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Institutional appetite for cryptocurrencies grows after bitcoin’s landmark year

A Bitcoin ATM in Hong Kong on Dec. 21, 2017.

Kin Cheung/AP

The past year was a landmark one for cryptocurrencies, with the price of bitcoin surging more than 1,500 per cent while hundreds of new digital currencies emerged. But if industry observers are correct, then 2018 could be even bigger, as the introduction of new investment vehicles could prompt large institutional players to dip their toes into the cryptocurrency space.

"Twenty-seventeen is going to go down in history as the year of the breakout of cryptocurrency," said Sean Clark, chief executive of bitcoin-mining operation Hut 8 Mining Corp.

Mr. Clark attributes the recent boom to the fact that people are finally beginning to understand the potential impact of the blockchain technology that underlies cryptocurrencies. The blockchain – a digital ledger of transactions that are encrypted and stored in blocks – has been touted as the solution to a variety of the world's problems, from simplifying cross-border payments to speeding up the settling of trades.

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"I think people are starting to wake up – especially incumbents like banks and governments – and see the power of this technology," Mr. Clark said.

Bitcoin started 2017 hovering around $1,000 (U.S.) before gaining upward momentum in the spring. By mid-December, it had climbed to nearly $20,000 before pulling back.

Meanwhile, the market for initial coin offerings, or ICOs – a new method of capital raising where companies sell digital tokens to finance a venture – went haywire. Some companies managed to raise hundreds of millions of dollars in just minutes by selling digital tokens or coins. A couple of token sales even drew celebrity endorsements from the likes of Paris Hilton and the Wu-Tang Clan's Ghostface Killah.

New entrants have been flooding into the emerging industry, looking for ways to apply the blockchain technology that underpins cryptocurrencies to everything from identity verification to real estate record keeping. Some, such as Hive Blockchain Technologies Ltd., have turned to the public markets for cash and been met with great enthusiasm. Hive, a cryptocurrency-mining company, went public on the TSX Venture Exchange via a reverse takeover last September and saw its market cap hit more than $1.2-billion (Canadian) before retreating slightly – despite the fact that it has yet to report a quarter of earnings under its new guise.

The flurry of activity has prompted comparisons to the frothiness of the dot-com bubble before it burst.

But while the price of bitcoin may already seem sky high, some industry observers are predicting it will climb even higher in 2018.

Marc van der Chijs, co-founder of digital currency investment fund First Block Capital, anticipates that bitcoin price will hit $40,000 (U.S.) or $50,000 next year after the introduction of a new technology, dubbed the "lightning network," that will allow for bitcoin micropayments.

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Another catalyst for price gains could be a flood of institutional money into the market, particularly once more crypto-investment funds and derivatives products hit the market.

"The institutional appetite is growing," said Genevieve Roch-Decter, CEO of Grit Capital, a Toronto-based advisory firm specializing in blockchain and cryptocurrency. Grit Capital is hosting a blockchain conference in the Bahamas in February and Ms. Roch-Decter said she's already getting interest from portfolio managers.

"There's an argument to be made that this is still early innings," Ms. Roch-Decter said. "The market is just in its infancy. Next year, it will be in its teenage years."

While the price of bitcoin may soar to new heights, the market for initial coin offerings is expected to be more tepid. In fact, cryptocurrency proponents say much of the enthusiasm for new token offerings has already died down.

"The mania is already over for the ICO market," Mr. van der Chijs said. Six months ago, companies could launch an ICO and raise hundreds of millions of dollars in a week, he said. Now, most ICOs are raising smaller sums of money over longer periods of time.

Ms. Roch-Decter said some ICOs have even been put on pause as a result of a lack of investor appetite.

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"I think there's been a bit of fatigue," she said. "People started realizing that not all of these things are created equal. Money has been lost."

However, this likely isn't the end of initial coin offerings, which have been dubbed a potential threat to the venture-capital industry. Instead, advocates claim the ICO market will mature in 2018.

"We're going to see a new wave," Toronto-based blockchain advocate William Mougayar said. "I call them tokens 2.0."

The new tokens will uphold higher standards in terms of transparency and disclosure and will be fully compliant with securities regulations, Mr. Mougayar said.

Regulatory compliance is particularly important, as it's expected that 2018 will be the year that provincial securities regulators tighten their grip on the cryptocurrency space.

"They are monitoring a lot of these ICOs very diligently and they've already taken some action," Mr. Mougayar said. The U.S. Securities and Exchange Commission has already gone after a number of token offerings that it has deemed fraudulent.

However, blockchain investor and entrepreneur Dmitry Buterin said regulators could find themselves playing a game of Whac-A-Mole, as companies looking to skirt the law could simply relocate to other jurisdictions.

"When there is an ICO announced in the Cayman Islands and they say 'Just send your cryptocurrency here,' what can you do as a regulator?" Mr. Buterin asked.

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