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18 May 2020

"The concept of intrinsic value is irrelevant and Corona shows that"

The current Covid-19 situation has impacted the world economy drastically. The blockchain ecosystem is no exception. “Many startups for example will not make it”, says Philipp Sandner, Head of Blockchain Center at the Frankfurt School for Finance & Management.

Sandner insists that the blockchain ecosystem is not a monolithic block: “There are many subsystems, stakeholders and technologies. Even if they are all interconnected, it's not a classical industry, so we cannot say how Covid-19 will affect blockchain as a whole.” 

He suggests looking at 4 key facets of blockchain and the possible outcomes for each one of them; cryptocurrency, security tokens, blockchain Start-ups and corporates as well as the global supply chains.

The real question is:
Is the demand for Bitcoin at some point of time high enough increase?

1.   Cryptocurrency

“The economic consequences may show once again that some assumptions about Bitcoin and cryptocurrency in general are wrong, or at least useless”, says Sandner, pointing to sceptics who say Cryptocurrency has no intrinsic value.

“Whether Bitcoin has or hasn't  intrinsic value does not matter”, Sandner argues. “Not to the investors, not to the traders and certainly not to the virus.”

The notion of intrinsic value itself is indeed problematic. One could argue bitcoin lacks intrinsic value because there is no state authority that guarantees to redeem it for a certain value of gold.

The same however is true for all currencies, since the abolition of the gold standard in the 1970. Both Bitcoin and traditional currency rely solely on the trust its users put in it, Sandner says.

“The real question is: Is the demand for Bitcoin at some point of time high enough increase?” Based on the latest predictions for the world economy, people might fear an inflation, causing investments of nominal currency into bitcoin - a scenario Sandner thinks is very likely.

“If that happens, the bitcoin would rise automatically. If on the other hand this is not the case and people prefer to invest in gold, the prices of Bitcoin would fall.” The concept of intrinsic value would explain neither of these behaviours, he concludes.

“What matters is the scarcity of the asset, and Bitcoin is by design a scarce asset.” There are only 21 Million Bitcoin that can exist in total. 

According to Sandner, the same is partly true for Etherum, even if it is not that scarce. Etherum is known for its polyvalent use cases in transactions and all kinds of business processes, smart contracts and security token offerings. “There is quite some usage for the ethereum Blockchain – to say it lacks intrinsic value is simply wrong.”

And - of course - the recent bitcoin halving is also expected to put upwards pressure on bitcoin prices.

2.   Security tokens

The hype around STOs was long expected
- and didn´t arrive yet

Security token offerings (STO) allow companies to issue tokenized securities in digital form and are a cost-saving and secure means for funding companies than traditional public offerings. This makes STOs potentially attractive for SME business, as the hurdles are significantly lower than those for a traditional IPO.

“STOs have been running in Germany since September 2019, and for about the same time they have been expected to revolutionise the market”, Sander says. "The hype did not arrive yet."

He estimates that the corona crisis is likely to put investors off. He points to major STO projects that have been halted recently, for example the Black Manta Property Platforms 11-Million Euro funding of which nearly 2 Million EUR of securities would have been tokenized. “The conditions are difficult, I don´t think there should be tokens issued right now.”

3.   Startups vs. Corporates

According to Sandner, there are around 200 Blockchain startups in Germany. Will their innovations experience a setback on the market? “For some, corona is good and bad at the same time,'' Sandner, who looks after some startups himself, acknowledges. “For others it's just bad.”

[Startups] very often have to rely on physical meetings,
trade fairs, conferences and so on. That's the bad news.

“Startups who have been funded with enough money will be able do very efficient sales now. They don't need to travel, meaning they save time and money. This is the good news. But growth will remain difficult. Very few prospects will buy solutions without having met face to face. You very often have to rely on physical meetings, trade fairs, conferences and so on. That's the bad news.”

For this reason, it will be hardly possible at all for startups that were just about to enter the market, says Sandner. “They are now almost completely unable to create the networks, touch points and the trustworthy relationships with clients.”

Finally the corporate blockchain projects. “There are projects which are already funded, they will go on. Other projects, which require budget decisions right now, might be in serious trouble, and could be stalled or halted because liquidity is needed somewhere else”, Sandner says.

4.   Global Supply chain

In the very short term, priorities will inevitably shift to continuity rather than innovation. Companies who struggle will look at how they can survive the next month, not big long term projects and that is the right thing to do.

Sandner would really argue that supply chain applications should in the future also be very relevant, especially now that the discussion around the digital euro is coming up.

Sandner explains: “In the supply chain area, for example, a Chinese manufacturer is sending stuff from China here to here. And the money needs to go from Germany to China all the way back.” These two typically separated processes will be coupled in the future. Once the good is flowing from China to here and specific milestones have been met, then money payment would be triggered towards China. “Imagine how this could not only give a whole new dimension of trust in international trade, but also to increase transaction speed and improve management throughout the value chain. I think the technological advancements will be crucial to rebuild economic ties.” 

Smart contracts like this urgently and inevitably require the digital euro on a Blockchain, Sandner states. “The authorities need to act.”

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