DeMarche Putting Research To Work Page 1

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1 DeMarche Putting Research To Work Page 1 (913)

2 Cryptocurrency and the Institutional Investor DeMarche Putting Research To Work Page 2

3 Mark Andes Consultant & Manager of Alternatives Research DeMarche Putting Research To Work Page 3

4 What is a cryptocurrency? Definition: Any form of currency that only exists digitally, that usually has no central issuing or regulating authority, but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions (Merriam-Webster) Term first used in 1990 In 2008, major concepts of implementing a cryptocurrency were presented in a white paper by Satoshi Nakamoto The whitepaper led to the creation of Bitcoin DeMarche Putting Research To Work Page 4

5 What is a cryptocurrency? Nice definition what does it mean? No physically tangible coin or paper associated with the currency Typically, no physical underlying asset backing the currency Typically not issued by banks or governments However, many central banks are investigating their use within a central banking framework Transactions and new coin issuance are tracked using blockchain technology DeMarche Putting Research To Work Page 5

6 What is a blockchain? Blockchain is a distributed ledger system that is linked and secured using cryptography Blocks of information detailing transactions are cryptographically chained to all prior blocks Blocks are distributed throughout the network at preset intervals Every computer (node) on the network validates the new blocks Updated blockchain is affirmed vs. the entire chain of prior blocks All nodes validate their copy of the updated blockchain with other nodes on the network for peer-level validation Blockchain is a form of distributed ledger technology DeMarche Putting Research To Work Page 6

7 Business applications for cryptocurrency Traditional Applications Method of payment Thousands of retailers accept cryptocurrency Microsoft, Expedia and Overstock, among others Highly volatile relative to traditional currencies Transactions costs can be a drag to execution Bitcoin (and its forks ) and Litecoin are leaders in this application Speculation The rapid rise of Bitcoin and Ethereum, among others, has created thousands of crypto-millionaires and at least two billionaires in USD terms DeMarche Putting Research To Work Page 7

8 Business applications for cryptocurrency Advanced applications Smart contracts Certain cryptocurrencies can administer self-executing contracts Ethereum was specifically designed to provide this application and is the dominant player in the space Settlement networks Cryptocurrencies with specialized blockchains can be used to quickly settle transactions globally Ripple and Tether are leaders in this application Raising Capital Initial Coin Offerings are competing with investment banks and venture capital Approximately $8.8 billion has been raised by ICOs through February 2018 (source: CoinDesk) DeMarche Putting Research To Work Page 8

9 The Rise of Bitcoin DeMarche Putting Research To Work Page 9

10 Breadth of the cryptocurrency universe Data as of March 5, 2018 DeMarche Putting Research To Work Page 10

11 Cryptocurrency headwinds Lack of Regulatory Oversight Legality of ICOs Registration with financial regulators Tax considerations Government intervention (China) Privacy and security limitations Scams (ICO pump a dump schemes) High volatility and potential for price manipulation Transaction delays DeMarche Putting Research To Work Page 11

12 Cryptocurrency as an investment? No not for most institutional portfolios DeMarche does not view cryptocurrency to be an institutional quality investment High volatility Limited regulatory oversight and difficult formative years ahead Subject to cyber-theft with limited (no) ability to recover the investment Inadequate number market cycles have been completed to establish clear risk and return expectations (ranges) But. DeMarche Putting Research To Work Page 12

13 Blockchain is an institutional investment Blockchain is already part of institutional investment portfolios Public companies are investing in blockchain IBM, Microsoft and Accenture combined account for 2/3 of blockchain technology sales globally Eastman Kodak recently launched blockchain-based photo storage system MasterCard is investing heavily in blockchain and has begun processing blockchain-based payments Hundreds of other public companies are already investing and seeking ways to deploy blockchain technology DeMarche Putting Research To Work Page 13

14 Blockchain in venture capital portfolios Venture firms have been active in blockchain for years DeMarche Putting Research To Work Page 14

15 Blockchain applications beyond cryptocurrency Banking New streamlined payment processing structures Voting Voter authentication applications combined with real-time results Critical Infrastructure security Tamperproof ledgers and cryptographic transmission of data to monitor and maintain key infrastructure UK uses blockchain to help administer nuclear power plants and their electrical grid Cloud storage More efficient and secure cloud storage systems Trading Clearing trades and payments quickly through blockchain networks First blockchain trade completed on an oil cargo transaction in February 2017 Logistics DeMarche Putting Research To Work Page 15

16 Disruption? Limited near-term potential for significant disruption Lots of headlines limited impact on daily lives or bottom-lines of most company balance sheets Some company specific exceptions- IBM, Microsoft, Accenture Public equity analysts are not citing blockchain or cryptocurrency in investment theses Cryptocurrency payments are largely impractical for nominal transactions Blockchain is a transformational technology More like the development of the internet than the arrival of Uber Over the next 5-10 years it will likely permeate all industries and have a discernible impact on society Still in the early stages of development and deployment DeMarche Putting Research To Work Page 16

17 Questions? DeMarche Putting Research To Work Page 17