How much higher could Bitcoin go?

Leigh Travers is the Executive Director of DigitalX, which is a small tech company listed on the ASX which specialises in blockchain application development and digital asset management services. We thought it’d be timely to get Leigh on given the recent Bitcoin rally occurring given he’s been involved in the blockchain industry for several years and DigitalX has also held Bitcoin since around 2013. Leigh explains to us why he’s bullish on Bitcoin and why there’s still plenty of juice left in its recent rally. DigitalX is also an interesting business in itself.

They run a Bitcoin fund which allows investors to easily access and trade Bitcoin and they also have a stake in xbullion, which allows investors to trade in digital gold. DigitalX is also a play in the regulatory technology sector and has just released an application called draw bridge, which digitises the compliance process for companies, so we discuss that too.

Here’s Leigh Travers, the Executive Director of DigitalX.

Table of contents:
Bitcoin rally
DigitalX Bitcoin Fund
Fees & performance
xbullion
Drawbridge & entrance into regulatory technology market
Australian reg-tech market
Cash situation & 2021 outlook

Leigh, I wanted to start on the topic of cryptocurrency and in particular, Bitcoin, given the momentum it currently has. DigitalX has actually been a holder of Bitcoin since 2013, so I just wanted to rewind back seven or eight years ago and ask you, what was appealing about Bitcoin to you back then?

Back then, my interest in Bitcoin really came from being that payment mechanism or payment protocol. My background was with listed equities, I was a listed wealth manager. I had a client that was in Brazil and had sold some shares with the company he worked for, it was quite a significant amount of money and when we transferred those sales proceeds to him it didn’t get there. So we had to go check via our bank to the intermediary bank, they checked Brazil’s intermediary bank and realised there was one missing instruction on there. Anyway, we were able to resolve it but it took around 11 days to resolve and Murphy’s law meant that the foreign exchange rate dropped about 7 per cent during that period, so the client was pretty unhappy and on our side, there was nothing we could do.

It was exactly at that time that I first became aware of a listed company becoming involved with Bitcoin being DigitalX and really seeing how that could legitimise what was, I guess, something I’d heard of more as being the dark web and a few other things like that, very much early stage in those days and sort of hearing how it’s now being used and would be used by companies to make payments international that settle in 10 minutes, you’d have no foreign exchange risk and it would eliminate these issues that we’d seen. I just wanted to be a part of that and joined DigitalX a month after listing so I could become a part of this ecosystem with blockchain and Bitcoin.

Where I really saw the value was in that payment protocol, rather than that digital gold store of value essence that Bitcoin has become today. I guess it’s a different reason that I got involved and we’re sort of seeing now other digital assets that replace that preferred payment protocol. At the same time, we’ve still got the issues with sending international transfers and following up with intermediary banks, tracing notices and long settlement times. That’s really the essence of how I first heard about Bitcoin and DigitalX’s involvement was specifically around the Bitcoin mining, using low-cost power, using data centres to then partner with the latest in Bitcoin mining hardware, which are specially designed computers that process Bitcoin transactions, ensure that those that hold Bitcoin can transfer to those that they wish to and also secure the network from nefarious actors…

I wanted to get onto DigitalX’s involvement in a bit, but I just wanted to first discuss – obviously, there’s been this massive surge in the Bitcoin price recently and as you mentioned, there’s now a growing perspective recognised by institutions that it’s become, as you mentioned, a digital goal in terms of investors buying it as a safehaven or hedging asset. Are you viewing that now as the reason investors should have exposure to Bitcoin or is it more based on what you initially thought seven or eight years ago about transferral of money safely and things like that?

Definitely that store of value, digital gold, and there’s a few reasons for that. That was really touted through China, maybe 2015-2016, that sort of period, as being a fantastic way to store assets that are outside financial infrastructure of that country and it was a preferred mechanism to gold because it was more liquid, you could transfer that anywhere in the world, you could store it on a USB, it’s divisible. A lot of the properties that make gold valuable, Bitcoin actually performs better at, so that was really more of an industry view than it was digital gold. It took around four years or so for those outside of that market to start to see that value as well, as digital gold, as that store of value.

We’re seeing now all price targets effectively that are coming through from JP Morgan, from BlackRock, from Deutsche Bank, all the big institutional investment banks, they all value Bitcoin as a percentage of either the total gold market or the investable gold market, so excluding jewellery and excluding some of the industrial use. That’s why we’re seeing price targets from anywhere between $150,000 and $500,000 dollars as a long-term view for Bitcoin. And really, why that’s taken place is that it’s really performed well last year, 2020, when we had unprecedented money printing and we had an environment where those that do have that disinflationary or non-inflationary element like Bitcoin, finite supply, should perform well and Bitcoin absolutely did that, taking market share away from gold.

When the pressure was on to perform that way, Bitcoin has absolutely done that and we really see that as being an asset that has a network effect as well, pretty much like Google’s got that search network, the more users that participate in search, the more companies that offer their business for advertising and so forth, the more valuable Google becomes, same with the social networks and now same with Bitcoin being a monetary network. It is seeing the more participants come in, the more value exponentially you see for that asset as well, it’s a really positive element and something we think has really just started as these investment banks now have that view and are starting to see more institutional investors make a small allocation, 0.04 per cent as a first allocation, but we expect that obviously to increase in allocation and increase from other participants within those conservative investment institutions.

We’ve heard JP Morgan, as you mentioned, have come out and said that Bitcoin could possibly get to even $100,000 US Dollars this year. Are you that bullish on how far this rally could go?

If we look at how Bitcoin has performed during these bull runs, we saw the significant run during 2013 from $10 to $1,300; we saw the run in 2017 from around $700 to $20,000; and this run we’ve gone from circa $10,000 to $40,000. So, really only a very small move historically and if you look at what we’ve done historically in those bull market periods, you’d expect Bitcoin would get to that $100,000 dollars – obviously, history being no guarantee of future performance at all, but there is something a little bit different with Bitcoin bull markets in that they’re characterised by these halving periods. The issuance of Bitcoin actually is not on a linear basis, it is around vesting periods almost if you look at traditional markets, where every four years the issuance into the market halves. You have a pretty significant supply shock to a market and the price actually responds accordingly to supply/demand economics. When you halve the supply and you’ve got demand increasing or even flat, you should see an increase in price. This year, we’re actually seeing as well, institutions start to join the market place as well as Bitcoin being really adopted as that digital gold. Thirdly, you’ve got a massive amount of actual activity happening within blockchain market places, so real finance that is happening within these marketplaces. Demand from an actual use point of view, demand from major institutions from an investment perspective, and then you’ve got that halving of supply and these bull market periods around that supply halving typically lasts for around 12 to 18 months. We’re only 6 or 7 months in – I think to say that this bull market has topped already, I think that’s probably not the right way to be looking at it given what’s happened historically and given how investors have just started to allocate to the space.

DigitalX recently launched its Bitcoin Fund, could you tell us a bit about that and how that enables investors to access Bitcoin?

This fund was designed for wholesale investors, so self-managed super funds, financial advisers, investments funds, family offices, to get the easiest exposure to Bitcoin and digital assets, Bitcoin specifically for the Bitcoin Fund. Why that is, is because buying through traditional means which is going to a cryptocurrency exchange, transferring your cash over there, either purchasing and then securing that via a do it yourself custody method using hardware wallets or paper wallets or leaving funds on the cryptocurrency exchanges has typically been fraught with quite a lot of risk. We’ve seen approximately 20 per cent of all Bitcoins lost stolen or hacked, and that’s a very real risk when we’re talking about the types of value that’s in this market.

I know a lot of that was very early on in the piece, but if you look at year on year losses due to those risks of going it yourself, the value of that has continued and trended to increase. Obviously, that’s helped in part by the value of Bitcoin generally, but these are very real targets that those out there in the market that do want your Bitcoin. There’s also some elements that make a fund much more attractive to traditional investors and one of the reasons is you actually receive titled, audited and insured exposure of Bitcoin, which you obviously don’t get by doing that yourself.

Another element is, if you are a fund that’s investing on behalf of others or you’re a family office where you expect those assets to be passed down to other holders over time, the process for managing that through private keys is very complicated. The process for managing that through a fund is very simple. To have that sort of balance, if you are investing on behalf of others, to be able to securely transfer the ownership to them over time makes a lot of sense using a fund.

We’ve also seen some really outrageous costs for managing ownership of digital assets, that’s either through the tax partner or the audit partner for self-managed super funds, doing so through the DigitalX Bitcoin Fund means all that taxation reporting is done automatically for you, so you don’t have those same sort of costs and complexities of doing it yourself. For many investors, they don’t want to become a Bitcoin or digital asset expert, they just want exposure to this asset class and this is what the DigitalX Bitcoin Fund enables them to do.

What are the fees associated with using the fund?

It is a passive fund designed to provide exposure. There’s no active trading, there’s no arbitrage, no high frequency trading, etcetera, so we charge no performance fee. It is a management fee of 1.65 per cent per annum. We don’t really have any competitors in Australia. If you have a look in the US, where we’ve got the largest fund being greyscale, they have a 2 per cent management fee. Over in Singapore you’ve got Stacks of 2.2 per cent. Van Eck has launched one through Europe and that’s around a 2 per cent fee as well. We’ve really designed this to provide really low cost access for Australian investors and we do know that obviously, Australia has been a bit of a laggard in terms of investment interest in Bitcoin, but we’ve really presented this fund to enable Australian qualified investors to get that exposure now and looking to see that product grow in size as well.

Obviously, it’s still relatively new, but how have you seen that perform, especially through last year?

Early on in the piece, there was a lot of work we had to do in terms of getting that exposure, getting that interest out into the market place. Over the second half of the year, we really started to see some traction. The last quarterly results we had were through the September quarterly, we were approaching that $10 million dollar figure. It’s now substantially higher than that and we’ll be releasing results end of this month as well with our quarterly figures, but we’ve been helped with really strong growth in terms of new investors coming through and also obviously the Bitcoin price, so tailwinds from both of those elements.

As we look over 2021, we’re looking to get investment grade rating for that fund, which will really assist also with those listings that we have on wealth management platforms. We’re actually able to get this Bitcoin Fund listed on both Netwealth and PowerApp and that now becomes a really easy way for financial advisers to allow their clients to allocate and get access to Bitcoin via a couple of clicks. That is a lot more of a convenient way than obviously going through a digital asset exchange, cryptocurrency exchange, as well as even going direct, while filling in a typical form that you would with investing into a fund. So, just improving that access is one of the key goals that we have, as well as the exposure through marketing.

You’ve also got a stake in xbullion, which is a blockchain-backed gold bullion product. Could you explain a bit about how that works?

xbullion is a really interesting product in that DigitalX has completed and delivered all the technical elements, so all the blockchain design and all the API integrations with gold bullion delivery as well as with platforms to enable the easy investment into digital gold. But it was actually designed with one of the larger shareholders being a gold bullion company based in Sydney, Jaggards. We actually had the blockchain expertise delivered by DigitalX, as well as having that traditional gold understanding, gold experience in the marketplace. The product has now enabled access to gold at around about a 7-8 basis point spread, so it’s now the lowest cost way of investing in physical gold that is both audited, insured and vaulted, so it’s extremely secure.

Blockchain gives you that digital ownership of that physical gold as well as being extremely low cost, complementing what the key benefits of holding gold are, as well as having allocated gold that is vaulted, audited, insured – the most secure gold, with that blockchain ownership which gives you the ability to have that liquid marketplace, so you can easily sell your interests at near spot rates as well as transfer ownership to anyone in the world within minutes. Key benefits of digital, key benefits of the physical storage and security around that.

That actually launched late in 2020 and has seen some pretty impressive growth very early on in the piece and looking to conclude a capital raising in that business in the very short-term to bring some new investors in outside of traditional gold investment and financial services to broaden that market more into the mining space as well. There’s some pretty interesting opportunities that you could look to have with something like xbullion, perhaps the ability to deliver dividends that are from gold companies, actually in the form of bullion rather than cash, and a way for making gold liquid – transferring that anywhere, storing that via a secure blockchain ownership and indeed, there’s a way now to get a yield on your gold holdings by transferring that into various savings products.

There’s some interesting elements about this product, not only from the low cost way and the new way of being able to transfer gold, but also on the ability to generate a return over and above what the gold market is delivering.

I was reading there are also plans to potentially expand beyond just gold and to perhaps other precious metals as well on there?

Yes. Gold was the first product, by bullion asset management, xbullion being the first product. Silver is an obvious target for us next. One of the main reasons is there is quite a challenge in actually acquiring physical silver. I’m not sure if you’ve been through that process of any of your listeners have. I certainly have and during that period around COVID where supply chains were impacted, the ability to actually secure that physical silver was a major problem. Digitising that, creating a liquid market for that and having the economies of scale with mass storage is a much more compelling way to actually purchase and store silver.

That is, from our point of view, the ability to then launch those products after we’ve seen that initial traction for gold is an obvious launch for us - platinum, palladium and other precious metals, and there’s even some other assets being considered. One of the key elements about this marketplace being effectively stable coins, digital assets that are pegged to the price of real world assets, is that market has grown from the 2017 Bitcoin bull market of around $15 million dollars to now around $15 billion. That’s a key driver we’ve seen of growth in this marketplace. That decentralised finance element is something that we’re helping to bring.

Looking at the marketplace size that we’re in at the moment, we’ve seen something like 15x growth in the last 12 months for digital gold products like xbullion, but very early days in terms of what the total market size could be. Interesting to be a part of that project and obviously looking forward to see some growth in 2021.

I wanted to get onto DigitalX’s own digital blockchain technology, Drawbridge, which is part of your entrance into the regulatory technology market, or reg-tech. Could you explain what Drawbridge enables your customers to do?

Drawbridge is a product that we launched late last year and it was the culmination in around a six-month process of determining where the best opportunities were for launching blockchain products within Australia. Obviously, ASX and the development of their settlement and clearing mechanism towards a blockchain based one has been well publicised. It is going to be one of the largest infrastructure builds that we’re going to see in blockchain within Australia. This product, Drawbridge, actually enables public companies to manage their securities trading policies.

What that is important for, is ensuring a fair and orderly market and a properly disclosed market place to give investors the confidence to know that public companies are obviously managing their responsibilities with regards to corporate governance. This product will connect with Australia’s public companies, they can manage their policies and that’s something which is really the first reg-tech product from which we’ve launched, but with what’s happening with this blockchain build within Australia, there’s actually going to be a huge amount of opportunities for us and with the initial rollout that we’ve seen at part of an early adopter program, we’ve already seen the opportunity for adding further products to Drawbridge to really help these companies manage what they’ve got with their directors, key management personnel and staff that actually hold shares within the company and managing the process for both buying and selling.

How do you sell it in terms of – is it a subscription model?

It is, it’s both a subscription product in terms of our revenue model is based on number of employees, as well as that onboarding process where we will have a sign-up fee for bringing your company on top of Drawbridge and using that within the company. As part of this early adopter program, that pricing mechanism is being discovered, but indicatively, we’re looking at this product as being that SaaS based product which will scale both with the number of staff as well as with the number of companies that will be launching their securities trading policies on top of Drawbridge. Early days for this product, but I think it is something that is certainly beneficial in the Australian marketplace and we’ve seen a number of headlines around policies that haven’t been properly managed and really helping companies stay out of the headlines for the wrong reasons.

Is the aim then to get most of or all ASX-listed companies on board with this and then potentially go to other markets around the world as well?

In terms of the Australia marketplace, it’s more suited towards companies that have circa 20 staff and above. That’s when you’ve got that administrative burden and the risks around that become much greater. With the Australian market, we’re seeing around 2,200 public companies, so a pretty significant marketplace there. But the rollout does see Singapore and Hong Kong as priority launches for us. The way that we’re actually going to get exposure to that is through that launch that Digital Asset Holdings is having. They’re looking to launch this product that’s being used by the ASX both in Singapore and Hong Kong.

We’ve become a foundation and consulting partner with them and looking forward to some introductions to those markets as that technology rolls out in other regions outside of just Australia. But to be clear, Australia is our target market to begin with and looking forward to bringing on more companies in the near future so that we can help define what will be the future features for this product outside of just managing share trading policies. It’s how to really manage the entire suite of share market issues, trading amongst all staff and that corporate governance associated with that through Drawbridge.

Could you give us some background on that reg-tech market particularly and in Australia and its growth potential? I’ve read that Australia is the third-largest reg-tech market in the world and there’s also been some relatively recent government investment in the sector.

In terms of the Australian market, we are the third-largest in terms of the number of reg-tech companies. In terms of the amount of funding that Australia gets for these, it’s only around 1 per cent of global funding. We are significantly down the pecking order, led by the US, UK and Canadian marketplaces and I think that’s a bit of a shame to start with. Obviously, Australia has had some very high profile technology businesses that have created success over the last couple of years, so you’d expect those dynamics around funding to change in terms of how the market in Australia could be assisted. Obviously, having government support around those regulatory frameworks that actually encourage companies to adopt tools, technologies to manage their regulatory requirements is a key element.

We’ve already seen some initiatives there by the Australian Government to do so, one being a $7 million dollar grant for this specific purpose. The other element is really around that investment marketplace, so encouraging investors to participate into this market to help support those reg-tech firms scale, I think that’s another key element. And really, Australian businesses just driving demand for reg-tech surfaces and creating events, awareness, collaboration opportunities to help reg-tech companies succeed. It’s really around industry, it’s around government and it’s around investors to really see this marketplace grow.

We recently saw a funding round within the blockchain funding place, over $100 million dollars at a billion dollar valuation for a blockchain analytics firm that was mapping where transfers across the Bitcoin and digital asset ecosystem were coming from, just to ensure that obviously those AML issues that can be present in payments are eliminated as best possible. These are the sorts of opportunities that we think reg-tech marketplaces offer highly scalable investments with very large marketplaces.

Where does this all leave DigitalX in terms of 2021 going forward? Could you give us a bit of an update on your cash position? Because you’ve obviously also got capital tied up in your digital assets as well.

In terms of DigitalX, we’ve launched the DigitalX Bitcoin Fund, we have our Diversified Digital Asset Fund, we’ve recently launched Drawbridge and xbullion went live late last year. In terms of product development, we have been very busy. 2021 is about scale and about growth of customers and revenue. Growth of assets has absolutely been seen. We’re only 11 days in and we’ve seen an incredibly performance by Bitcoin and by Digital Assets in what is six months into this bull marketplace. I think we’re really looking to deliver further revenue, further customers and help shareholders understand it has been a very active period from a product development point of view, but now it’s about scaling DigitalX’s revenue over the better part of 2021.

I think we would see some further features coming through from Drawbridge as well, outside of just managing share trading policies and I think those are also going to be revenue generating as well, so should be, in what is a really positive environment for both digital products like Drawbridge and Bitcoin and digital assets, a really good year for us I believe.

Do you feel like you are in a comfortable position cash-wise to continue this growth then?

Cash-wise, yeah, of course. Last quarterly, we had around two years of runway from our cash balance. Absolutely, we’re well positioned, well-funded for growth and I guess that’s another part that enables us to hold digital assets for the long-term as well. You mentioned, we’ve been a long-term holder of Bitcoin, we see the company’s Bitcoin position and funds as being as part of our long-term assets and wouldn’t look to sell those to fund operations or anything like that. We’re using the cash for deployment within that and we expect the market for digital assets to continue to grow, well-funded to rollout our plan for our existing products in the market.

Thanks very much for your time, Leigh.

Thanks very much.

That was Leigh Travers, the Executive Director of DigitalX.