Asia’s cryptocurrency traction overstated, PE/VC sector lacks alignment: Aswath Damodaran

Aswath Damodaran, Professor of Finance at Stern School of Business, NYU.

Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University (NYU) and a specialist in corporate finance, believes that the traction in Bitcoin and other cryptocurrencies in Asia’s emerging markets is overstated.

Asked whether the current surge in the value of cryptocurrencies reflected the maturation of the market or indicated a coming correction to more stable levels, given similarities to the Bitcoin bubble of 2013/2014, Damodaran explained: “This is a pricing game, where mood and momentum dominate. Predicting corrections is meaningless since you cannot act on them unless you get specific about when the correction will happen and by how much.”

Given the boom in Bitcoin and the potential that major cryptocurrencies like Bitcoin and Ethereum can play in Asia’s emerging markets, particularly with the proliferation of smartphones and growth of mobile commerce in South and Southeast Asia, Damodaran continues to remain sceptical of their traction.

He told this portal: “What traction? All I hear is talk. There seems to be much less going on in the transaction front on cryptocurrencies than there is in the trading front. And since fiat currencies work perfectly well with smartphones and mobile commerce, those cannot be the basis for the rise of cryptocurrencies.”

What about the potential that central bank cryptocurrencies offer, given that Singapore’s regulator, the Monetary Authority of Singapore (MAS), is engaged in Project Ubin and working with Japan’s banks exploring the J-Coin? Damodaran opines: “I think that there will be a global digital currency, sooner rather than later, that has the implicit (if not explicit) backing of the major central banks. I don’t see the advantages of creating fiat digital currencies.”

Moreover, the current growth in initial coin offerings (ICOs), whose growth has synchronised with the boom in the cryptocurrency market and which have emerged as an entrepreneurial finance tool that sees both startup ventures and PE/VC firms in the Indo-Asia Pacific raising funds, are likely to see more regulation.

Damodaran elaborates: “ICOs right now vary from quasi-equity offerings (allowing startups to raise money legitimately from global investors, without giving up control) to outright fraud/donations since they are loosely structured. My guess is that sooner or later, ICOs are going to be regulated and are going to require information disclosure and ownership rights to be more clearly specified.”

Given that ICOs present a danger that a business venture is over-capitalised, this development also aligns with concerns in the PE-VC sector that enterprises in the technology space are overvalued. To an extent, this might be reflected in Asia’s VC sector, which has seen a migration of VC funds to later-stage rounds.

Asked whether a rationalisation of the PE-VC market in Asia can be expected in the Indo-Asia Pacific, given the bubble for overvalued US unicorns quietly collapsing, Damodaran argues: “Since PE/VC investors are not exactly well versed in valuation – they are the ultimate momentum players – who cares what they think? In fact, their actions, where they continue to pile into these investments, don’t match their views.”

With the current trend of technology enterprises in the Asia Pacific – the SEA Group being a prime example – looking to list on the NASDAQ or NYSE in New York when raising capital or looking for exit, given that bourses in Southeast Asia lack the capacity to support the high valuations of technology enterprises, Damodaran opines: “You can take the capital-raising out of Asia but Asia has other problems that are not so easily solved. In particular, many Asian business owners want to have their cake and eat it too, raise money like public companies but continue to run their businesses as family fiefdoms.”

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