April 13, 2022

Unpacking Digital Assets and Why The Time to Invest is Now

By
Flowtrack Team
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First Market Commentary

Q1 2022

In the first issue of Flowtrack’s quarterly commentary, we will discuss:

  • What are digital assets: Evolution of the internet, and why this is important for investors
  • Flowtrack’s digital asset market review
  • How Flowtrack intends to address this space
  • Protocol spotlight: ATOM

What are Digital Assets?

Digital assets are a result of one of the tech industry’s newest and most exciting innovations, blockchain technology. Flowtrack is investing in the ‘shares’, more accurately known as the coins or tokens, of these new digital businesses.New technology often leads to more efficient business models, and blockchain technology is no exception. Specifically, blockchain technology has unleashed a suite of tools for developers, creators, investors, and operators to build the next transformative business of our future.Examples of new concepts derived from digital assets:

  • Store of value in a digital form - Think gold, which has been a reliable way to store wealth for centuries; bitcoin (BTC) can be thought of as its digital version. And to ensure digital currency is not easily duplicated, the blockchain timestamps groups of transactions that are mathematically related to previous transactions, then broadcasts them to all nodes in the bitcoin network. Store of value provides an efficient way of transmitting value online, allowing for new forms of currency to be borderless, transparent, and secure. This unlocks tremendous commercial potential
  • Smart contracts - In the simplest terms, smart contracts give instructions to perform some sort of action. Whether that be as simple as transferring assets from a wallet to a vault to be lent out, or as complex as intricate derivatives contracts to hedge a portfolio. Smart contracts are the lifeblood of the digital asset economy. With smart contracts, you can also perform tasks that previously required hiring a team of people, investing in required infrastructure, or depending on third party systems with high costs embedded in their pricing. Smart contracts can significantly reduce your cost structure
  • Decentralization- The control and decision-making of digital assets are not governed by a centralized entity, but a distributed network. Below are some main benefits:
  • Decentralization allows for money to be “censorship resistant”, generally meaning no centralized governing body can confiscate or control any entity’s money - individuals living in authoritarian regimes where the currency is unreliable and not a great store of value can benefit from crypto
  • Artists and other creators may bypass gatekeepers such as Youtube or Spotify, deciding what information and which users are allowed on their platforms, and directly interact with fans on their unique digital works
  • Decentralization enables a larger total addressable market. It creates a global market where new customers can access applications and financial primitives that were previously unavailable to them

EVOLUTION OF THE INTERNET

When thinking about technologies that have led to more efficient business models, you have to think of the internet. The internet has been one of the most revolutionary technologies of our time, and will most likely be viewed as one of the most influential inventions in human history. The original version of the internet, the “World Wide Web” (or what we now call Web1.0), was a much simpler version than today’s, it mostly allowed for storage and access of information. Think of online libraries or encyclopedias that anyone in the world could access with an internet connection.

Then the onset of high-speed internet and innovations in technology, such as personal computers and smartphones, fostered the growth of Web2.0. This iteration of the internet is best known for its social connectivity and interactivity. Think Facebook, Twitter, Uber, Zoom, and Airbnb. All of these applications are possible because of the evolution of the internet and the connectivity it facilitates.Some of the technologies highlighted in Web2.0 such as Uber and Airbnb have characteristics of decentralization. At the moment, Airbnb does not own any of its listed properties and Uber does not own any of its rideshare vehicles. These companies supply the infrastructure for individuals to provide themselves an income source or some form of convenience.

Decentralization is a core concept of Web3.0, allowing individuals to freely connectto applications and use any service of their choosing, without fear of censorship from an individual, organization, or group thereof. While in Web2.0 some companies profit from a user’s data, Web3.0 aims to prevent the misuse of user data and create better alignment with who benefits from the sharing of information. Another goal of Web3.0 is to give equal access to investment – since these applications are permissionless.

WHY IS THIS IMPORTANT FOR INVESTORS?

Blockchain technology (and the digital assets which are associated with them) is here to stay and already improves our everyday lives

  • Healthcare and Pharmaceutical industries are using blockchain and smart contract technology to track prescriptions from the manufacturer to the patient’s doorstep
  • Walmart partnering with IBM to develop a food safety blockchain solution, requiring food suppliers to upload certain data to the blockchain to ensure quality

The returns of digital assets will be positive

  • The relative market value of digital assets compared to other major asset classes, such as global equities or debt markets, is, let’s say, at the beginning of its cycle. Coupled with its innovation and network effects, we believe the digital asset class will grow to many multiples of its current size. For example, digital assets have more technically advanced tooling and earlier access to investment than many other asset classes, making it very efficient from a business and investment perspective. Finally, certain digital assets are hybrid in nature, as they also have both fixed and equity income properties.

Digital asset tokens give investors the ability to invest early in the space

  • Digital assets are reducing friction and allowing permissionless access to countless applications - more investors now have the opportunity to buy interests in these new businesses at an earlier stage than they would have been able to in the past. This gives more individuals the opportunity to participate early in high potential companies, which have generally been reserved for the venture capital community.

With the penetration rate for crypto at around 1%, we are still very early. We believe this presents an incredible opportunity for investors, as much of the growth in this asset class is yet to be seen.

Flowtrack’s digital asset market review

2022 has been off to a tumultuous start, with inflation increasing across a number of markets and geopolitical tensions rising due to the Russia-Ukraine conflict. Crypto markets declined between 7%-30% among the majors and 20-50%+ for many emerging protocols during Q1. Here, we define majors as the protocols that are in the top ten in size according to market cap, and emerging protocols are the promising protocols smaller in market cap. In the last two weeks of the quarter, both the majors and the emerging protocols staged impressive comebacks. Bitcoin had a strong rebound and ended down only 7% for the quarter. Ether (ETH) and the Nasdaq 100 were down about 14% and 10% respectively from the beginning of the year through March 31st. And Gold has outperformed all, including BTC.

BTC has outperformed ETH, other majors, and emerging protocols so far in 2022; the one exception being LUNA. BTC tends to behave as a “safe haven” in the crypto market during times of bearish price action and uncertainty.On March 16th, 2022, the Federal Open Market Committee raised the Federal Funds Rate by 0.25% in what could be the first in a series of rate increases aimed at combating rising inflation. It remains to be seen whether these rate hikes are priced in and how they will affect the crypto markets, and more broadly, risk markets in the future. The Fed policy direction combined with rising geopolitical tensions, has caused markets to go risk-off, and more volatility can be expected in the near future until some of these issues are resolved.

How Flowtrack will Address this Space

While volatility in crypto may seem daunting, many of the most successful and largest companies in the world experienced extreme volatility at some point in their history.Technology adoption cycles are shortening over time and we would expect cycles to shorten even further, as the internet and mobile technology make the spread of information viral and efficient. Flowtrack is attempting to take advantage of these steepening adoption curves, by investing early in the emerging protocol space, as we expect digital assets to continue following this trajectory. With the constant iteration of the internet and new tools developed for Web3.0, we expect there will continue to be inspiring innovation and exciting investment opportunities for years to come.

1 Facebook, Apple, Amazon, Netflix and Google.

While volatility in crypto may seem daunting, many of the most successful and largest companies in the world experienced extreme volatility at some point in their history.Technology adoption cycles are shortening over time and we would expect cycles to shorten even further,as the internet and mobile technology make the spread of information viral and efficient. Flowtrack is attempting to take advantage of these steepening adoption curves, by investing early in the emerging protocol space, as we expect digital assets to continue following this trajectory. With the constant iteration of the internet and new tools developed for Web3.0, we expect there will continue to be inspiring innovation and exciting investment opportunities for years to come.

Technology adoption over the years

Technology adoption is taking place at a faster rate with each new innovation. Blockchain technology adoption will take place at a faster rate than the market appreciates.

Protocol Spotlight: ATOM (Cosmos)

Every quarter, we will highlight a protocol in order to provide an inside peek into some of the transformative technologies of this space.Cosmos protocol has been an important part of the crypto ecosystem since 2016 when it was introduced. It is an internet of blockchains, an ecosystem that allows for the exchange of digital assets and data using Inter- Blockchain Communication (IBC). At the core of this network of blockchains sits the Cosmos Hub, the economic center of Cosmos that is secured by its native token, ATOM. Cosmos’s vision is a decentralized network of independent and interoperable Proof-of-stake blockchains. Ideally, this ecosystem will facilitate the interaction of multiple blockchains such that the unique characteristics and value of each individual chain may be easily expanded to other chains.

While competition is healthy, and there is a lot of competition in the crypto ecosystem, Cosmos’s focus is on adding value through customization and interoperability, rather than attempting to take market share and users from other chains. The idea behind Cosmos and inter-blockchain communication is to facilitate a more seamless and enabling user experience.