By Sinhae Lee, Partner at GBIC
Last month, I wrote a piece for Financial Times China on trends in key blockchain and crypto markets — the U.S., China, and South Korea. By far, these three markets are leading the blockchain and crypto industry and with our footprint in New York, San Francisco, Shanghai, Beijing, and Seoul, GBIC and Block72 will continue to invest in and support projects with great potentials. You can access the article HERE. And the English version below.
According to a recent report from McKinsey & Company, “digital flows — which were practically nonexistent just 15 years ago — now exert a larger impact on GDP growth than the centuries-old trade in goods.” The flow of information has no boundaries these days, especially with the help of blockchain and its decentralized, peer-to-peer digital ledger technology. Blockchain and cryptocurrency are global concepts in nature, however certain key regions such as the U.S., China, and South Korea currently play a more significant role in this industry.
Trading volume of major cryptocurrencies shows how the U.S., China, and South Korea have been impacting the blockchain market. These three countries account for a large portion of trading volume due to their economic and regulatory conditions. In 2016, Bitcoin trading against the Chinese Yuan accounted for most of the volume before the Chinese regulations hit at the beginning of 2017. To be more specific, at one point in Dec 2016, Chinese Yuan represented over 70% of the entire trading volume of top 12 coins with the largest market caps. After the regulations hit, Japan’s Yen became the biggest trading pair for a short period of time, but the spotlight was shortly taken over by Korea from the secondary market perspective, favoring Ethereum over Bitcoin. During the second half of 2017, Korea’s Won represented about ~30% of the entire trading volume of top 12 coins in average and even spiked to over 50% at one point in November 2017. Since 2017, U.S. has contributed a substantial share of transactions to this market, consisting roughly of a quarter to a third of the market volume.
Trading volume is not the only reason why these three regions are essential. The U.S. is a hub for innovative blockchain projects. According to Crunchbase News, the U.S. accounts for one-third of recently funded blockchain startups with strong technical foundations that stem from the existing and well-established tech industry. Additionally, a lot of active investors that participate in venture rounds to support the blockchain projects are based in that region. This investment trend does not stop with crypto funds, but has definitely extended its reach to some big name, traditional VCs as well.
Approximately eight out of ten Venture Capitals in Silicon Valley are already involved in or are trying to be more active in the blockchain industry. In order to make their way in and penetrate the market, they usually use the three following techniques — change the existing LPAs (Limited Partnership Agreements), create their own crypto funds, or invest into crypto-focused funds. For example: Andreessen Horowitz has invested in other crypto funds such as Polychian Capital and branched out into their own $300mm crypto fund called a16Z crypto.
The world has always followed the U.S as an example for regulatory rulings, as the SEC and other regulatory bodies in the U.S bring thought leadership to the industry. Recently, the SEC made one of the most major crypto-related announcements so far when they issued a statement that BTC and ETH are not classified as securities, which will consequently enable more institutions to further deepen their toes in crypto. Due to these regulatory movements, many exchanges in the U.S. such as Coinbase are pursuing regulatory approvals by acquiring broker dealer licenses in anticipation of the next big wave.
South Korea, a much smaller country on the other side of the world, with a population totaling about 50m, had the highest trading volume per capita at the end of last year. Additionally, South Korea once accounted for 45% of the total volume that globally traded Ethereum, which resulted in a concept called ‘Kimchi premium’ that is symbolic to the fact that the price of ETH traded was much higher on Korean exchanges. The premium soared up to 30% higher at the end of 2017, and finally recorded an all-time high at more than 50% higher on Jan. 8, 2018. Why do Koreans love cryptocurrencies so much? Korea is a hyper-connected society with close to 80% smartphone penetration rate, 24/7 banking, easy access to online trading, etc. Due to these factors, Korea has always been a leader in financial trading. Also, local investment options have been focused primarily on real estate and the domestic stock market, but both markets are getting squeezed. With such limited opportunities to flip a buck — even most gambling is illegal — the risk-takers are ready to pour hot money into the digital currency market.
Reverse ICO, a method used by existing real-world businesses to build their service on top of the blockchain technology and get into cryptocurrency, is a global trend, but Korea has been one of the early adopters and leaders of the phenomenon. For example, Rayon, a decentralized matchmaking service protocol for lending, is a reverse ICO of FINDA, Korea’s the largest financial product aggregator. In Korea, over 30% of the population owns cryptocurrency. With its enthusiasm about crypto investing and with the reverse ICOs trend being on the rise (which will put more tokens into the hands of its native businesses), Korea has the potential to become the first cryptocurrency nation.
China has been driving lots of innovation in the industry. One interesting aspect of the China market is that it is very interconnected with major groups of exchanges, funds, projects, media, and minors, etc. Larger players in the industry are building out their own blockchain ecosystems and are trying to expand their businesses to cover more parts of the market. For example, Node Capital has invested in many exchanges including Huobi, BiBox, FCoin, as well as media companies like Jinse and wallets — AToken.
Also, China has been innovative in terms of coming up with new ideas. For example, FCoin was launched in May, 2018 by a former chief technology officer of Huobi, who came up with a disruptive new idea of “trans-fee mining” revenue model. FCoin reimburses the user transaction fees in FT (FCoin’s own token), a concept which successfully helped FCoin acquire users. Later, hundreds of new exchanges are adopting this new business model. China has been leveraging its strengths in the mobile internet to develop some tools to generate lots of crypto traffic. For example, ImToken is the world’s largest Ethereum wallet with over 4 million active users per month in over 200 countries. It provides good UI/UX with some interesting features to generate traffic (e.g., ImToken App Airdrop, Trade competition within the wallet).
Not to mention, ~ 75% of mining pools for Bitcoin are from China. TC.com and AntPool, which are both owned by Bitmain, account for over 40% of hashrate distribution globally. Sequoia Capital China invested $400M in Bitmain in June 2018. Although the three regions are known for different key strengths, cultural and institutional aspects — all together they bring blockchain and crypto onto a new, higher plane. The U.S.’s blockchain projects innovation and regulatory leadership, Korea’s secondary market dominance, and China’s large community and innovative ideas are the building blocks of a successful future for the blockchain industry, which will alter the way we, as a society, function on the daily basis.
Although the blockchain industry is a global initiative, it is clear that the U.S, China, and South Korea have tremendous potential to speed up the process of its development. I am very excited to have a front-row seat to this new global revolution.
(Written by Sinhae Lee, Partner at GBIC — a blockchain and cryptocurrency fund, and Block72 — a comprehensive blockchain consulting firm based in US, China, and Korea.)