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Monochrome is a client of MGI South Queensland. This interview took place on Wednesday 15/12/21

Karen Ng, from our Brisbane office, spent some time talking with Craig Hobart, Head of Distribution to find out more about the world of investing in Cryptocurrency and what they are accomplishing in Monochrome.

Disclaimer: MGI South Qld does not provide financial advice to clients and this article is not intended to provide professional advice in any shape or form. MGI have produced this purely to highlight the interesting ventures of our clients and to give some interesting information on relevant topics in the marketplace. We recommend that readers of this article obtain their own financial advice before considering any of the investments discussed in this article.

Karen:  Craig, thank you for your time and spending time talking to us today. Tell us a bit about yourself and tell us a bit about Monochrome.

Craig: I’ve been in the funds management industry for 25 years, predominantly in the intrinsic value, investing space around Australian equities. More recently, I was on the executive of a large industry fund called REST Industry Super. What attracted me to this business was a recognition that Bitcoin and digital currency, is a nascent asset class, and newish asset class. There is a lot of demand for understanding and inquiry around what is going on in this space. It’s been predominantly consumer driven and, importantly, that has created some problems. For example, digital exchanges are not regulated. So, if you buy through an exchange, you don’t actually own the digital currency, the exchange does and they make a promise to you that if they collapse, you lose your wealth. Obviously, a lot of the ramps in and out of these assets is fraught with fraud scams, I mentioned, the exchanges are also unregulated themselves. So, I saw there was a need and I identified with Monochrome’s vision that we need a solution that provides a safe pathway for investors to get exposure to digital assets. 

Equally as important, I saw there’s obviously so much misinformation out there. This is one of those things, it’s like Dr. Google, yes, if you Google digital assets, you will go down a bunch of paths that are manipulative. There’s an agenda sitting behind the content that’s provided. Therefore, there is a very important role that Monochrome could play in providing balanced, independent, objective research that would allow not only investors but importantly, the advice community to explore what is occurring in the asset class.

Karen: What does that look like?

Craig: We’ve produced CPD content. Content that advisors can put on their training register as their continuing education requirements. We’ve put six modules on our website as well, which provide a foundation for advisors to get started in this space and respond to their client’s inquiry. For context, we did a survey and 77% of advisors have taken inquiries from their customers. And 89% of them have said that they’re ill equipped to respond. And that’s for a range of reasons. It’s regulatory. Their licences have not allowed them to advise not until the 29th of October. And there’s been no products that are issued. We could see that what we call “suits” were coming into the asset class, in other words, institutional investors, participants, therefore Monochrome has arrived at a time which provides a ramp for investors whether they be wholesale and ultimately retail. When we issue a PDS, it will be a pathway to get exposure safely. Also, provide an appropriate platform for institutional investors, like industry funds and sovereign funds to get exposure, and we use all of our knowledge around digital assets to provide that safe custody experience.

Karen: How would you describe Monochrome’s vision?

Craig: Okay, so our vision is to provide safe access to digital assets and to educate the market. Our foundation product is a Bitcoin fund and all that we do is buy the Bitcoin at the spot price at the end of the month, and put it in what we call cold storage, which means it can’t be hacked or got to it’s a bit like Fort Knox, I guess, like gold and continue to educate the market. It’s a very simple product, we’re not trying to generate outsized returns or do anything tricky. We’re not trying to pick the time of the day, that week that month to buy bitcoin, we just buy it at the market price at the end of the month, and invest it, put it in cold storage, and it’s a buy and hold Strategic Fund, it doesn’t have any intention of doing anything other than provide people that safe access to the asset class. That’s our foundation product, we will do other things in time. Bitcoin is the dominant digital asset by market cap in the world, and it’s also the foundation one, meaning that the protocol of Bitcoin won’t break. The technology is robust, it’s very liquid, meaning like that’s a deep liquid market, it’s over a trillion dollars. There are plenty of liquidity providers, and all the things that ASIC requires of this asset class to be suitable for an ETF, for example, is things like institutionally supported strong service providers, a spot market for accurate pricing, a regulated futures market for the asset, all of those characteristics and things exist with Bitcoin and initially, the only other asset out of the 10,000 out there. The only other one that meets that hurdle is Ethereum. So those two are what ASIC have given permission to proceed forward with.

Karen: You have mentioned that education was probably the biggest barrier for financial advisors to look at this asset class. There is still the opinion that cryptocurrency and Bitcoin, is a “Ponzi” scheme. How do you see that changing? Will it be at the point of when the ASIC and ASX sort out regulation? You are right in the thick of it all and talking to many financial advisors? Have you seen that change?

Craig: Well, there’s a few things inside all of that I mentioned, my background was Intrinsic value investing, so I’ve had to go on a journey as well. The first thing you have to recognise with Bitcoin, is that most other assets, in some way or another, they produce an income stream, whether it be dividends, profits, rental yields, bond yields, coupons and everything in the intrinsic world is linked to interest rates in one way or another. So, when you value a company, you do a discounted cash flow, and you have to put a risk-free rate in and you have to put an equity risk premium in and then you have a discount rate. The first thing to understand is that this (Bitcoin and other digital assets) doesn’t operate on that way of value, which for a lot of advisors is that’s it for them, “I only invest in things that I can intrinsically value”. That’s the Warren Buffett’s of the world, the Hamish Douglass’s of the world, they all operate in that realm, which is completely acceptable and understandable. What is interesting about Bitcoin in particular, is it’s not nominally valued, because it doesn’t produce an income stream and therefore, by inference, it’s not caught up in an event that occurred for the last 20 to 30 years as interest rates have gone down. 

All of your readership has seen the value of their homes go up and money has become cheap. We’ve seen equity markets go up & up and we were reaching the end of the dance. We can’t ring any more out of the economy on nominal interest rates. Institutional investors are really looking for some insurance against a market correction, and a realisation that this dance can’t go on any further or for much longer. It’s quite nerve racking, in a way. We’ve seen some industry funds pull risk earlier, meaning like they said that this is all too expensive and have gone conservative being left behind. And they’ve been punished for that. Even though they might be right in the long term.

Bitcoin, for the institutional market, is also seen as a form of insurance because it’s not nominally valued, it’s a store of value and it can sit there when other things collapse. Like gold is sometimes seen as and is used for that purpose as well. 

Now, Bitcoin still needs to prove itself, but that’s some of the thinking that’s occurring in that space. Our role in Bitcoin is not for everyone. I mean, it’s volatile. You need to have asbestos gloves on when you handle it. And you need to understand what it is. A lot of education is around the volatility, about the correlation with other assets and the limiting of exposure to percentage of your portfolio like we looked at the United States advice into experience which is ahead of Australia in this particular asset class in terms of understanding, and it’s one to 5%, is kind of where they actually say to clients, and it’s appropriate, how much are you willing to lose? What percentage of your wealth and of course, that then gives everyone a sense of their risk tolerance, and then when you invest it, you monitor it. If it doubles in value, and you’ve got a 1% allocation that goes to 2%. Well, you profit and then reinvest that in your diversified portfolio then need to put some disciplines around dealing with volatility. That is a strategy in itself, but also an awareness because it’s volatile, expect it to be volatile and not be put off by it. 

When we turn to value itself, with Bitcoin, there are a number of models out there and people have different ways they look at things like network effects, like how infused is it in its brand value, like Bitcoin itself.

It’s very interesting times. If you take a very simple approach to Bitcoin, which is an economic 101, supply and demand, that determines price, what someone is willing to pay for something, not what it cost to produce, but what they’re willing to pay for it. That’s an interesting way of looking at what is occurring. 

We know there isn’t a finite supply of Bitcoin to be mined, it’s 21 million coins, and we’re hovering around the 19 million mark. And every 10 minutes, six and a quarter coins are produced, and there’s a harvest every four years. 

That means we are at the end of the production cycle. 99% of all Bitcoin will be mined by 2040. And that last 1% will take another 100 years. Inside of that is the demand equation. Interestingly, a couple of things, this is one of the reasons I got involved in the venture was there are a lot of believers in Bitcoin, and they’re very disciplined around their belief.

And they invest the percentage of their income every month, in continuing to add to their wealth inside the world of Bitcoin, the demand function for that exceeds the supply function, just that alone. If you think of all the coins that are going to be manufactured through this mining process in the next 12 months, over 100% of that production has already been requested through people that are already in Bitcoin, they want to continue to add to this, then we add to it the “suits” that I referred to coming into the sector, the institutional investor, you can just see that the demand exceeds the supply. That has to give us some growth. There may or may not be but certainly the protocol of Bitcoin’s not going to break, like that’s approved 13 years, it’s the first blockchain framework that’s beautiful and it’s eloquent in the way that it was manufactured and it’s not going to break. Bitcoin itself is robust, what you paid for it. That’s the market and we think in life, we don’t realise how much sentiment drives decisions, for example, residential real estate property. We do it all the time. Everyone’s very confident in residential and what we do is look at competitive prices. What did the house on the left sell for and how much did the one on the right sell for? 

In the Bitcoin world, what did the coin on the left sell for and how about the one on the right? I know it sounds overly simplistic, but in reality, that’s what’s occurring and we see it in things like how much you are willing to pay for a pair of shoes, or for fine art, or, for a motor car, we’re seeing prices of vintage cars going up, and it’s what someone’s willing to pay for it. They’re all sentimental, we live with a sentiment market. In fact, if we look at traditional equities, you know, Tesla’s on a P E of 350 times, four months ago, it was on 1000 times. An intrinsic value investor wouldn’t be attracted to a stock like that. Even in the real, intrinsic investing world, there are many examples of sentiment being the determinant of the price that people are willing to pay.

Karen: Craig, it’s been a great conversation. Last question, what is one piece of advice for the consumer, who’s looking at possibly entering the asset class of investing in cryptocurrency and Bitcoin especially and then the other one being advice for business owners. 

Craig: Yeah, I think, for consumers, do your homework and read extensively. Be careful of what you’re reading, you certainly can come to our website, the comfort of knowing that there’s no bias or sales pitch or anything other than just informing and educating. Like anything in life, before you invest, you should invest the time and understand what it is. Certainly, what we’ve seen with consumers is they just get on a rush from things going up, we’ve got our own fear of missing out. Yes, without having done the homework, we sadly say 90% of all digital ventures fail, no different to what happens in equity markets, or pre-equity markets and there’s a high failure rate. So the first thing is just to be very aware of your interest, and then channel that into knowledge gathering before investing and then be very wary about your pathway or ramp into an asset, particularly around digital assets. We have had plenty of experiences where people think they’re investing in an exchange, and it’s not, it’s a front, that’s a fraud. It’s an area where you need to be particularly careful. 

For consumers, I think if they want to explore it, they should do their homework and verify and verify and verify. And make sure that they don’t get caught – the schemes and scams are very sophisticated now. So, they need to be extremely careful before they invest in it. There’s a lot to get over to be able to actually invest. Again, that’s why we came into existence is to basically take all of that concern. So, in terms of the pathways into the asset of the away, so there’s a claim, trusted by through trust accounting in a custodian. 

The other thing, of course, for consumers is that when PDS are issued, take the time to read the target market determination, the TMD, which is new legislation. To really understand the PDS before you invest in it. I will be quite clear and it’s important that you read it. A lot of people don’t. And when things don’t turn out the way they want them, they want other people to take accountability for their lack of preparation for the investment. I think consumers need to be very patient about the documents that are prepared, particularly a PDF. 

The target market determination, basically, on a page will tell the investor what to expect, are you this type of investor? What is the volatility? How long should I be investing? And, you know, that’s an important step that every investor should put themselves through before they invest. 

In terms of business owners

There’s a number of things in this. We’re seeing innovation occurring with digital currency, which opens up new markets for businesses. You see companies like Square and Tesla, for example, have Bitcoin on their balance sheet and Twitter. There are a number of companies that are starting to invest in the primaries and they’re actually investing in Bitcoin, because they actually need a treasury function around the asset itself, because they are offering an alternative form of payment, or a service for their customers. We’re starting to see that.

There’s a range of participants that would love or like the opportunity to transact with a company, not using a fake currency, but using Bitcoin for example, you would have seen in the press recently a tropical island up in North Queensland, being offered for sale, settlement with Bitcoin? 

Karen: Yes. I have heard of that

Craig: It’s emerged from a business strategy perspective. It’s just a new way of presenting your business to the market and taking another form of payment. If that develops, then that becomes a treasury and that’s where your accountant gets involved. The question becomes should you have a sleeve of your holdings in this other currency because that’s what you’re transacting in and then going back to the fundamental discussion around how your wealth should be invested in the price of Bitcoin and a portfolio can equally apply to a balance sheet. Remember I’m not giving personal advice here. I haven’t met the person on the other end of the camera. So, all those disclaimers need to be said, of course. 

Karen: Yes of course. We are NOT a financial advice firm, and we are confirming that this is just an interview with one of our clients, a series we will hopefully continue in our newsletters. Craig, thank you for the tips and the really great insight to what’s happening in the world of Bitcoin and what’s happening in Monochrome as well. I’m very excited to hear about the journey so far. I certainly think that Monochrome has got a lot of great things ahead of them. So, thank you it really will be a case of “Watch this Space”

Craig: Yeah, we just have to be patient. The market takes time too, to get our head around it. So, you know, when you’re starting a business, it’s awareness, consideration and then there’s a purchasing decision. There will be competitors that will come in behind us and there will be flattery. In other words, they’ll be plagiarising our business model and our ideas. But, you know, we’re a specialist business that offers something special. We’re looking forward to how the next couple of years plays out.

Karen: Thanks Robert, for giving your time today to discuss this topic.