Insider View – With Eric Ervin, CEO Reality Shares
We look at the key points from an exclusive Bitrazzi interview of Eric Ervin, the founder and CEO of Reality Shares, Inc. His firm is one of the first to launch an index (Reality Shares Nasdaq Blockchain Economy Index) and ETF (Reality Shares Nasdaq Nexgen Economy ETF (BLCN)) that extensively tracks companies actively engaged with blockchain technology. The write-up here summarizes Ervin’s views on:
- the blockchain bubble,
- the SEC’s reluctance to accept cryptocurrencies,
- the future of bitcoin futures, and
- why Kodak And XNET could not make it into his blockchain index and ETF?
1. Bubble Talk With Reality Shares’ CEO: “Blockchain Is a Technology and it’s not Going Away.”
~Here’s what Eric Ervin has to say about the blockchain bubble
Blockchain and cryptocurrency: bubble or not?
Ervin holds a very optimistic and pragmatic view of the blockchain industry. “I do see it as a little bubble-ish and frothy. But it’s too early to tell that this is the top. It may be just a tenth of where we would go [with the blockchain & cryptocurrency market] before there’s a big correction,” Ervin told Bitrazzi. And, Ervin also sees the possibility of moving higher and higher from there. So, he certainly doesn’t see the cryptocurrency business going away. “It’s not like any other bubble. It is a technology, and has its own interconnectivity!”
Bears similarity to the Internet bubble
He cites the example of the Internet bubble (1995-2001) that was quite hyped up too! There were companies that were overpriced or inefficient during that phase too, and these were the ones that didn’t work out. But despite all that, the Internet still remains. “The Internet itself, it touches everyone now!” said the Reality Shares CEO, “I don’t think blockchain is going to be any different in that regard.”
Overvalued or not?
“I don’t think it’s overvalued. It almost got ahead of itself because the technology couldn’t scale fast enough. So, prices went up in so many cryptocurrencies on account of pure speculation, but some of these cryptocurrencies are actually very useful in the blockchain. But with solutions such as the Lightning Network and other solutions coming up, the technology will catch up to these levels,” Ervin told Bitrazzi. Ervin sees it as a self-fulfilling cycle. As the value of the market goes up with more and more people getting onboard, the scalability issues come up, which leads the need for a collaborative solution, and once they find one, the value will continue to go up and up. So, smaller blockchains may face an issue with scaling up to their notional values, but for the longer and better-established blockchains, the self-fulfilling cycle should help in justifying values.
2. The Simplest Explanation To The SEC’s Hesitance Towards The Cryptocurrency Market
In my recent experience, I have come across a lot of explanations for the U.S. Securities & Exchange Commission’s (SEC) hesitance towards the cryptocurrency market and why it’s taking time for the SEC to get involved into something that’s got a myriad of market participants so enthusiastic. Most of these have been rephrased versions of the SEC releases or quoted opinions of US Federal Reserve bankers. While all very valid and deep in their place, I would personally vouch for this one short and simple explanation to the SEC’s hesitance towards the cryptocurrency market, shared by none other than the founder and CEO of Reality Shares, Eric Ervin.
We were talking about the recent SEC staff letter, entitled Engaging on Fund Innovation and Cryptocurrency-related Holdings where the SEC acknowledged that the cryptocurrency markets are developing swiftly and invited interested sponsors to engage in a dialogue on an identified number of questions. “In my view, it is the SEC’s way of saying that we don’t want to stifle innovation, we just don’t want to be rash. We want the markets’ help on this. The SEC wants to understand how it would impact a publicly traded security where thousands and millions of investors would be able to invest”.
During the interview, Ervin laid out a very easy way to understand the SEC’s hesitance towards giving the green light to people who are inclined to issue regulated publicly traded securities that invest in cryptocurrencies. “So, the markets are already talking about a cryptocurrency bubble and there’s this ocean of dollars waiting to get in there, but currently isn’t due to the barriers to entry that are there in place. Once, the SEC opens the gates, and all with that money rushing into this tiny market (relative to the global capital base), one can only imagine how fast that balloon is going to grow.” It could have the capability to disrupt prices, transaction time, and security. So, the SEC needs to make sure whether the (required) infrastructure is there yet.
The biggest question that remains in front of the SEC is: Is the infrastructure ready yet?
3. The Future of Bitcoin Futures Could Be Very Similar to the VIX
Ervin also told us that he found the Bitcoin futures very similar to the VIX (volatility index). “And mainly because it’s really hard to hedge,” he said. “You can’t hedge it directly as there’s no spot market for VIX. And there has to be someone that’s willing to take the other side of the transaction, every time.”
He took us back to the time when the VIX was launched; there wasn’t a lot of demand as it was difficult to hedge. But, as more and more people thought of ways to do it, they finally launched some ETFs (exchange-traded products) on it. And that money that came into the market actually developed the futures market for VIX and vice versa. “It’s like, the more products you can issue that give access to something, the better off that market is because it has a two-way flow,” said Ervin. Gradually, we saw the futures market becoming more robust and more liquid.
“With the cryptocurrency market, what we’re seeing right now is like there’s just one-way order flow it seems because there’s just a lot of enthusiasts that are bulls.” So, once the market opens up to more tools that allow shorting, the market should develop further. The carry cost of shorting Bitcoin directly is a little over 20% currently, which is what is keeping the bears at bay.
4. Why Kodak And XNET Do not Qualify for the Reality Shares NASDAQ Blockchain Economy Index Right Now
Blockchain’s “massive innovation wave across all sectors of the economy” is what led Ervin to pioneer the development of an advisory board, an index and an exchange-traded fund for enabling better and greater investor access to the blockchain community.
- The Reality Shares Blockchain Advisory board consists of blockchain industry experts including:
- Erik Voorhees, founder CEO ShapeShift AG (digital assets exchange)
- Jeff Garzik, one of the core developers on the Bitcoin protocol, also on board the Latex foundation, CEO of Bloq (which helps enterprises link to public blockchains)
- Garrick Hileman, Economist & PhD Professor at the University of Cambridge
- The Reality Shares NASDAQ Blockchain Economy Index uses a rules-based Blockchain Score methodology to evaluate companies across the globe and industry sectors based on their potential. Factors taken into account while evaluating companies during this quantitative process include the company’s role in the blockchain technology ecosystem and its participation in industry groups, the degree to which the company’s blockchain technology is developed, innovative, economically impactful and publicly referenced, and the company’s general research and development expenditures.
- The Reality Shares NASDAQ NexGen Economy ETF (BLCN) tracks the above index.
While interviewing Ervin, we came across two company names that do not currently qualify the parameters set out in the index and the ETF. These are Kodak (KODK) and Xunlei (XNET). “For Kodak, right now, there’s no evidence that they actually have the actual source code to implement their concept,” Also, “China-based XNET is currently under investigation for a securities offering for going around with the regulation for their token sale,” Ervin told Bitrazzi.
Ervin did not, however, sideline the possibility of these companies making into the index later sometime, when they do qualify based on the strict Blockchain Score methodology. The index rebalances every 6 months.
Amplify ETFs’ Amplify Transformational Data Sharing ETF (BLOK); however, does have exposure to both these stocks.
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