The puzzle of how to make money from cryptocurrencies just got a lot easier to solve, thanks to a soon-to-arrive platform called Prism.
Anyone who has tried to invest in cryptocurrencies knows how challenging it can be to buy and secure multiple cryptos at once.
After people buy their cryptocurrencies on an exchange, many avoid the hassles of setting up a wallet by storing their holdings on the exchange - and leaving their digital assets vulnerable to theft by hackers.
Those who download the digital wallets to their PCs find that owning more than a few quickly becomes unwieldy, as most cryptocurrencies each require their own wallet.
That's where Prism, a project of the ShapeShift digital asset exchange, comes in.
"We wanted to do something better than either of those options, but do it in a non-custodial way," ShapeShift founder and CEO Erik Voorhees told Money Morning.
Prism uses the smart contract feature of Ethereum to allow customers to create their own handpicked cryptocurrency fund. This allows investors to profit from their selected cryptocurrencies without the hassle of buying and storing the underlying digital assets, similar to how investors use exchange-traded funds in the stock-trading world.
Voorhees is a well-known innovator in the Bitcoin community. He's also served as head of marketing for early Bitcoin exchange BitInstant and was a co-founder of Bitcoin payment-processor and wallet company Coinapult.
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Voorhees created ShapeShift as a place for people to exchange cryptocurrencies on a website without setting up an account (thus avoiding the cumbersome customer verification process other exchanges require).
And now he's created Prism to make investing in cryptocurrencies easier too. Right now the project is in the testing stage, so access to Prism is by invitation only. But Prism is expected to go live sometime in early 2018.
Here's how it works...
While the Prism experience simplifies investing in cryptocurrencies, it does require customers to own some Ethereum, since the system is based on Ethereum.
To get started, an investor needs to set up a Prism account and fund it with the Ethereum equivalent of the amount they wish to invest. During the "beta" stage, the limit is 10 ETH, worth about $3,000.
ShapeShift doesn't hold your funds; the smart contract part of Ethereum controls the funds, which you can withdraw at any time.
You can choose up to 20 cryptocurrencies to include in your Prism and assign by percentage how much value will be allocated to each asset. The process is similar to setting up a 401k retirement account. (See image.)
The current test version of Prism has 45 cryptocurrencies available, but Voorhees said, "ultimately we will have hundreds."
But you're not actually buying the cryptocurrencies.
Instead, each Prism smart contract is essentially a derivative contract. Its value is only based on the current prices of the underlying assets. ShapeShift doesn't buy the cryptocurrencies, either. The prices are sourced from an "oracle," an online agent that determines current cryptocurrency prices and is updated on the site every few minutes.
You can log in to the Prism site to monitor the progress of your crypto-portfolio. Should you want to make any changes, such as adding or deleting a cryptocurrency or rebalancing your holdings, there's an option for that. The screen is essentially the same as the setup screen. ShapeShift charges a 0.5% fee for each rebalance.
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To close your Prism, you send a transaction of 0 ETH to your Prism address, which signals the smart contract that you're ready to close out. You must withdraw the entire value of the Prism. The closing fee is 0.05 ETH plus 2.4% of your portfolio.
The resulting ETH - your gains or losses - are then sent to your Ethereum wallet.
Prism is an innovative approach to investing in digital assets, but some in the cryptocurrency community have raised concerns...
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The biggest objections point to Prism's multiple fees. In cryptocurrency forums, commenters complained the fees would eat up customer profits.
In addition to the fees outlined above, there's also a variable monthly fee that Voorhees says will be market-based. That fee was originally set at 1%, but Voorhees changed it to a market-based fee in response to these concerns.
But he maintains the fees are necessary.
"I think our fee structure is reasonable," Voorhees said. "People are going to pay fees regardless of where they buy their cryptos. We're saving people time, so that's worth something." Plus, he said, using Prism avoids the risk of storing cryptocurrencies on an exchange.
Of course, it's true that ShapeShift does make some money from the fees, but Voorhees said the company needs some compensation for putting up the collateral - the other side of customers' trades - that makes Prism possible.
Some have also objected to a side effect from using smart contracts to build the Prisms - the maximum gain from any one Prism is 100%. Since cryptocurrencies often gain far more than that - Bitcoin is up 500% in 2017, and Ethereum is up about 3,600% - the limit strikes many as a deal-breaker.
"When we started this, we didn't think one of the main criticisms would be that you can't make more than 100%," Voorhees said. "In future versions we will remove that limit."
He said the problem is that as long as ShapeShift is serving as the counterparty, it can't afford to put more than 100% - the same amount as the customer is investing - into each smart contract.
In the meantime, Voorhees offered a simple solution. "If a Prism gets to 100%, make a new one with the same configuration," he said. He admits this requires some management on the customer's part, but the strategy does allow for gains greater than 100%.
Another part of Prism's evolution will help solve this. Voorhees said that, in the future, customers will take both sides of the trades, so ShapeShift will not always be the counterparty.
And that means customers will be able to set higher return levels as part of the smart contract.
This will also serve to lift the 10-ETH limit on the value of the Prisms, since customers will be able to invest as much as they want as long as there's a willing counterparty.
Voorhees is also optimistic that the Prism project will spawn other forms of blockchain-based investing.
For example, he believes someone will come along and create cryptocurrency tokens that will represent individual Prisms.
"We won't do it ourselves, but we can't stop other people from doing it," Voorhees said, noting that the SEC would likely classify such tokens as securities, which would invite regulatory oversight.
All things considered, Prism is a promising first step in blockchain-based investing for the masses.
After playing with Prism for the past two months - ShapeShift allowed me into the beta - I can say the site is extremely user-friendly and works as advertised.
If you've been looking for an easier way to invest in multiple cryptocurrencies, Prism just may be the answer.
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