Why is your company going to succeed?
Demand for Decentralized Cryptocurrency Hedge Funds
One of Betoken's competitors, ICONOMI, has seen rapid growth in user count and book value. Quoting ICONOMI's Q4 2017 Financial Report:
Our user base increased more than 50% in the last quarter, and in January we added more than 10,000 new users. Our book value increased to $327 million USD, which is 173% more than in Q3. But even more important than book value is the revenue the platform is generating. DAAs have generated over $200,000 in revenue in one quarter, an increase of more than four times over Q3.
From this evidence, it is clear that the demand for decentralized cryptocurrency hedge funds is real and fast growing.
If we look at cryptocurrency hedge funds in general, the numbers are even more promising: according to Morgan Stanley, investors have put over $2 billion USD into hedge funds specialized in cryptocurrency investments in 2017, and 2018 will likely be bigger.
The latest estimate of the number of crypto funds is 226 at the beginning of 2018, with $3.5 - 5 billion in assets under management. 2018 could be on the same order of magnitude as 2017. And according to the Eurekahedge Crypto-Currency Hedge Fund Index, we’ve witnessed a 1,708.49% return for the 9 best crypto funds in 2017. With this kind of performance, we could witness a massive influx of new investors in the next months.
There is also evidence that quants and data scientists are interested in participating in hedge funds.
According to Quantopian's website, over 700,000 algorithms have been submitted to their platform throughout its lifetime.
According to a Wired article, over 7,500 data scientists joined Numerai's competitions in 2016.
The market cap for the ICONOMI token, which will be used for creating hedge funds on ICONOMI's platform, is currently over $156 million USD. (Coinmarketcap, Feb 8 2018)
While we do have a formal proof (https://github.com/Betoken/documents/blob/master/Incentivized Meritocracies/Incentivized Meritocracies.pdf) that Betoken's Incentivized Meritocracy will optimize the fund's profits, we feel it best to provide some additional reasons of why Betoken will be successful that are more intuitive and more closely related to reality. They will be laid out below.
1. Better Than Direct Investment
To be able to attract people with flair in investing, we must make participating in Betoken's investment process more lucrative than directly investing in the tokens oneself. There are two main reasons why being a Betoken manager is more profitable:
Leverage: Being part of a large fund means you can manage, and profit from, more money than you otherwise would've been able/willing to invest yourself. It's similar to having a leverage.
Less risk: Since managers are paid commissions even if the fund did not profit, they are subject to less risk and can ensure a minimum income.
2. Analogous to Markets
Betoken's Incentivized Meritocracy shares many similarities to markets of investable assets, such as the stock market and the cryptocurrency market. In fact, staking in an investment decision is almost exactly the same as directly investing the token, except that the ROI is better. Therefore, we can estimate Betoken's success as a meritocracy by looking at how meritocratic the stock market and other markets currently are.
To our knowledge, there is no evidence that they are not meritocratic: no one's heard of a dumb and inexperienced investor besting market growth, and smart people (like those at Renaissance Technologies) have achieved amazing ROIs (71.8% annual on average!). Thus, we can expect that Betoken will also be meritocratic.
3. Friendly to Beginner Managers
Since the launch of our Testnet Alpha, some people have told us that they haven't had time before to do their due diligence researching and accumulating knowledge about the best crypto-assets, but want to get better at it. Betoken offers beginner managers a safe environment to grow, since they can first observe how veteran managers make investments and let the community handle the fund's money, before dipping their toes into making decisions for an already full-fledged hedge fund.
One major painful oversight for crypto fund managers and individual investors is operations. We aim to be part of a new wave of tools to service funds and individual investors by automating the whole buying, selling and reporting process. Facilitating the collection, consolidation and sharing of data for tax and legal purposes is also one of the potential key benefits of Betoken.
Where did your team members meet originally?
We've met on Reddit and at the San Diego University (UCSD).
What are the top five risks you see for your business?
1. The Existing Regulatory Framework
Existing regulations do not provide an appropriate framework to existing and future blockchain projects and should not be applied to those projects as-is.
The regulatory wait-and-see policies represent a significant obstacle. Simple things such as the choice of company’s location or the fact that at any time, a directive or a legal decision can make your activity illegal.
Betoken aims to evolve quickly if the framework and rules are updated by the regulators. The use of blockchain technology in the markets induces a change of paradigm. Since the development of blockchain-based “disintermediation” exchanges, the current regulatory regime appears to be ill-suited to facilitating growth and innovation in the Fintech community.
More details about the constraints of applying a blockchain technology to finance can be found here: https://www.esma.europa.eu/sites/default/files/library/dlt_report_-_esma50-1121423017-285.pdf.
2. Approval, Licensing and Operating Requirements
Betoken could need to get an approval and licensing from a national regulator, according to specific requirements in terms of operating rules, organizational structure, and human and material resources. Once authorized, Betoken could be subject to a certain number of organizational rules, market surveillance and conduct requirements, in order to ensure that the markets are fair, transparent and efficient places, and to provide customer protection.
3. KYC and AML Compliance
On the question of fraudulent activities and AML (Anti-Money Laundering), a robust governance would ensure that only trustworthy participants are accepted. In addition, the Ethereum network would allow for more transparency on transaction history and beneficial owners, which would enhance KYC (Know Your Customer) and help trace and prevent fraud.
4. Tax Burden
Some challenges could also arise from the transnational nature of the blockchain. For example, a tax may apply on a given transaction depending on its place of execution. The law applicable to blockchain networks should be specified in advance to avoid conflicts.
5. Operational risks
A mistake in the coding of smart contracts or reference data might affect a great number of participants. What would happen if the external data are flawed or become unavailable?
Supporting cross-chain crypto-asset investment will be a major opportunity for Betoken. Solutions are emerging to handle this issue in the near future (for eg. $WBTC by Kyber Network).