption are clustered in Asian markets and a few markets in Europe.

To this last point: Ripple recently announced an initiative with 61 Japanese banks to beta test a blockchain-based settlements system this year, South Korean commercial banks have teamed up to launch “BankSign”, a blockchain-powered customer ID verification platform. These are just two of potentially dozens of initiatives being piloted across Asia.

Meanwhile, Bank of America is filing patents. Their chief technology officer said recently that, “While we’ve not found large-scale opportunities, we want to be ahead of it we want to be prepared.” Her comments beg a question: if banks across Asia are finding enough compelling use cases to launch pilots and actually put blockchain to use, what is BofA missing?

In Europe, Swissport, the world’s largest ground and cargo handling company, is launching a blockchain pilot for cargo handling. The Swiss city of Zug is launching a voting pilot that puts polling systems and residents’ IDs on a blockchain. Two years ago, Switzerland’s largest rail company, SBB, added bitcoin capabilities to its ATM kiosks throughout the country.

Asia and Europe are the proving ground for this emerging technology. In their view, cryptocurrency and blockchain are no flash in the pan. It’s a technology to be embraced, rather than ignored, even though it’s not yet mature. In this world, spending your time “being prepared” could easily mean being left behind, as others take the lead.

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

3 The Rorschach test is a psychological test in which subjects' perceptions of inkblots are recorded and then analyzed using psychological interpretation, complex algorithms, or both. Some psychologists use this test to examine a person's personality characteristics and emotional functioning.

Sources that inspired this entry:

https://www.swissbanking.org/en/financial-centre/key-figures/the-swiss-banking-centre

https://www.cointelegraph.com/news/swiss-federal-councilor-blockchain-will-penetrate-our-entire-economy

https://www.swissinfo.ch/eng/crypto-valley-conference snb-director---cryptocurrencies-too-primative-for-national-money-/44208494

https://cointelegraph.com/news/swiss-central-bank-exec-crypto-too-primitive-to-issue-state-digital-currency

https://futureism.com/cryptocurrency-hacks-shaking-investors-faith-coinrail/

https://cnbc.com/2018/60/20/why-bitcoin-made-a-comeback-after-hacking-crypto-traders.html

https://fortune.com/2018/06/20/ bank-of-america-blockchain-patent-why/

https://cointelegraph.com/news/swiss-aviation-services-company-launches-blockchain-pilot-for-cargo-handling

https://coindesk.com/swiss-city-plans-to-vote-on-blockchain-using-ethereum-digital-id/

https://news.bitcoin.com/switzerland-densest-bitcoin-atm-network/

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.

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THIS IS WHAT DISRUPTION LOOKS LIKE: THE COMING SHAKEOUT IN TRANSACTION BANKING

Brian Kelly, Portfolio Manager

As fee-hungry bankers pursue this business, it’s shifting beneath their feet

What does blockchain1 disruption actually look like, on the ground? One hears about blockchain’s potential for disruption all the time, but mostly in generic sound bites that emphasize lower costs, improved transparency, higher efficiency, and the like. But seldom do those discussions get into the nitty-gritty of how disruption actually shakes out.

Now, in transaction banking, we have a small window into that process—what it looks like, how it affects markets, and how it may impact investors.

The consultancy Bain & Company issued a report estimating that blockchain technologies “have the potential to reduce trade finance operating costs by 50% to 80%, and to realize three- to fourfold improvements in turnaround times.” Bain is already seeing price declines in the SWIFT payments network as a result. Most important, according to Bain: “These forces are washing through every region and every product in the transaction banking portfolio.”

Therein lies the rub: all kinds of banks (global banks, local banks, investment banks) are currently piling into the transaction banking business, attracted by its steady fee income and high potential return-on-equity. Yet, as costs and prices are driven downward, thanks to blockchain adoption, that business may actually end up looking very different than it does today—in a few years, it may end up being a low-margin, commoditized business with just a few dominant players. It’s also very possible such operations may get carved out and sold off as profitability declines, splitting transaction banking from credit banking.

For investors, generic forecasts of blockchain disruption are not actionable, but use cases are. Here, that means understanding a portfolio’s exposure to transaction banking, across all its financial services holdings. In my view, one should be skeptical of any banks forecasting high profitability and revenue growth based on transaction banking operations—especially if those are new initiatives or planned expansions. Maintaining that revenue stream clipping fees is going to be very difficult if the cost of a transaction ends up approaching zero—as it may on a blockchain.

Further, in any disruptive trend, it’s typically the fastest moving, most innovative, best executing companies that end up thriving. Financial services companies that don’t have a record of innovation, and are following the lead of others into the transaction business, may not be the most attractive opportunities as this disruptive process unfolds.

This Is What Myopia Looks Like: Central Bankers Doubt The Future

For every tangible and evolving use case, there is a choir of skeptics who will furiously insist that blockchain applications—in particular cryptocurrency2 applications—will never fulfill the “hype.” Last week this skepticism took the form of a sensational report that if everyone in the world used bitcoin, it would require so much processing power that it would “bring the Internet to a halt.” The report was authored by the Bank for International Settlements (BIS), an institution owned by the world’s Central Banks.

It’s understandable that advancements in cryptocurrency would strike fear in the hearts of central bankers. But that doesn’t change the fact that central banking is ripe for disruption. It also doesn’t provide a sound basis for rational analysis. And I question many of their conclusions about the cost, reliability, and utility of cryptocurrencies.

The biggest problem with the BIS report, in my view, is that all its assessments are based on technology “at the time of writing.” They make no allowance for improvements in technology—not better chip technology, nor the possibilities of quantum computing, nor even just the newest crypto tech on the horizon. Lightning Network, a next-generation crypto-payments protocol, may be able to process transactions as fast, or faster, than Visa and Mastercard.

I put the BIS report in the same category as a 1981 TV newscast I recently viewed on YouTube. The San Francisco Examiner had just launched its first online issue, and the newscaster was guffawing at the horrible user experience: people using dial-up modems to access the online paper and then waiting two painful hours for it to download. His take on it was something like, “Well, this is never going to work.”

But just because it didn’t work then, didn’t mean it would never work. In fact, the Internet brought the newspaper business to its knees before they figured out how to deal with it.

Technology is changing at a blistering pace. Prognostications of doom, based on an analysis of today’s tech environment, entirely miss the point. Large-scale disruption is coming, and even if we can’t implement it fully today, that doesn't change the fact that someday it will arrive.

WHAT DOES MY 2CENTS ADD UP TO?

My view is that blockchain will do to financial services what email did to the Post Office—and it’s already happening. We don’t know 100% what it will look like once it all shakes out, but there is a massive disruption underway. Blockchain will have its role. Cryptocurrencies will have their role. Even advances in simple database technology will have a role.

The most lean, forward-thinking, best-executing companies will likely survive, while slow-to-change institutions could be left behind as markets undergo a radical reshaping over the next few decades. Crypto applications, specifically, have a huge addressable market in the financial services space, and that’s why I am invested in companies that support these systems.

As for the dilemma of central bankers, at a recent panel discussion I was asked for one trenchant thought on crypto. My answer: “Crypto will eventually disrupt central banking.” That’s my answer and I’m sticking to it.

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

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 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.

Sources that inspired this entry:

BIS Annual Economic Report 2018 V. Cryptocurrencies: looking beyond the hype

Bain & Company: By Thomas Olsen, Ada Di Marzo, Sen Ganesh and Mike Baxter Wolf in Sheep’s Clothing: Disruption Ahead for Transaction Banking

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SEEING THROUGH THE HYPE AND GIMMICKS

Brian Kelly, Portfolio Manager

Blockchain Money Grabs Recall The 90s Internet Bubble: “Déjà Vu All Over Again”

After the recent “Money 2020” payments conference in Amsterdam, a CNBC colleague, Arjun Kharpal, wrote that he overheard one conference delegate telling another, “Let's just call it a blockchain1 anyway, we'll get funding.” That same day, Forbes published a piece re-visiting “blockchain” stocks, pointing out that even if calling something blockchain might bump a company’s stock price for a few weeks, it seldom lasts if the initiative is just a fig leaf.

For those of us who cut our teeth during the technology bubble of the 1990s, this sounds awfully familiar. In those days, simply launching a website could boost a company’s stock, even if the website didn’t do anything. Today, that notion sounds quaint. But back then, launching a website sounded like a big deal because hardly anybody knew what a website was, or what it was supposed to do.

We know better today, and there are two ideas I’d suggest that people remember when trying to sort the hype, gimmicks, and money grabs from the real opportunities in crypto2 and blockchain:

First is that most crypto-blockchain initiatives will likely fail. I’ve said it before publicly: in my view, 90% of initial coin offerings (ICOs) will probably go to zero. That shouldn’t be surprising, given that 90% of venture start-ups don’t pan out. It’s just a handful of companies, out of hundreds, or even thousands, that go on to become the next Amazon, Facebook, or Netflix.

Failure rates are likely to be high because many of today’s crypto-blockchain ideas are just too early, or they lack an addressable market, or the technology isn’t ready, or management doesn’t have the execution chops to build a viable business.

But that brings us to idea number two: Just because it’s too early now, or the tech isn’t ready now, that doesn’t mean it never will be. People love to joke about the now-deceased Pets.com as emblematic of the speculative tech bubble of the 1990s.

Consider that Chwey.com (a company with the same business model, product line up, and strategy) just pulled in a $1 billion private equity investment for just 20% of the company. That’s a $5 billion valuation for a business model that would have gone bankrupt (and did) back in 2000.

U.S. Tempting The Currency Fates?

Put this news in a similar category of “too early but not out of the question”: the Chief Executive Officer of Lazard, Ken Jacobs, made some eyebrow-raising comments a couple of weeks ago that America’s new unilateralism is “tempting the world” to find an alternative to the U.S. dollar as a reserve currency. He said that it’s unlikely in the near term, and I would agree, but he specifically mentioned cryptocurrencies as a reserve currency alternative.

While it’s not practical today, with a little imagination, as Jacobs suggests, one can see the possibilities for a digital reserve currency, as well as the macroeconomic shifts that could get us there.

The U.S. is currently running twin deficits – budget and trade deficits. Today, they are working together to support our status as the world’s reserve currency. Countries that accumulate dollars through trade invest those dollars back into U.S. government debt. But if tariffs and other measures crimp global trade, then our trading partners will have fewer dollars to buy our debt. This could happen just at a time that the U.S. needs to issue mountains of debt to finance an exploding budget deficit. At that point, trade and budget deficits may no longer work together. Those particular dynamics—falling investment combined with growing debt—are the recipe for the kind of acute crises we have seen unfold many times, especially in the developing world.

Moreover, for the first time the world now has an alternative to gold: Bitcoin. Using a supranational currency standard offers a technology solution to nations fleeing a reserve currency vulnerable to unreliable trade policies, disinvestment, and growing debt problems.

WHAT DOES MY 2CENTS ADD UP TO?

This post could have a different title: “What a difference a few decades can make.”

With emerging technologies, a big part of the recipe for success is: Right place. Right time. Right tech. Don’t forget that Bitcoin is not the world’s first digital currency. We had HashCash, Nick Szabo’s Bitgold and other iterations before Bitcoin. The difference with Bitcoin is that I believe it solves the problems of digital currency better; the market is ready to embrace and use it; and technology has advanced far enough to support it.

So how does one tell what’s viable now—in the crypto-blockchain world—instead of what might be viable 20 or 30 years from now?

My approach is to look for companies that: 1) solve a real world problem; 2) solve a problem that could not be solved prior to crypto-blockchain existing; and 3) have the ability execute on the vision, not just the tech vision, but also the business case.

Today, those look like infrastructure plays. That is, any technology offering a platform for others to build on top of. We are looking for foundational protocols that will fuel the next generation of applications across the decentralized web. If I were to make an analogy to the early days of the Internet: I’d be looking for the Ciscos of the world, not the Facebooks. People could not get online to use something like Facebook until we had enough routers to support that kind of traffic.

Today, in my view, the most viable crypto-blockchain opportunities are in the backbone technologies. Just remember that naming something “blockchain” or “crypto” doesn’t automatically make it a viable business, and even if it’s a good idea in principle, a viable market and business model might still be decades away.

This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.​

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 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.

Sources that inspired this entry:

https://www.cnbc.com/2018/06/06/blockchain-is-so-hyped-right-now-and-many-companies-will-get-burned.html

https://www.forbes.com/sites/petertchir/2018/06/06/re-visiting-the-blockchain-stocks/#20bc4a1c543f

https://www.bloomberg.com/news/articles/2018-06-07/u-s-tempts-dollar-s-fate-by-going-it-alone-lazard-ceo-says

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GOVERNMENTS QUICKLY CHANGING THEIR TUNE ON BLOCKCHAIN

Brian Kelly, Portfolio Manager

All Over The World, Governments Are Seeing Enormous Potential In Enterprise Blockchain Applications

Go back five years or so and you’d be hard-pressed to find any government endorsing blockchain1 technology, and many were (and still look to be) openly hostile to cryptocurrencies. That posture is now shifting—quickly.

An hour-long TV special aired in China last week, extolling the virtues of blockchain and claiming that its value is “ten times more than that of the Internet.” To me, that does not sound like a country intent in keeping up its ban on cryptocurrencies2. And contrary to what many Westerners believe about China’s crypto-hostility, I’ve talked to a number of investors in China, Singapore, and Hong Kong who all have said that crypto/blockchain is alive and thriving in China. In my view, China is likely to re-emerge very soon as a big player in this space.

Moreover, proposed government blockchain initiatives now run the gamut, with objectives as diverse as preventing corruption in public sector finance (Italy), streamlining land registries (Netherlands) and managing customs controls (South Korea).

Where governments used to openly dismiss blockchain, they are now seeing potential benefits in its traceability. They have come to understand that it is not necessarily the anonymous, shady underworld they thought it was. The more they explore its potential, the more use cases they are finding, particularly for blockchain enterprise applications.

And now that they’ve stuck their toe in the water, I don’t believe it will take long for them to see the potential benefits of blockchain-based currency systems—i.e., “cryptocurrencies.” There is hardly any large-scale adopter that’s larger than a government. So this slow coming-about of the ship of state is potentially a huge development for blockchain technology applications, manufacturers, and implementers.

Rewards Programs Joining the Crypto Ecosystem?

Two of the themes I’ve been covering in this blog are “interoperability” and diversification within the cryptocurrency ecosystem. This week we see another small step forward on both fronts, both in the arena of consumer loyalty programs.

Right now, you can use your American Airlines miles to book a hotel room, so why shouldn’t you be able to use them to buy a burger? Or a pair of sunglasses? Every year, American Express publishes a rewards catalogue where you can exchange your points for everything from electronics, to kitchen gadgets, to apparel.

These rewards programs are, in many ways, already a kind of “permissioned” currency—useable within a closed ecosystem built by each company. But now those ecosystems may be getting larger, potentially even approaching the utility of cash.

American Express has built a blockchain application that lets its merchants develop bespoke Amex rewards points programs. Just as you might get airline points for booking a rental car (or vice versa), now you might be able to get Amex points for buying a cup of coffee, or a sale item that a retailer wants to move off the shelf. More important, once you earn them, you may be able to spend them any way you like.

Meanwhile, Mastercard has patented a system that puts coupons on the blockchain. EZ Rent-A-Car is piloting a program to let rewards members exchange their points for bitcoin. Rakuten, the Japanese e-commerce giant, has about $9 billion in rewards outstanding and is talking about converting those to a loyalty “coin” that is convertible to fiat currency.

Fungible rewards points offer greater flexibility to consumers, attracting them to the issuer’s rewards ecosystem. That attracts more merchants, and accrues more fees to the program operator. And finally, the larger the program, the more data (troves of it) the operator will have on consumer purchasing habits and trends.

There are two key take-aways here:

First, the more that rewards points can act like cash (and that’s where it looks like they are headed), the more potential value in the issuing enterprise, whether it’s an airline, retailer, or credit card company.

Second, I have said before that the cryptocurrency ecosystem is not winner-take-all: it has room for a diverse array of digital tokens, with “interoperability” (i.e., convertibility) driving growth of the ecosystem. New developments on the rewards front demonstrate both points: growing diversity, with issuers fueling adoption by making digital tokens as convertible as possible.

WHAT DOES MY 2CENTS ADD UP TO?

We are seeing some every encouraging signs in the direction of crypto-blockchain adoption, across a diverse set of players. But this is truly emerging technology. Many of these initiatives will fail, and because there is so much attention on this space right now, many of those failures will be very public.

On the path to crypto-blockchain adoption, it’s important to remember the old adage of: crawl, walk, run. As one emerges from the crawling stage, there can be a lot of bumps, bruises, falling down, and the occasional nasty head bang.

In my view, investors should neither be surprised, nor frightened away, by recent data out of China that most blockchain initiatives are abandoned after 15 months. (That small data point has been getting too much press.) After all, 95% percent of all venture capital start-ups fail to deliver the projected return on investment. An article in Fortune a few years back quoted a 90% failure rate for corporate “innovation” projects. An estimated 75% of corporate “change initiatives” will fail. The failure rate for IT projects varies between 50% and 70%, depending on whom you ask.

On the whole, I see very positive signs around enterprise blockchain adoption and cryptocurrency diversification. But high failure rates in tech innovation are normal. So, avoid falling in love, and don’t be too disheartened if favored opportunities don’t pan out.

I’d suggest that one needs to have an active approach to managing opportunities in this space: rigorously vetting opportunities to find those that may have the best chance at success and longevity. Think of it like putting bumper-guards on the coffee table and plug-covers over the power outlets.

This blog is intended for information purposes only and does not constitute investment advice. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. Please see important risk disclosures at the bottom of the page.

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 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.

Sources that inspired this entry:

https://www.forbes.com/sites/billybambrough/2018/06/01/italy-just-took-a-step-closer-to-mass-blockchain-adoption/#393c7e2846c5

https://cointelegraph.com/news/netherlands-land-registry-to-test-blockchain-solution-for-real-estate

https://cointelegraph.com/news/korean-customs-service-to-develop-full-scale-blockchain-customs-platform

https://www.americanbanker.com/news/has-amex-found-a-data-gold-mine-with-its-rewards-blockchain

https://www.ccn.com/mastercard-wins-patent-for-blockchain-based-coupon-authentication-system/

https://www.bloomberg.com/news/articles/2018-05-30/forget-airline-miles-crypto-coins-are-coming-to-reward-programs

https://www.inc.com/john-mcdermott/report-3-out-of-4-venture-backed-start-ups-fail.html

http://fortune.com/2014/10/07/innovation-failure/

http://www.connerpartners.com/how-challenging-is-the-change/the-dirty-little-secret-behind-the-70-failure-rate-of-change-projects

https://www.cio.com/article/3068502/project-management/more-than-half-of-it-projects-still-failing.html

http://www.information-age.com/projects-continue-fail-alarming-rate-123470803/

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SINGAPORE PUTS PEDAL TO THE METAL IN BLOCKCHAIN

Brian Kelly, Portfolio Manager

Asian Nations Vying For Global Leadership

In last week’s post, after Blockchain1 Week, we addressed the issue of adoption versus development: Asia is working overtime on adoption, while the U.S. is still working on development.

This week we see that theme continuing to play out—with interesting news, this time out of Singapore. A recent article in Forbes listed all the ways Singapore is vying to lead the blockchain race, proposing a new regulatory regime for decentralized exchanges, as well as new clearing and settlement systems, and even floating the idea of putting the national currency on the blockchain.

We also saw supportive news out of South Korea, where the National Assembly started pushing regulators to lift their ban on Initial Coin Offerings. The elections coming up on June 12 have become somewhat of a referendum on crypto2 policy, with crypto-friendly candidates favored. South Korea is one of the world’s biggest cryptocurrency hubs: on some days accounting for upwards of 40% of global bitcoin trading. Bringing Korean demand back on line, and fresh cash into the ecosystem, could be hugely supportive of crypto prices.

Meanwhile, back in the U.S., the state of Wyoming’s efforts to be the blockchain-friendliest state in the union appear to be paying off. Wyoming has attracted a raft of new crypto and blockchain start-ups. But as CNBC pointed out, it’s still very early days: “So far, only a small fraction of them exist as more than electronic paperwork.” Despite the fanfare, nothing on Wyoming’s horizon is as “shovel ready” as the myriad projects getting underway all across Asia.

The take-away here is that Asia is working on adoption more than any other region of the world. Asia, as first-mover, is successfully modeling what a crypto-blockchain-driven future could look like. And every new initiative potentially stokes global demand for this new asset class.

Good News: Cypto Price Manipulation The Subject U.S. Criminal Probe

The U.S. Department of Justice, working with the Commodities Futures Trading Commission, is looking into crypto price manipulation. They are going after traders who spoof, wash trade and otherwise manipulate the market.

In my view, this is good news, and potentially wildly bullish for crypto assets in the long term. It’s true that, in the short term, sentiment could take a hit until the probe is finished. It could push back new money entering the market, at least from the U.S. But the longer-term agenda of regulators is to “clean up” these markets, potentially making them safe enough for institutional participation—a critical development in terms of market growth.

The correct frame for understanding this news, in my view, is that crypto-blockchain is an emerging asset class. Eventually, institutions will be hard-pressed to stay on the sidelines. But they cannot enter the market until there is a viable spot3 market, as free as possible from manipulation—a market safe enough to receive the blessing of regulators in terms of approving ETFs, mutual funds, and other regulated investment vehicles.

That’s why this investigation is good news. It’s a prelude to a more transparent market, accessible through regulated vehicles, and safe enough for institutional assets—which, by the way, total anywhere from $100T to $300T globally.

WHAT DOES MY 2CENTS ADD UP TO?

What we’re seeing here—in the rapid adoption across Asia, and the cleanup of markets in the U.S.—is a maturation of an emerging asset class. I have no doubt that there will be bumps. This process is very unlikely to proceed in a straight line. But the asset class is moving, in fits and starts, toward maturity.

In the end, what could that look like? For starters, take cryptocurrencies as an investible asset class, compared to the size of the world’s institutional asset pool. At the low end, we’re talking about perhaps $100 trillion in institutional assets. By contrast, the current market cap of all crypto assets is about $400 billion globally.

Taking just the lowest estimate of global institutional assets: if half a percent were allocated to cryptocurrencies, that would double crypto’s global market cap, independent of any market-related gains or losses; a one percent allocation could triple crypto’s global market cap.4 That’s without taking into account any multiplier effect.

It’s tough to find any asset class with a potential upside of this magnitude—and that’s purely on the cryptocurrency side. It does not include blockchain opportunities for hardware makers, software/app designers, and legacy businesses with flare for innovation.

I believe that understanding the secular opportunity in crypto-blockchain requires keeping an eye on broad themes—like adoption across Asia and potential institutional entry in the U.S. It’s early in the maturation process for this emerging asset class, but supportive developments like these may indicate possible tectonic shifts in value and opportunity.

This blog is intended for information purposes only and does not constitute investment advice. The blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. Investing involves risk, please see important risk disclosures at the bottom of the page.

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 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.

3 Spot market means the current price of an asset or index.

4 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.

Sources that inspired this entry:

https://www.forbes.com/sites/chynes/2018/05/25/how-singapores-academics-are-helping-it-win-the-blockchain-race/#5e2515b92c89

https://www.coindesk.com/us-department-of-justice-cftc-probe-crypto-market-manipulation-report/?utm_content=buffere74dd&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

https://www.fundstrat.com/

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Blockchain Adoption Ramping Up in Asia

Brian Kelly, Portfolio Manager

U.S. Works on Blockchain Development, While Others Prioritize Adoption

The week of May 14, 2018 was blockchain1 week in NYC and if you haven’t been paying attention, you could no longer ignore this potentially revolutionary technology. More than 8,500 people attended the Consensus Conference up from 700 just a few years ago. Beyond the juicy headlines – things like Snoop Dogg playing a private concert for Ripple2 supporters – there is a trend taking shape, which many U.S.-based investors may not have seen.

My biggest takeaway from Blockchain Week is that massive amounts of cryptocurrency3 and blockchain adoption are happening in Asia. I noticed this trend when I travelled to Hong Kong in March. While the U.S. was fretting over regulatory clarity, Asia had taken the crypto-ball and run with it. The side conversations I had during Blockchain Week confirmed my observation from earlier this year. Asia is the leading market for cryptocurrency use and adoption.

Did you know that China has quietly taken first place in blockchain and cryptocurrency patents? That’s right, China, the country that has banned cryptocurrencies too many times to count. China holds three times as many applications as the second-place U.S., according to Forbes. The number of Chinese blockchain and crypto patent applications has nearly quintupled since 2016.

In India, conglomerate Infosys is launching a blockchain-based trade network called India Trade Connect. Infosys is partnering with seven Indian banks to help “digitize trade finance business processes, including validation of ownership, document certification and payments,” according to a company press release.

On May 14, HSBC announced first-ever trade finance transaction using blockchain platform: a letter of credit issued to U.S. agriculture giant, Cargill. And there was a smattering of blockchain adoption announced in Israel (blockchain-based securities lending), Russia (a blockchain-based bond purchase), Spain (blockchain-based proxy voting). Even JPMorgan recently appointed a head of crypto development—based in the UK, rather than at headquarters in New York.

The bottom line: don’t judge blockchain momentum (and by extension crypto) by what’s happening in the U.S.

China Launches New Crypto Index – Ranks Ethereum4 #1

China, which has proven to be a wet blanket on cryptocurrencies so far, recently launched a new crypto index. The ostensible reason is a “lack of objective analysis” in the crypto space, according to the government agency managing the index. Color this weathered investor skeptical of their rationale.

Ask yourself why would a country that bans crypto trading launch a government-sponsored crypto index—and one that explicitly ranks the usefulness of crypto currencies? If cryptocurrencies are truly to remain banned in China, there would be no need for this index.

Not only is the initiative is surprising, but so are its results: ranking Ethereum number one and Bitcoin number 13. (More on that in a future post.)

My view is that China realizes the immutable audit trail of crypto could be helpful to the government. As discussed last week, I don’t believe China will cede the crypto space to regional leaders Japan and South Korea. And China’s recent moves don’t look like the actions of a country bent on shutting down cryptocurrencies forever. They look like delaying tactics. I believe China is likely to "un-ban" crypto, with the blessing of the central bank, once they have figured out how to craft a system of state control.

Bottom Line: pay attention to what the big players are doing, not what they are saying. As the saying goes, paying attention is the cheapest thing you can do.

WHAT DOES MY 2CENTS ADD UP TO?

If one steps back to look at what the biggest players in the crypto-blockchain space are doing, what you see is accelerating adoption outside the U.S., particularly in Asia.

Crypto is thriving in China, even as the government works out its regulatory scheme. Japan now recognizes cryptocurrencies as valid means of payment (as long as they are registered with the government). Blockchain is finding new applications in financial markets in Japan and India. South Korea has done a u-turn and is trying to figure out how to regulate and tax its booming crypto markets.

I cut my teeth as a trader during the telecom and Internet boom of the 1990’s and the spirit of adoption across the Pacific reminds me of what I heard from telecom analyst in the 1990s about Latin America. While analysts were busy assessing the potential expansion of landline systems by traditional telcos, Latin American consumers were busy leapfrogging legacy technologies in favor of mobile phones.

The U.S. has a highly efficient legacy banking and payments system. So I don’t see it as a mystery why crypto-blockchain adoption has been slower here. At the same time, it also should not be surprising that savvy Asian consumers are ahead of the curve on adoption, particularly in areas where it enables them to leapfrog outmoded legacy systems.

The key message here: global adoption is accelerating, but if you’re only looking at the U.S., you’re going to miss that story.

Looking at the entire global picture, the story is one of growth—in the overall ecosystem, the diversity of applications that reside there, and the value they may create for consumers, businesses and investors.

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

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.

3 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.

2,4 Ripple and Ethereum are two individual cryptocurrency networks.

Ripple.com: Ripple provides one frictionless experience to send money globally using the power of blockchain. By joining Ripple’s growing, global network, financial institutions can process their customers’ payments anywhere in the world instantly, reliably and cost-effectively. Banks and payment providers can use the digital asset XRP to further reduce their costs and access new markets.

Ethereum.org: Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without likely downtime, censorship, fraud, or third-party interference. These apps run on a custom built blockchain, a shared global infrastructure that can move value around and represent the ownership of property.

Sources that inspired this entry:

https://www.forbes.com/sites/ralphjennings/2018/05/17/how-china-pulled-ahead-of-the-u-s-in-patent-applications-for-new-technology/#55d070c26048

https://www.infosys.com/newsroom/press-releases/Pages/pioneers-blockchain-based-trade-network.aspx

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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.

WHAT DOES MY 2 CENTS ADD UP TO?

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:

https://qz.com/1166103/a-third-of-south-korean-workers-have-invested-in-cryptocurrencies-like-bitcoin/

https://www.forbes.com/sites/elaineramirez/2018/02/28/facts-and-myths-surrounding-crypto-in-south-korea-death-taxes-and-bans/#10e9f6ec57e4

https://cointelegraph.com/explained/south-korea-and-crypto-regulations-explained

https://www.csmonitor.com/Business/2013/0830/Warren-Buffett-10-pieces-of-investment-advice-from-America-s-greatest-investor/It-s-far-better-to-buy-a-wonderful-company-at-a-fair-price-than-a-fair-company-at-a-wonderful-price

https://www.goodreads.com/quotes/1140603-games-are-won-by-players-who-focus-on-the-playing

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.

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BIG AUTO THROWS DOWN THE GAUNTLET

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.

WHAT DOES MY 2 CENTS ADD UP TO?

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.

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BLOCKCHAIN COMES TO BENTONVILLE

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.

EARLY INNINGS IN THE LIFE OF BITCOIN

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.

WHAT DOES MY 2 CENTS ADD UP TO?

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  

The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund.​

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.

There is little regulation of cryptocurrency and blockchain technology other than the intrinsic public nature of the blockchain system. Any future regulatory developments could affect the viability and expansion of the use of cryptocurrency and blockchain technology. Cryptocurrency and blockchain technology systems may operate across many national boundaries and regulatory jurisdictions; therefore, cryptocurrency and blockchain technology may be subject to widespread and inconsistent regulation.

Currently, there are few public companies where blockchain technology represents an attributable and significant revenue stream. Blockchain technology may never develop optimized transactional processes that lead to increased realized economic returns to any company in which the fund invests.

Generally, cryptocurrency and blockchain technology is not a product or service that provides identifiable revenue for companies that implement or otherwise use it. Therefore, the values of the stocks in which the fund will invest may not be a reflection of their connection to cryptocurrency and blockchain technology, but may be based on other business operations.

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.