Morningstar Magazine - February/March 2018 - 57

Sinegal: We've seen that in the technology
realm a number of times, where the first mover is not
necessarily the eventual winner.

Morris: As a counterpoint, I think bitcoin does
have a pretty significant moat in the nature
of its hashing algorithm. To mine bitcoin, you need
to go out and buy a specialized chipset. Some
of these other cryptocurrencies like Ethereum rely
more on GPU mining, a more commoditized
and standardized type of chip that was originally
developed for graphics cards. It's much easier
to switch over from Ethereum to another
GPU-mined coin.
Sinegal: Can you explain what an initial coin

offering is?

Morris: An ICO-many people call them token
sales-is the mechanism by which new tokens are
launched to the public. Typically, it's set up as a
smart contract, often using Ethereum, where
people will send their digital tokens to a specific
address and get these new tokens in return.

Note that virtually all of these ICOs are preproduct.
Money is raised just on the background of
the team and a white paper with a promise about
what they're going to do with the proceeds
of the ICO or token sale.
Wu: These ICOs were designed to jumpstart
a network. These token sales are springing up
without a product because they're trying
to fund the creation of a network that will never
produce an ongoing revenue stream, unlike a
traditional startup, and there's also not going to be
multiple rounds of funding. You can think of it
as a blend between an IPO and perhaps a
Kickstarter. There's no product in hand, but they
will have something down the road.

Blockchain is a useful technology
even without bitcoin or another cryptocurrency
attached to it.
Kai Wu

from the actual entrepreneurs to the folks
who are buying these tokens. And you do see
in the market some shady ICOs.

Sinegal: You're investing in a new type of asset

Sinegal: What are the barriers to entry for ICOs?

in a startup application. I would argue it's even more
speculative than venture capital.

Morris: And from an entrepreneur's perspective,
it's putting the liquidity event prior to the
product development. There are some obvious
conflicts of interest there and not much
accountability at this point.

Morris: The barriers to entry for retail investors are
very low. All you need is a cryptocurrency wallet
and to follow instructions. Now, however, the
barriers to entry for institutions are getting lower,
because a number of funds are popping up that
invest both in established cryptocurrencies and at
the early stage in these emerging ICOs and tokens.

Wu: To translate it into more plain terms, to
some extent they're transferring the risk of failure

Wu: Typically, more sophisticated investors
will go into a new asset class first, given

the complexity. Here, for an institutional investor,
there are a lot of risks to consider. Regulations that govern what happens if things go wrong
just aren't there right now. That's why
you're seeing investment vehicles come
in-such as funds and futures-to give these
institutional investors exposure to this
space without some of the risk of investing
directly into it.

Building on Blockchain
Sinegal: How does blockchain as a technology differ
from bitcoin?

global.morningstar.com/Morningstarmagazine

57


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Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
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