Investment Alternatives To Deploy Your Cryptocurrency Needed, Says Algo 'Crypto-Asset' Manager

As the "Big Daddy" and largest crypto currency by market cap, Bitcoin represents around 45% of the entire crypto currency universe. It has all the characteristics of a currency and aspects of being a commodity and a technology. It has limited supply, with less than 21 million Bitcoin ever being issued, can be used as a means of payment and a store of value.

But what is striking is the lack of investment vehicles available to crypto currency holders. Currently, they have the choice between holding crypto currencies and jumping from one to another - directly or through some dedicated funds - or invest in private equity/crowdfunding through Initial Coin Offerings (ICOs).

The first option, however, does not allow for significantly large volumes to be traded as the cryptocurrency market is still very fragmented. According to Stéphane Ifrah, CEO of French-based NaPoleonX, dubbed the first algorithmic crypto-asset manager, the second option is quite risky and “a large number of ICOs should fail - if we take the internet revolution as a benchmark in 2000’s.” 

In the asset management industry there have recently been quite a number of ICOs, some of which have proved very successful. These include Blackmoon, Cindicator, DIGIX, Enigma, ICONOMI and Melonport to name a few.

A first category are those that are providing the infrastructure to launch crypto funds, while a second group are offering services to asset managers such as providing financial data. And, a third category in the shape of hedge funds, which have specialized in crypto currency trading. However, none of these ICOs allow for the possibility to bridge the gap with the real world. 

“We believe that in order to continue to attract new investors from the fiat world, more conventional investment vehicles will be required. They will need to handle large amounts of investment and bear a more reasonable risk level,” asserted NaPoleonX’s Ifrah, who started developing algo strategies over 10 years ago at BNP Paribas and headed an investment team until 2013 managing c.€4 billion (c.$4.7 billion today).

A graduate from the École Polytechnique (EP) in Paris, one of France’s most prestigious grandes écoles, and who holds a Data Science certification from EP, Ifrah subsequently participated in the launch of a hedge fund before becoming involved with the crypto currency world. He is joined in NaPoleonX’s project by co-founders, Jean-Charles Dudek and Arnaud Dartois, who have each more than 15 years of finance sector experience.

Tokenization Of Real Assets

What has been observed of late is the tokenization of real assets. This is a clever way to reduce liquidity concern and alleviate risk considerations. Gold and now real estate have been the first real assets to be tokenized.

However, Ifrah, who spoke yesterday at the BECON (Blockchain Ecosystem Network) conference in Barcelona that runs from October 3 to 5, pointed out that there is “one drawback” in that funds tokenizing real assets have had to sell their crypto currency and buy those real assets. Given the exponential run of the crypto currencies over 2017, these tokens have also performed badly on a relative basis.

Take the price in Bitcoin (BTC) and US dollars for the tokenization of Gold by DigixDAO (DGD), which ranked the 45th highest cryptocurrency by market capitalization as October 3 2017 and reached a year high of $103.53 on June 12 (equivalent at the time to 0.034754 BTC).

This was before it declined to $47.50 (0.023969BTC) a month later on July 17 and thereafter rebounding to $99.20 (0.021456 BTC) by the end of August. Today (12.34 UTC) it was trading at $72.60 or the equivalent of 0.016948 BTC. So, while the price of DGD in US dollars between June 12 and has seen a decline of almost 30%, its value in BTC terms has halved.

Many ventures in the blockchain and crypto space also claim they have some special kind of mousetrap and they are the first to initiate X or Y. But can one believe all the bluster and hype?

Well, in this environment there is perhaps one project, NaPoleonX, which could potentially offer an interesting solution that is claimed “ticks all boxes” according to the protagonists behind it.

The Paris-based firm has specialized in low frequency quantitative trading on liquid assets through futures only. This allows it to handle very large amounts and provide regular returns. For example, at the market close it is possible to trade $300m plus fairly easily in just one click on the futures markets according to the firm.

The concept behind the NaPoleonX project is explained as: “An investment solution dedicated to cryptocurrency holders, through the creation of an open online computer driven asset management platform selecting quantitative strategies (trading bots) from world class traders. [This is] where each crypto-fund dedicated to a specific asset class shall enhance the traditional model by improving its governance through smart contracts’ implementation.”

Now because NaPoleonX is also able to use derivatives to hedge crypto currency fluctuations, they claim that they will be able to “transpose” the strategies’ performance into crypto currencies directly.

This, it is asserted “will give birth” to the first crypto currency plus funds that can handle large amounts - in the region of $200m or more according to Ifrah.

And, given that quantitative strategies have started to expand exponentially over the last ten years in the traditional asset management universe, this is a proposition that should “please traditional investors” the firm posited.

But while these investors may be tempted to invest some of their assets in the crypto universe, they would need reassurance that it is undertaken by following well-known investment techniques and for sizeable amounts.

Traditional Asset Management Industry

NapoleonX’s whitepaper makes reference to the asset management industry having been dominated in an “oligopolistic manner” by large banks or financial institutions for ages and that they want to “bypass” the traditional asset management system.

Between them such institutions have accumulated huge amounts of fees while delivering poor performance - and on the back of investors – “who are the real risk takers” it was noted by the French firm.

Trading bots, which are very cost effective today, have started challenge the aforementioned institutions. The NapoleonX whitepaper stated that over time: “Algorithms will become smarter and more efficient. They will reduce all these undue expensive management fees down to more acceptable levels.”

Highlighting the exponential interest in quantitative strategies in recent years, the graph below depicts the growth in assets under management for systematic strategies called Smart Beta (see the plain black line).

NaPoleonX

Graph showing growth in assets under management for systematic strategies called Smart Beta .

Source: Morningstar, Wells Fargo Investment Institute Global Manager Research, May 2017.

Decentralized Autonomous Funds (DAFs)

Behind NaPoleon’s project is the concept of Decentralized Autonomous Funds - or DAFs for short. Conceived as smart contracts that are able to invest in financial markets through trading bots, DAFs were first introduced by the firm last December in its 20-page paper.

Essentially a trading bot is an algorithm that buys or sells a given underlying asset class (e.g. Bitcoin (BTC), Ethereum (ETH), S&P 500, etc.), in order to generate absolute performance.

A DAF will empower its owners to choose:

(1) Those trading bot(s) to utilize among a select list provided by Napoleon Crypto; and,

(2) The appropriate leverage level. It is understood that this initial “bot allocation” will be reviewed by its owners in the course of a regular voting process. (Note: Napoleon Crypto has developed a range of performing trading bots and will offer them for the first DAFs to be created).

The interesting point about quantitative strategies is that they are highly compatible with smart contracts since everything can be completely automated. And, given that everything is stored on the Blockchain, proof of performance will also be easy to achieve. Madoff-style or Ponzi-scheme funds should “not be possible to exist in this universe”, Ifrah contended.

Over the long term, investors in the fiat world and in the crypto currency universe will be the same.

“We believe that as Blockchain technology will become mainstream in the future…the associated crypto currencies will too in order to operate them. This is just the start of this revolution,” he said.

So, the sooner the “gap is reduced” between the two universes as he ventured, the quicker the emergence of the crypto currencies. Bitcoin or Ethereum should become just as widely used as other currencies - and not exotic products that few of us barely understand. “A revolution has started, and we should all embrace it,” argued Ifrah.

NaPoleonX’s Initial Coin Offering

NaPoleonX will launch its ICO by issuing NPX tokens, with the goal of raising 40,000 Ethereum (ETH) that will be donated to Napoleon Crypto. The ICO will be declared successful provided a minimum amount of 25,000 ETH is raised. (One hundred Napoleon Coin (NPX) token will be issued for 1 ETH: 100 NPX = 1 ETH).

Should the minimum amount of 25,000 ETH not be achieved at the end of the ICO period, any subscriber may order the redemption of the smart contract and every subscriber will receive back their contribution (excluding gas spent for subscription and reimbursement).

Proceeds raised will be used amongst other things acquire or rent the required licenses to launch DAFs, to develop a platform to publish indices based on proposed strategies for performance monitoring, promote the NPX tokens and the DAFs’ creation and performances, and finance  research and development to create new performing trading bots.

NaPoleonX’s crowdsale will commence in mid-November 2017 and last for one month, with a pre-sale starting early next month. For details on their roadmap see this link.

Follow Roger, who has penned various investment stories over the years, on Twitter @AitkenRL, LinkedIn, Forbes, Google+. He is involved with the Campaign For Fair Finance in the UK.

Bron: Forbes