Since the 2008 financial crisis, central banks have turned to unconventional monetary policy in an attempt to spur global economic growth. Featuring ultra-low interest rates and unprecedented quantitative easing, trillions of dollars have been released into the financial system and near-zero interest rates have become the new normal. Today, total debt held by global central banks exceeds $18 trillion and multiple countries such as Switzerland and Japan have implemented a negative interest rate policy, charging depositors for holding funds in the central banks.
For over five years, the US Federal Reserve has maintained a target Federal Funds rate between 0.00-0.50%, exerting significant downward pressure on global interest rates and forcing investment capital into exceedingly risky markets in pursuit of yield. The Fed has quadrupled the US monetary base via debt purchases yet the velocity of money has dropped sharply. This means additional dollars flooding into the financial system are not being lent to consumers, but utilized by institutional banks to double down on risky bets in various equity, debt and derivative markets.
Markets have responded well to this influx of capital aided by the global accumulation of debt by central banks. The current bull market has lasted for over seven years, with all three major US stock indices topping all-time highs in 2016. The question is how will central banks normalize monetary policy and begin to raise interest rates? As noted by prominent economists, extended periods of zero (or negative) interest rates could have adverse consequences for the global economy.
In 2009, as central banks took these unprecedented steps to spur economic growth, Bitcoin was anonymously released with the aim of revolutionizing digital value transfer and restructuring the global financial system. The Bitcoin protocol introduced the idea of distributed ledgers, i.e blockchains, an innovative technology that is now being applied in various industries such as record management and distributed computing. Neha Narula's TED Talk, 'The Future of Money' does a exemplary job explaining this disruptive concept.
Over the last few years, other peer-to-peer platforms have been created, building upon and tweaking the attributes of Bitcoin's underlying technology. The Ethereum Virtual Machine (EVM) was released into production, allowing for the formation of decentralized autonomous organizations (DAOs) and the development of decentralized applications (dapps). The ethereum platform aims to become the backbone of the Internet of Things (IoT) economy, which will allow inanimate objects to conduct autonomous transactions via micro-payments.
Per coinmarketcap.com, less than $15 billion is currently invested in peer-to-peer platforms and supporting projects. Within this diverse industry, multiple disruptive technologies have come to market offering innovative services at significantly reduced costs. With close to $70 trillion invested on global stock exchanges, even the slightest reallocation of capital into this space will materially increase market values.
Please take a moment to explore the information provided throughout this site and utilize the links as a jumping off point in your research. Feel free to contact us to discuss the purchase of distributed digital property or ask any questions you may have.
With the launch of Digix 2.0 soon upon us, I thought I'd share a workbook I use when analyzing potential DGD annual returns. Make sure to update the prices in blue to get accurate numbers.
Many investors, traders, and financial institutions utilize ETFs to gain exposure to gold without truly understanding the product they are purchasing. "Exchange traded fund" is not a legally-defined term in securities law statute. Rather it is a market term individually defined by each fund's binding legal documents. ETF structures are quite complex and are designed by the best lawyers money can buy to benefit the share issuers and limit their liability.
In the case of GLD, the largest gold ETF by daily volume, documents such as the Unallocated Bullion Account Agreement, Participant Agreement, and Trust Indenture Agreement severely restrict investor's claims on the trust's underlying assets and limit the Custodian's legal liability. For instance, the GLD Trust Indenture Agreement states that "the Sponsors, Officers, Directors, Employees and Affiliates of the Trust are indemnified against liability for claims in connection with performance, outside of gross negligence, including securities law liabilities". Essentially, if investors sued to recoup losses in the event of the fund's collapse, any judgement would likely be paid out of the fund's assets, if there were any left. Worse still, the GLD Participant Agreement states "the Authorized Participant (investor) acknowledges that it is an unsecured creditor of the Custodian with respect to the gold held in the Participant Unallocated Account and such gold is at risk in the event of the Custodian's insolvency." Therefore, if there is a major financial crisis in which Custodian or Sponsor banks fail, GLD shareholders would be among the last in line to recoup their investment. We believe this would be news to the majority of GLD shareholders. An in depth analysis of these documents can be found at the following link. http://solari.com/articles/Precious_Metals_Puzzle_Palace/
Beyond the hopelessly complex financial arrangements and legal claims surrounding gold ETF investment, there is an inherent conflict of interest for gold ETF Custodians and Sponsors. Current regulations allow major financial institutions and banks to maintain net short positions in gold futures and derivatives markets while serving as gold ETF Custodians and Sponsors. This means they can "sell" derivatives and future contracts based on the current gold price while purchasing bullion on behalf of gold ETF investors. In our opinion, this goes beyond typical market-making activities as physical gold and financial derivatives based on gold price are not the same asset. Some have alleged price-fixing activities result from this unique financial relationship. In addition, ETF share price is determined by supply and demand on the open market, rather than shares being priced on net asset value per share, as is the case with mutual funds. This increases the potential for price manipulation.
Bottomline, if a gold ETF investor believes they own an outright share in physical bullion, they are mistaken. Until recently, gold ETFs were the most convenient option for investors and traders looking to gain exposure to gold prices digitally. However, technological advances now allow for the tokenization of physical assets on the blockchain, a distributed decentralized ledger.
DigixGlobal has leveraged these technological advances to create the DGX token, the first crypto-currency with each token backed by 1g of physical gold. Utilizing ethereum smart contracts, DGX tokens can be exchanged for an equivalent quantity of physical bullion and redeemed by investors. For example, an investor who holds 100 DGX tokens can exchange their tokens for an 'asset card' representing a 100g bar of physical bullion, or visa versa. The asset card stores all of the bar's pertinent attributes on the ethereum blockchain, including quarterly audit sign offs, and can be used to redeem gold directly from the custodian. Clearly this new tokenized gold system is superior to gold ETFs, as each DGX token is specifically backed by physical bullion with no underlying legal agreements or contractual liens. Furthermore, the conflicts of interest discussed above are avoided. Put simply, investment in DGX is clean-cut gold ownership.
2016 marks an exciting year for investors eager to own and transact gold in the digital economy. Technological advances are setting the table for tectonic shifts in the way we transact online.
With combined daily transaction volume of approximately $21 million USD and combined assets in excess of $42 million USD, digital assets such as SPDR Gold Shares ETF (GLD) and iShares Gold Trust ETF (IAU) are currently among the most popular options for mainstream investors holding and trading digital gold.
Though backed by physical gold, ETF shares don't represent a specifically identifiable gold bar or coin, rather they represent a share in a large amount of gold bullion held in trust. Constant arbitration on the open market ensures the ETF share price stays in line with the value of the underlying holdings.
Until recently, if an investor wanted to use gold ETF holdings to purchase goods and services online, the investor must first liquidate the ETF position for digital cash before spending the funds. In other words, it isn't possible to purchase a book on Amazon with GLD shares. This demonstrates gold's historic inability to function as a digital currency in the online marketplace.
In comparison, the Digix Proof of Asset (PoA) protocol is the first to successfully 'tokenize' gold bullion on the Ethereum blockchain utilizing the Inter Planetary File System (IPFS). 'Tokenization' is the process of securely storing pertinent asset information onto a unalterable public ledger. That 'token' can than be traded in trust-less peer-to-peer markets. Once a PoA Asset Card representing a specific gold bar is created via the PoA Verification Process, the Minter Smart Contract can be utilized to parse the PoA Asset Card into Digix tokens (DGX). Each DGX represents 1g of specifically-identifiable physical bullion. These DGX tokens can be converted back to PoA Asset Cards via the Recaster smart contract at any time.
With the Digix platform live, now is an opportune time for gold investors to tokenize their bullion holdings via the Digix Proof of Asset (PoA) protocol. As DGX tokens gain traction as a digital store-of-value and online collateral, the tokens may trade at a premium to physical gold prices.
We believe this premium would be justifiable and could represent the market's desire for physical bullion's registration & audit via the Digix PoA Verification Process. As a global DGX market develops, investors could potentially profit from purchasing gold bullion and minting DGX to sell on the open market, increasing DGX supply and the value of the DigixDAO platform.
For a detailed outline of the Digix platform and it's smart contract processes, please see the Digix WhitePaper.
First of all, I would like to congratulate you on having the foresight and technological ability to secure an investment in Digix DAO during the hours-long crowd sale. Thanks to the successful ICO procedures facilitated by the Digix Global team, there are high levels of interest in DGD tokens leading up to the platform's launch. On April 28th, the actions of DGD token holders will begin to reflect in the overall value of the DAO. With that in mind, I ask you to consider the long-term value of the DAO when assessing profit-taking opportunities in the coming months.
In the infant days of this corporate governance experiment, it will be tempting to sell large portions of your investment at 10x, 20x, and perhaps even 30x valuations, but remember these transactions will be forever known by other members of the DAO community. For the first time in the history of venture capitalism, ownership data is public knowledge and available for audit on a blockchain.
Imagine organizing future ventures such as the p2p lending platforms, decentralized exchanges, or virtual nations mentioned in the most recent Progress Update. Founders could potentially devise DGD reputation systems which consider the token age of DGD in a wallet, as well as the quantity. Such a system may become necessary, as a top 50 ICO investor could dump his/her DGD tokens at a substantial gain yet hold the Proposal Badges to influence the community in the future. In other words, there may one day be additional value in holding ICO tokens over DGD tokens purchased in the secondary market.
As DigixDAO builds the industry standard in digital gold platforms, the DAO community must continuously focus on productive efforts to enhance the architecture of the global DGX market and maximize daily DGX transaction volumes, all to the benefit of DGD holders. As DGX gains widespread popularity and traction, DGD tokens could one day become the most attractive asset to own in the global financial system.
On April 28th, remember to keep thinking long term.
Tyler Logsdon is a CPA and Registered Securities Representative located in Newport Beach, California. He is actively employed in the blockchain industry.
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