The Economic System build by Fiat Currency is obsolete While we talk of global economy, fiat currency: USD, Euro, Yen are still local. Nowadays e-commerce giants like Amazon and Taobao operates all over the world. But the currency the customer pays is seldom the currency the producer receives. It means there are many currency exchange transactions hidden in a simple purchase. It creates friction and costs.
Tokenomics is simply the amalgamation of two words: Tokens and Economics. So what is a token? According to Merriam-Webster Dictionary, it is “a piece resembling a coin issued as money by some person or body other than a de jure government. “ In essence it can be anything that represents legal money or anything that is of value. Based on this definition your Octopus Card is a token, your Starbucks Card is a token and a share of a stock is a token since they all represent something of value. Their values are recognized by the central authority and are protected by legal means.
A group of crypto enthusiasts, who get rich from cryptocurrencies, is interested in NFTs nowadays. They sell their cryptocurrencies to buy NFTs. They consider buying cryptocurrency is a kind of speculation, but they consider buying NFT is same as collecting art piece. For NFT investors, digital art minted as an NFT is same as a physical oil printing. Traditional art collector will hang the printing on a wall. Similarly, NFT holder will show the digital art on LED monitor. Furthermore, they feel themselves more superior, because they are supporting their favourite artists financially.
Who spent the most on a digital art?
The most expensive digital art, Everydays: The First 5000 days created by Beeple, was bought by the founder of the world’s largest NFT fund, Metapurse. Metakovan, the pseudonym of the buyer, paid 42,329.453 ETH to settle the transaction and said in a statement released by Christie’s. “When you think of high valued NFTs, this one is going to be pretty hard to beat. And here’s why – it represents 13 years of everyday work. Techniques are replicable and skill is surpassable, but the only thing you can’t hack digitally is time. This is the crown jewel, the most valuable piece of art for this generation. It is worth USD 1billion.”
NFT is a Non-Fungible Token embedded in a Blockchain network. Digital contents, including digital image, digital art, digital song, digital music, digital video, digital sticker, digital document, online game, virtual real estate, e-book and tweet, can be minted as an NFT in the blockchain which will be immutable.
An NFT cannot be divided into smaller size, and it exists as a whole piece. One NFT can only be linked to one single digital content, but a single content can be linked to more than one NFT. Each NFT is unique and it cannot be replaced or exchanged, which is unlike Bitcoin. A digital game CryptoKitty in green colour in form of NFT has different value to another NFT of CryptoKitty in pink colour, therefore they are not exchangeable. However, a Bitcoin can be split into many fractions. A Bitcoin has the same value as any another Bitcoins, so they can be exchanged.
NFT cannot be destroyed or removed, because it is stored via a smart contract in a blockchain. Ownership of NFT is recorded and immutable, where the history of ownership information can be found on blockchain. The first owner of NFT is usually the digital content creator, which can be represented as a certificate of authenticity as well as a virtual signature of the creator. Of course, when the NFT is transferred to the buyer, it will also become a proof of ownership for the buyer, too.
Where do NFTs live?
NFT firstly appeared in Ethereum ERC-721 on 21 October 2015. The first tradable user-generated content of NFT was available on 13 November in London. Proof-of-Stake (PoS) verification method is used in NFT transactions. Although it consumes less energy than another consensus algorithm, i.e. Proof-of-Work (PoW), NFT is still criticized by environmental organisations, as a study revealed that for an average single-edition NFT, its carbon footprint could be as high as driving a car for 1,000 kilometers. Nonetheless, Ethereum ERC-1155 introduces the idea of ‘semi-fungibility’ to the NFT world with a lower transaction fee, incorporating an ERC-721 asset.
Alternatively, the Simple Ledger Protocol (SLP) can also be used to support NFTs by minting an indivisible token. Using this SLP token structure, NFT1 was introduced onto the Bitcoin Cash blockchain in 2019.
Flow is the other blockchain which also has NFTs running. It is created by Dapper Labs, the team behind CryptoKitties which is a digital game for players to purchase, collect, breed and sell virtual cats. In 2019, over 2 million on-chain transactions were generated by nearly 100,000 CryptoKitties owners, occupying 10% of network traffic in Ethereum. The Ethereum network was almost halted and the speed of transaction was slowed down significantly, so Dapper Labs decided to build their own chain. Flow, which also adopts Proof-of-Stake, offers a lower transaction cost for users. Importantly, Flow NFT can only have 1 owner, who cannot be copied, duplicated or destroyed, which ensures the real value preservation and safety protection. CryptoKitties are migrating from Ethereum to Flow. Upgradable and extensible smart contracts will be available after migration.
SPAC is also known as “The Blank Check Company”. After SPAC launches and shares trades in the stock exchange, the raised capital will be safely deposited into a third-party custodian. The money, which will earn interest, will be locked for 2 years maximum.
As soon as the IPO is completed, the Management team starts searching for a private company to acquire and negotiating with responsible people in the targeting company. After reaching an acquisition agreement with the target, the Management team has to propose their plan to the shareholders and start voting to get shareholders’ consensus. The acquisition process can be kicked off and money can be withdrawn from the custodian account for settlement when the majority shareholders support the deal. Shareholders, who do not agree to the acquisition, can redeem their shares and get their money back from the custodian.
When the acquisition is completed, SPAC and the acquired company will merge into one company. The stock exchange will assign a new industrial classification and new stock code to the merged company, meaning DE-SPAC. In 2019, Social Capital’s IPOA SPAC acquired Virgin Galactic, the SPAC ticker ‘IPOA’ was replaced by ‘SPCE’ immediately.
However, if the Management team is not able to complete an acquisition within 2 years, the SPAC will be dissolved and the capital less IPO fee will be refunded to all investors.
According to Nasdaq and SpacAlpha, US-listed SPACs accounted for 79% of all IPO in 2021, 53% in 2020, 23% in 2019 and only 3% in 2013. U$77 billion capital raised via SPAC in the U.S. In 2020, which was almost 6 times the amount in the previous year.
Why are SPACs doing better than IPOs?
Traditional IPO requires heavy preparation works and many underwriters. Companies need to pay a large amount of money to those financial institutions and lawyers as the administration fees. However, most investors become cautious in 2020 when businesses are shut down under the pandemic environment. Many IPOs, including WeWork and Uber, did not have enough subscribers and needed to terminate the selling process with the underwriting fee paid anyway. As a result, SPAC is a better alternative because of the smaller administration fee, the shorter time required, lower risk and less restriction by SEC.
On the other hand, many private companies are suffered from the pandemic, facing financial difficulty since 2020. Owners of those private companies are more willing to sell their businesses than before, so SPAC will have a higher chance to find a good private company, negotiate a better deal and get strong support from its shareholders.
SPAC has been introducing many companies to the market since 1990, including Virgin Galactic, DraftKings, Opendoor and Nikola Motor Co. Excitingly, Virgin Galactic’s stock, which went SPAC in 2019, rose from $11.7 on 2nd Jan 2020 to $59.4 on 11 Feb 2021, creating 5 times value in one and a half year.
SPAC is known as Special Purpose Acquisition Company which is a public listing company with no operating business. It usually consists of a Management team, a Sponsor and a group of small public investors.
At the very beginning, the management team, who are the financial expert, private equity fund managers or famous CEO, generate any investment idea, create a shell company and sell to the public. The more reputation the manager has, the better the roadshow story is, the more money will go after his idea. In Jun 2020, a U.S. Hedge Fund Manager, Bill Ackman, had raised the largest SPAC offer, U$4 billion. Investors believed in his investment ability and his track record, hoping the share price of his SPAC to rise in the future.
Moreover, Anthony Leung, the former Financial Secretary of Hong Kong, had raised U$200 million through SPAC with the investment idea of healthcare technology in China in 2018.
Sometimes an entrepreneur of a start-up company is the Sponsor. Sometimes few private investors buy in an interesting idea from Management, becoming the Sponsors. Otherwise, the Management team, who funds themselves at an early stage, is the sponsor too.
The Process of SPAC Listing
The process of listing a SPAC is much easier than a traditional IPO because it is only a shell company without commercial operation or financial history. The SEC needs to take only 3 to 4 months to review. Besides, SPAC requires little preparation work, small administration costs and only one underwriter anyway.
With the approval from the SEC and the Sponsors, SPAC will allocate 20% of total shares which is known as ‘founder shares’ to sponsors, sell the remaining 80% to public investors at U$10 per share in a stock exchange. Normally, warrants will be given to shareholders to gain their long-term investment commitment.
How can Israel be Outstanding in Start-up industry?
Israelites are creative adventurers. Israel is recognized as the start-up nation, which is ranked the world’s fifth most innovative country by the Bloomberg Innovation Index. They have been spending the highest ratio of GDP on civil R&D in the world for years, reporting 4.95% in 2018 according to World Bank data. They are also one of the most patents filed per capita, too. Moreover, their government has established supportive policies to back up innovation and help their entrepreneurs grow, sponsoring exhibitions of all sectors, including Biotechnology, Industrial processing, Chemical engineering, Agricultural Technology, Defence Security, Electrical engineering, Mobility transportation, Green energy and Environmental technology, throughout each year. Over 50% of government spending was allocated to university research and industrial-technological development. Google Chairman, Eric Schmidt, has complimented ‘Israel has the most important high-tech center in the world after the U.S.’ in his visit in 2012.
Israeli start-up companies are attractive to many global investors. In Mar 2021, a Tech investment firm Flashpoint, which is based in London, plans to raise U$200 million for their secondary fund and half of the fund will be allocated to Israel start-up companies with U$350 million in managed assets in the next 3 years. Frankly, Flashpoint has already invested in Israel-based technology companies for their first fund a few years ago.
In the U.S., ION’s first SPAC raised U$260 million and went public in October 2020, making the largest deal in the Middle East and merging with an Israeli tech company, Taboola, at U$2.6 billion valuations. The deal was multiple times oversubscribed, and the fundraising was more than initially planned. The company claims to be the leading discovery platform globally, reaching over 1.4 billion individuals or 44.5% internet users, generating U$1.2 billion revenue and U$34 million operating income in 2020.
Continuously, Israeli electric vehicle tech company Ree with a valuation of U$3.6 billion, smart car company Innoviz which makes sensors for self-driving cars and a fintech company Payoneer will all go public on Nasdaq through merging with SPACs this year. 20 more Israeli companies are joining too. U.S. investors are attracted by their strong share price performance, taking advantage of their 10% to 30% discount versus American peers.
Intelligent Israelites prefer merging with SPAC to raise funding quickly, expand operation faster and gain the advantages of being a public listing company. Everything moves rapidly in the technology industry, so tech companies cannot wait for 2 to 3 years for a traditional IPO. Nevertheless, they can get money from private investors and stay privately owned forever. By listing as a public company, disclosing financial reports and following regulatory requirements, the company will be able to build up a reputation and provide confidence to partners doing business together. Partners will believe that they will not be acquired or disappear tomorrow.
The famous ARK fund manager, Cathie Wood, increased her Bitcoin target to USD400,000 on 10 February 2021. The price has been rising like a rocket since November 2020, just after Pay-Pal had enabled their users to buy, hold and sell Cryptocurrency on 21 October. The market capitalization of Bitcoin hit USD1 Trillion in early 2021, reaching USD 58,330 all times high on 21 February (data from coinmarketcap.com). Year-to-date return as of 3 Mar 2021 was 475% and 5-year return was 12,440%. It was USD1 in 2011.
People buy Bitcoin because of their faith in Blockchain technology with the idea of decentralization. Some people buy it because of they don’t trust fiat currency. Some buy Bitcoin to hedge against inflation. Others buy it to diversify their investment portfolio.
When money is printed by governments around the world, people will demand more Bitcoin to preserve their purchasing power. When Bitcoin price goes up, hedge fund managers will need to invest a portion of their portfolio into Bitcoin to diversify risk and gain a better return and to beat other fund houses. Interestingly, a new blockchain app is offering their users to aggregate all kinds of their digital assets, including loyalty points, in-game assets and air mileages, E-vouchers and coupon, then to convert them into cryptocurrencies. This will further increase the demand for Bitcoin and other cryptocurrencies. In fact, the higher the Bitcoin price, the more investors will be attracted.
However, Bitcoin has a limitation of issuance. Only 21million will be mined eventually, and there are around 18 million coins have been created since inception. When the demand is increasing but the supply is shrinking, Bitcoin price has to go up because buyers can only acquire from the existing holders who are not willing to sell anyway.
Blockchain technology has been appearing in many industries and is widely discussed in many communities. Moreover, Bitcoin price has been a hot topic among investors globally, as it has recovered rapidly after being blocked by China government and tackled by The Securities and Exchange Commission in the U.S. Occasionally, bad news about crypto-exchanges filed bankruptcy due to cyberattack will be heard, alerting governing bodies and triggering their investigations. The more the governors investigate, the deeper understanding of Blockchain technology they will learn. Now they know how powerful this new technology is, and they start to change their perceptions from negative to positive. The dawn of Blockchain technology comes after 10 years of a hard time.
Bank of England was the first central bank to show interest in Blockchain development for Central Bank Digital Currency (CBDC) in 2014, causing other central banks, such as HKMA, Monetary Authority of Singapore, Bank of Canada and Bank of Sweden, to start planning. In 2019, the Bank of Sweden announced their CBDC issuance will adopt the Blockchain technology by 2023, which will be operating by central bank 24 hours 7 days a week, handling onshore/offshore money transactions, exchanging foreign currencies and indicating personal identity information. Their goal is to transform fiat money into digital, achieving a greater effects in monetary policy and reducing the cost of money printing.
Many people have started engaging more in digital transactions and shopping online during the pandemic, so governors have to look into CBDC more seriously. Christine Lagarde, who was the Chief of IMF, told the banks to be open to Cryptocurrencies in 2018. One of the ECB Executives commented Facebook’s Libra was a wake-up call to them, as ECB worried their 200 million users would adopt Libra broadly. Eventually, Lagarde, who is the new Chief of ECB, has planned to launch CBDC within 2 to 4 years in December 2020. She considered new development can improve the implementation of monetary policy, tackle cyberattacks effectively and regulate the Anti-Money-Laundering as well as Financing of Terrorism activities.
Most recently, the Federal Reserve Chairman, Jerome Powell, allows their banks to provide services for Crypto-assets. Immediately, the U.S. banks, such as Citibank, are building their Crypto Services Centres to offer Crypto Debit Cards and Custodian Management for their customers in America as well as Mexico. Furthermore, J.P. Morgan creates their digital coins for customers for payment. Resultingly, investment in Crypto-assets will be more secure with greater protection from those commercial banks.
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