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Fintech General

Australia’s Open Banking Dream Drifts Away

Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a neowealth disruptor in Australia

It would seem Australia’s hopes of having a quickly implemented open banking regime are fading fast, if not completely transparent already. An already delayed start date of February 2020 has been pushed out to July 2020, causing much consternation in the startup community, as fintechs continue to battle with unpredictability around the regime.

On top of this, fintech advocacy groups have highlighted the significant costs that fintechs will face to become accredited to use the system, making testing product-market fit near impossible, without significant upfront funding. As most founders will know, this is hugely problematic – most investors want some of the chicken and at least the egg before they’ll part with their dimes.

To add insult to injury for fintechs downunder, consumer groups are pushing for screen scraping technologies to be banned once open banking is in play, arguing that legacy fintechs must migrate to the higher standards of the open banking regime.

In principle, I’m sure many fintechs, even those on ‘legacy’ screen scraping technology, would migrate in a heartbeat – if it were commercially viable and simple to do so. But the fact of the matter is it isn’t. Firstly, it’s not even available, and secondly, what should be a simple and open set of standards, is mired in controversy and debate amongst stakeholders.

What seems to be lost in this debate is that for decades banks have sat on legacy data that has seen them pass on billions of dollars in unnecessary costs to consumers. If the nation is serious about actually challenging the stranglehold banks have on consumers, and the free-for-all of fee taking that currently exists, they would be bending over backwards to create an environment that allows fintechs to flourish.

Australia needs to invest in this infrastructure and invest fast. We need to stop talking about it and just do it. Internationally, it is somewhat embarrassing that we cannot even get this done. The UK is already years ahead of us. Developing nations, on our doorstep, are likewise leapfrogging us.

Stagnation and uncertainty are the enemy of progress, and fintech seems to be caught right in the thick of it. Investors and founders be warned.

You get 3 free articles on Daily Fintech. After that you will need to become a member for just US$143 per year (=39c per day) and get all our fresh content and our archives, and the opportunity to participate in our forum.

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Blockchain, ETFs, Fintech General, investing

Blockchain Thematic ETFs from the West to the East

blockchain ETFs

Listing on exchanges continues to dominate. Whether listing on regulated or unregulated Centralized exchanges (CEX) or Decentralized exchanges (DEX) of any sort; this has not changed at all for assets.

Brain Armstrong, the CEO of Coinbase, in his New Year medium post, foresees that we will be moving from a predominantly trading & speculation phase of cryptocurrencies and Tokens of all sorts, to a phase of actually Using Tokens.

In the meantime, however, incumbents and startups continue building all the necessary infrastructure to issue, custody, settle and clear, trade and invest of all sorts of digital assets.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

You get 3 free articles on Daily Fintech. Get all our fresh content and our archives and participate in our forum, by becoming a member for just US$143 a year.

Blockchain exposure a la ancienne

Investing via listed equities will never die. In fact, I foresee Blockchain will enable it grow exponentially. More listed equities, across more jurisdictions, better information, fractional ownership.

For now, the traditional way to participate in the growth of the Blockchain sector is to buy publicly traded stocks. For example, mining companies, companies building enterprise software, or hardware.

Hut 8 which is the largest publicly listed bitcoin-mining company worldwide. Listed on the Toronto stock exchange Hut 8 Mining (TSXV:HUT) has a market cap close to $100million. Most pure blockchain companies, have small capitalization (less than even $10mill). As a result, the market sees more potential to capture the upside in Blockchain by investing in publicly traded tech companies with significant strategic exposure to the sector.

Blockchain Stocks that lists and tracks such stocks, shows companies like Accenture, MasterCard or funds investing in the sector; as their picks in the List of Blockchain stocks and their list of Large cap Blockchain Stocks.

Traditional investors can otherwise consider public equity exposure to the Blockchain sector through thematic ETFs. In the US, there are 8 Blockchain thematic ETFs that have accumulated $240million?

Screen Shot 2020-01-13 at 10.42.03

Source

Only 4 of them have managed to accumulate more than $10million and none of them have surpassed the $100million mark.

The top holdings of the two largest Blockchain ETFs are companies like the Japanese IT providers – GMO Internet and Digital Garage.

GMO is the company preparing for the launch of the first Yen backed stablecoin – GYEN. It is also expected to launch a new Bitcin mining device with low cost and electricity consumption, the B2 miner.

Digital Garage another Japanese company (4819-TYO) with and an ADR. They teamed up with Blockstream last year to serve institutional needs in the sector in Japan.

BLOK ETF has more than half a dozen Japanese companies in its top holdings, like LINE, KAKAO, SBI Holdings, and Korean Rakuten.

BLCN is more diverse with some Asian companies, like JD, Baidu, and LINE.

All Blockchain ETFs contain Bigtech companies, like Alphabet, SAP, or Nvidia.

In Europe, there is the Invesco Elwood Global Blockchain UCITS ETF listed on the LSE (BCHN:LN) with $38 million AUM since its launch last March.

Top holdings are similar to the US ETFs

Screen Shot 2020-01-13 at 11.18.01

In China, the Shenzhen Stock Exchange just launched a Blockchain 50 Index that includes listed companies on its exchange in the Blockchain sector.

blockchain-50-index-constituents-1536x765.png

Source

The top holdings are Ping An Bank, Midea Group – electricity company, East Money Information.

The Shenzhen Stock Exchange, has applied to the China Securities Regulatory Commission for permission to list a blockchain exchange-traded fund (ETF) benchmarked off its index.

All these investment wrappers, are essentially offering tech exposure with a Blockchain tilt.

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California, catastrophes, Daily Fintech Advisers, disaster insurance, FAIR Plan, Fintech General, fire insurance, hard market, Homeowners insurance, innovation, InsurTech, parametric insurance

Can industry changes soften a hard property insurance market in California?

hard-market-to-soft-market-cycle

There are suggestions of hardening markets for US property insurance participants, and there is no better example of this than what is occurring in California.  Non-renewals in wildfire prone areas, premium increases, reductions in coverage and the seeming ultimate reaction- regulatory prohibition of policy non-renewals.

How did the state get to this point, and is there a lesson to be gained for any area that is exposed to regional maximum losses?  Is the hardening multi-trillion dollar California homeowners market a bellwether for others?

 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

image

Hard Market — in the insurance industry, the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. Can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.[1]

 

An on point definition of a hard market for the California property insurance market prompted in great part by successive years of severe wildfires throughout the state, a circumstance that recently culminated in the state’s insurance commissioner to enact temporary regulations that prohibit non-renewal of homeowners’ policies for one million insured properties located within wildfire-prone areas. The commissioner’s action came as a result of insurance premiums in affected areas rising to seemingly unaffordable levels, in carriers refusing to underwrite properties, and in delayed recovery in wildfire areas due to limited availability of hazard insurance.

[1] https://www.irmi.com/term/insurance-definitions/hard-market

How did a bad fire situation get worse? Two years of homeowners’ lines’ loss ratios averaging in the 190 range, or $1.90 being paid out for every dollar of earned premium.  Who expects carriers to absorb that extent of loss without an according rise in premiums?  Let’s take a look at how the state got there (we’ll set aside the climate risk and fire damage negligence/liability discussion), and how things aren’t as simple as one might think.

Loss History

The state’s homeowners’ carriers were essentially the same in 2017-2018 as they were in the ten years preceding the heavy wildfire years.  Why does that matter?  Consider this chart of data for HO line earned premium, losses, and loss ratios for the ten years prior:[2]

CA Premiums Losses

[2] http://www.insurance.ca.gov/01-consumers/120-company/04-mrktshare/2018/upload/MktShrSummary2018wa_RevisedAug1519.pdf

$37.4 billion surplus of earned premiums over losses incurred during that ten-year span. That is not bad.

 

If one looks at the 2017 and 2018 results, the numbers flip:

Earned premiums–           $15.6 billion

Losses incurred–               $29 billion, or a $13.4 billion deficit. That gets companies’ attention.

A significant compounding concern for carriers for the 2017-18 period is that the losses were compressed into repetitive geographic areas, reflect concentration of maximum losses within same, and the factors behind the peril have not materially changed. So even though there was a $37 billion surplus noted for the ten years prior, carriers (being forward looking for revenues) reacted not only to raise premiums, but to restrict available coverage and restrict the scope of coverage, classic hard market characteristics.

Premiums and pricing

If the discussion continues to market factors regarding historic pricing, more evidence of the roots of a hard market come to the surface. Average homeowners’ policy premiums for the state relative to median property values are significantly skewed in comparison with other states with higher population and exposure to concentrated risk:[3]

States Premium

[3] data from https://www.policygenius.com/homeowners-insurance/how-much-does-homeowners-insurance-cost/#average-homeowners-insurance-cost-by-state

So the case builds for how a hard market builds- premium levels that seemingly fail to consider the potential effects of regional peril occurrences.  California having premium values one quarter of those in Florida?  There is also significant evidence that- on average- properties have been under-insured for value in that post-disaster rebuilding costs are exceeding coverage limits. The market (through pricing history) inadvertently set its own table for hardening.  And it’s not just carriers- homeowners and financing institutions are partners in the issue.

Coverage

Homeowners do have options when persons have are unable to obtain voluntary insurance due to circumstances beyond their control- the state’s default insurer, the FAIR (Fair Access to Insurance Requirements) plan.  The state’s FAIR plan provides limited coverage for primary perils but its use requires property owners to have separate wrap around policies in order to have cover that reasonably matches the benefits of voluntary cover.  The FAIR plan is a syndicate pool supported by the state’s property insurance carriers, so think of it as analogous to auto/motor risk pool insurance.

Increasing the number of persons accessing the insurance of last resort is one thing, but considering a recent order by the state insurance commissioner to require FAIR to provide broadened coverage limits[4] (to $3 million) and broadened peril coverage (to mirror an ISO HO-3 policy form) seems (per FAIR leadership) to exceed the commissioner’s authority.  Right or wrong, the change in the FAIR plan does not alleviate the issues with concentration of risk, actuarially supported rates, or the fundamental fact that risk factors need to be mitigated.

[4] https://www.insurancejournal.com/news/west/2019/11/14/548537.htm

What to do?

Property insurance is a keystone to any economy- borrowing, recovery, risk sharing, and risk management, etc. Absent a thriving insurance industry, a jurisdiction simply will flag in comparison with other areas. A hardening market is a wake-up call that the inherent cycle of insurance is at an attention point- carriers see challenges in the near future and are retracting access to insurance and placing a premium on price, even if company capital levels are currently higher than average.  Soft markets certainly reflect the reverse, but who complains when underwriting is easier and rate taking is de-emphasized? The surpluses in premiums gained during 2007-2016 are long forgotten.

Ideally the market would:

  • Set premiums at a level anticipating significant regional events
  • Price wildfire risk into all policies in the state (everyone gets affected when these events occur)
  • Leverage the available capital surplus and interest from reinsurers
  • Partner with private risk vehicles (ILS, Cat bonds) for broader backstopping of risk
  • Consider wildfire cover that is similar to earthquake or wind covers, with more substantial deductibles for that peril
  • Adopt complementary parametric plans that trigger when wildfires occur, providing immediate recovery funding to affected property owners rather than wait for government programs alone (that may take years to administer)
  • Refrain from using FAIR plan changes to circumvent needed changes in voluntary policies/underwriting/pricing
  • Tread very cautiously before having regulators take anecdotal actions ex post to occurrences
  • Implement immediate subsidies for areas that suffered direct and as yet unrecovered damage- not taking action affects all

With these efforts being in conjunction with all efforts being made to mitigate risk factors, encouraging behavior changes, and encouraging policies more in keeping with risk management- climate, economic, and functional.

Why this?

The state has other, potentially bigger concerns with risk- earthquakes.  Wildfire risk has had terrible effects, multi-billion dollar effects, most often in more remote or less densely populated areas than urban Los Angeles, San Francisco, and Oakland, heavily populated and developed high-risk earthquake areas.  EQ insurance penetration (approximately 11% of property owners) suggests uninsured losses will far eclipse wildfire losses if a significant quake occurs, and there is not enough resources (currently) for the state to back-fill an EQ disaster recovery.  The entire country will be affected.

And what of the balance of the world’s economies?  A recent Swiss Re Institute assessment of insurance protection globally denotes an estimated $222 billion natural disaster gap[5], a number that again would be overshadowed by temblor damage in developed regions.  What of the wildfires in Australia, where the affected areas are more than six times greater than the 2018 California wildfires affected?

 

Hardening of insurance markets- that’s a challenge for insurance customers, but for markets like California’s homeowners’ lines it’s a precursor for what may be coming elsewhere.

[5] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/56236161

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Fintech General

Facts & Figures, Risks & Challenges in the ETF market

Screen Shot 2020-01-06 at 14.59.31.png

I am starting the New Year with a focus on ETFs, a 30yr old financial product that has shown Resilience, and relentless Growth. It is simple in its use but not that simple in creating and going to market. It has even been the wrapper of choice to bridge the old world to the new digital asset world. But Distribution remains key.

In 2016, I reviewed the process of issuing an ETF and the `hidden` risks and costs. Hidden not in a deliberate sense but in the sense that investors get carried away and ignore the devil in the details.

Are ETFs Trackers that Fintech can turn into Trucks with No Brakes? Worth a review of the details since each one of us owns ETFs directly or indirectly.

Remember, 2016 was the year of The Betterment/Brexit incident that showed the ugly head of illiquidity and out of whack bid-ask spreads in ETFs.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

State Street, one of the major ETF issuers, has been campaigning consistently about the myths regarding ETF costs

Screen Shot 2020-01-06 at 12.19.40

Let’s call these things with their name.

The ETF industry continues to grow and 2019 was a year of several milestones.

European ETFs AUM was hit by underperformance and closed 2018 with €633.1 bn AUM. In 2019, European ETFs reached close to $1 trillion. ETFGI, reports $960bn = €860bn.

Screen Shot 2020-01-06 at 12.37.15

A record $4.4 trillion of assets flowed into ETFs and ETPs in the US. ETFGI research reports this 30% growth.

Screen Shot 2020-01-06 at 12.24.21

The reality is that growth was mainly performance-driven.

The fact remains that it is very difficult to launch a new ETF and get it over the $100million AUM mark. This is a small-cap hell for ETFs.

2019 was the year of what I call the `Robinhood-effect`, in other words the zero-fee breakout. Several large incumbents in the US followed suit after Charles Schwab announced its zero-commission policy for trading single line stocks. This may seem as the green light to replicate indices at no cost and the democratization of rebalancing towards any kind of benchmark. But of course, nothing is what it looks like at the surface.

Indices have licensing fees that ETF issuers have to incur. Managing the tracking error of the portfolio with respect to the benchmark, simultaneously with the cash drag, comes also at a cost. Custodial charges, brokerage charges may or may not be offset by revenues from lending out securities held in the portfolio. Securities lending for ETFs that hold stocks that hedge funds may want to short (borrow) is a business that is not unusual. It is actually the way that ETFs earn some revenue and are able to offer nearly-zero cost ETFs. I am referring to the expense ratio of the ETF.

Expense ratios of ETFs (asset mgmt. fees) have been dropping too but taking into account the bid/ask spread of the ETF (which is linked to the size) is important. Also, differentiating between trading fees and asset mgt. fees.

The lowest expense ratios of ETFs are in the range of 2 or 3 bps but the catch is that their bid-ask spread may shoot up to 50bps in certain market conditions. For a complete list of low expense ratio ETFs see here.

  • SPY, one the largest ETFs, has over $300billion AUM and an expense ratio of 9bps.
  • Vanguard S&P 500 ETF (VOO) is another S&P500 ETF tracker with a much lower expense ratio of 3bps and $130billion AUM.
  • The Invesco QQQ (QQQ) NASDAQ 100 tracker has a rather high expense ratio of 20bps and $87Billion AUM.

Yes, there are currently close to 2,000 ETFs that trade on platforms with zero trading commissions (according to a WS article). Fidelity has launched its own commission free trading of ETFs that already includes 500 such ETFs. This does not mean that these ETFs have zero expense ratios. Charles Schwab and TD Ameritrade also offer more than 500 commission-free ETFs on their platforms. Vanguard leads the pack with 1,800 commission-free ETFs on its platform[1].

Commission-free trading is less likely to help ETFs in increasing their assets, much like low expense ratios have not actually proven to be the key to large scale distribution of ETFs. The market has spoken on this front and the verdict is `It is all about distribution channels`.

Look at SoFi`s zero-cost S&P ETF , the SoFi 500 ETF (SFY) launched in April 2019 with zero expense ratio (at least until June 2020). The online lender has managed to accumulate $72million AUM and the average bid ask spread is 21bps (compared to zero for SPY and VOO).

Salt Financial played the same game and in an even more aggressive way last Spring. They launched an ETF with a 5bps rebate until it reached $100million AUM (a negative expense ratio). The Salt Low truBeta US Market ETF – LST has only accumulated approx. $10million AUM by now.

Their strategy was that the rebate (negative expense ratio) would be their marketing budget and when they accumulated $100million AUM, they could cover costs through securities lending. That is also the way some Vanguard Index ETFs beat their benchmark – by distributed to investors their revenues from securities lending (3 or 4bps).

CNBC reports that over the past year, there are only 4 new ETFs that have managed to accumulate more than $100million AUM. It remains bloody difficult to grow a new ETF. The only new ETFs that reached $1 billion mark are two ETFs that were heavily funded by an insurance company.  The Blackrock ETF iShares ESG MSCI USA Leaders launched in May has already $1.84billion with an expense ratio 10bps and a bid-ask spread of 5ps. And the Xtrackers MSCI USA ESG Leaders Equity launched in March has already $1.7billion with an expense ratio 10bps and a bid-ask spread of 5ps and in these cases the ETFs were seeded with big money from an insurance company.

Issuers of ETFs like Schwab, BNY Mellon, Goldman Sachs, Fidelity have essentially in-house distribution channels. Schwab feeds its Schwab Intelligent Portfolios investment platform, BNY Mellon its custody client needs, Goldman Sachs has United Capital and S&P Investment Advisory to place its zero-cost ETFs, and Fidelity has its fund families. Bloomberg reports that more than 70% of U.S. ETF assets are in low expense ratio funds. In 2019, 93% of new money flowed into such low-cost products[2].

Image source statistica

[1] Data is as of July 2019 from ETF.com.

[2] There’s a Dark Side to Zero-Cost Investing You Can’t Ignore

 

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Fintech General

Thank You

Happy New Year. Today is my last post on Daily Fintech. Before signing off, I just wanted to say a few words of thanks.

Image Source

Before Daily Fintech, I was a Fintech enthusiast and an investor. However, I had not written regularly on a focused subject anywhere. I only knew I could write, but had to prove it to myself.
When I reached out to Bernard about this time three years ago, he was kind enough to offer me the Friday slot on Daily Fintech. Writing became a routine, but more importantly, reading up became a religion.
I had to read so much to get a holistic view of a topic, think through the trends, figure out a pattern and create a storyline around that. It was an intellectual journey that I look(ed) forward to every week.
In the initial days, writing an article took almost a day. It became a lot easier as I kept reading, connecting dots and writing. Especially after a panel discussion, an event or a speech, the article would take less than an hour to write.
I learnt a lot in the process. In my meetings with potential investors for my fund, the wealth of knowledge I had accumulated in Fintech helped. It helped establish immediate credibility and made fund raising a lot easier.
It was especially true when I first met Banesh Prabhu, who was the ex Global COO of Citigroup consumer bank international. Our discussion got to a point where I was competing with him on a Fintech trend discussion. It was no simple task doing that with Banesh. He eventually became a cornerstone investor in my first fund, and is now my partner at Green Shores Capital, my second fund.
Daily Fintech was one of the top reasons for my first book offer. I was headhunted by a top publisher to write a book. The book should launch in Q1 2020.
I must thank Bernard Lunn for giving me the opportunity to write on Daily Fintech. It has been a challenging and rewarding journey writing alongside great minds like Bernard, Efi, Jessica, Pat and Ilias. It was a nervous journey at the start, but this community of authors made it quite an enjoyable ride.
Thanks to all my readers, for the comments, social media support and engagement. That is often the biggest validation for a writer.
I will still be writing on sustainable and climate friendly innovation. I believe there is a lot of work to be done in that space. Please do connect with me on LinkedIn if you have enjoyed my writing and would like to follow my work.
Thank you and a very happy New Year!

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Fintech General

Why London could become the Bitcoin capital of the world

Editor’s Note: this is the 8th post on Daily Fintech, written in 2014 – before all the political craziness of Brexit

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

Fresh insights will be coming from our knowledge bakery tomorrow.

This is one of a series called Explorations down the Bitcoin rabbit hole.

First, my bias. I am a Brit. When I left the UK in 1990, the start up scene was dismal, new ideas were greeted with skepticism and the status quo was glorified. It is a great pleasure to see that point of view so totally reversed now. There is a vibrancy, optimism and big ambition change-the-world thinking that is “oh dear, so Unbritish”.

The UK tech scene has had false starts before. 8 years ago I was writing about how innovation was going global and yet Silicon Valley still dominates to an extent that I did not envisage when I wrote this post on ReadWrite in 2007.

I think this story about London as a leading global Fintech/Bitcoin center has legs for 3 reasons:

  1. Critical mass of techies and rich people. Paul Graham of Y Combinator fame famously said that all you need for an innovation center is (i paraphrase) techies and rich people. There is one caveat. The rich people must have made their money from the domain you are asking them to invest in. If the rich person made their money in property or manufacturing, a digital startup just looks ridiculous. London has plenty of people who made their money in Finance. They know that even the most venerable institutions are “data centers with fancy lobbies”, so a new tech powered innovation is not too big a stretch for them.
  2. A light regulatory touch. Compare what the Cameron government is proposing vs what the New York State Department of Financial Services has proposed. It is clearly a fine line to walk. It is counterproductive if a center becomes a haven for scamsters and consumers to lose a lot of money. Bitcoin is a global phenomenon and many Bitcoin startups have global teams who can decide where they want to be based and regulation (along with talent and capital) is key to that decision. Regulation to protect consumers is good. Regulation to protect incumbents from competition is bad. New York has a lot of incumbents that certainly want protection; if they succeed in getting it, London will have a playing field tilted in their favor.
  3. Talent with the right mix of domain expertise and deep tech. Fintech needs both. Deep tech expertise can be found in any location with good Computer Science colleges. Fintech startups need those engineers in the same room with people who understand the nuances of things like credit rating, derivatives, exchanges, asset management and so on. The devil is in the details that sit at the intersection of both deep tech and. domain expertise.

I see three “straws in the wind” to indicate that this is happening now:

  1. MeetUp attendance for hot new Bitcoin 2.0 platforms such as Ethereum. These could be huge or they could be flashes in the pan. What matters is how the techies are voting with their time. London is doing well on that score.
  2. The VC funding for Bitcoin startups. The numbers from Coinbase show Europe ahead of Asia in Q2 ($30.9 vs $20.8). This is still a long, long way from the $186m for America and I would like to see the regional numbers (e.g NY vs Valley and London vs Berlin) but I suspect that London is far ahead of any other European center. The Valley will always score on access to big Funds. What matters is London vs New York i.e two centers with deep Financial Services domain skills and networks.
  3. Big Silicon Valley Funds such as Accel see the trend lines and are setting up in London or strengthening their operations.

This is one of a series called Explorations down the Bitcoin rabbit hole

 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

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Fintech General

My top 11 songs about money

Daily Fintech is about the business of money, so for some light relief on New Year’s Day here are my top 11 songs about money:

The Romantic view:

 

A slightly more jaded romantic view:

 

The practical view:

 

Anticipating derivatives (“you never give me your money, you just give me your funny paper):

 

What we all want:

 

Jaded realism:

 

The yuppie anthem:

 

Sadly real: 

Resisting the sadly real:

 

Celebrating the practical: 

 

Ask and ye shall receive:

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Fintech General

Bitcoin VC Funding is now over 30% of Fintech and catching up fast

Editor’s Note: this is the 7th post on Daily Fintech, written in 2014 – to close out 2019. Happy New Year to our Western readers

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

This is one of a series called Explorations down the Bitcoin rabbit hole.

Actually this understates it, but more on that later. First the basics. I looked at data from Coindesk on Bitcoin VC funding and data from CB Insights on Fintech.

The Coindesk data is for Q2 and the CB Insights data is for 2013, so I multiplied the Coindesk data by 4 to get an annual run rate of $960m vs total Fintech over $3,000m. Thus the 30% headline number.

This understates the Bitcoin number. Where would we record the pre-mining that funds a lot of Bitcoin 2.0 start-ups?

However the bigger story is around momentum. Bitcoin startups only started to get serious money in the last 12-18 months. As some of these like Coinbase and Bitpay get real traction, this will pull in more funding. More importantly, the Bitcoin 2.0 platforms such as Ethereum, Maidsafe and Counterparty are getting funded through pre-mining and they are platforms to attack Fintech markets well beyond what we narrowly think of as Bitcoin today.

My guess is that if did the same analysis in Q4 of 2014, the Bitcoin run rate would be closer to 50% of total Fintech. Some time during 2015, this analysis will no longer be useful as most Fintech startups will use Blockchain technology in some way. By 2016, it will be like saying “we use the cloud”.

This is one of a series called Explorations down the Bitcoin rabbit hole.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

The post Bitcoin VC Funding is now over 30% of Fintech and catching up fast appeared first on Daily Fintech.

Fintech General

What will trigger Wall Street Adoption of Bitcoin?

Editor’s Note: this is the 6th post on Daily Fintech, written in 2014 – well before the ICO wild days of 2017.

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

This is one of a series called Explorations down the Bitcoin rabbit hole.

Bitcoin is:

1. A payment network

2. A currency

3. A store of value.

So far I have focused on 1 & 2. In this post, I am focused on 3.

Call it a currency or call it a commodity (as the IRS does), the store of value question is simply “will I get a better risk-adjusted total return than other alternatives?”

Let’s parse that question for Bitcoin:

  • “Total return”. This means capital appreciation PLUS Interest (Bonds) and Dividends (Equity). You receive no Interest or Dividends if you hold Bitcoin. Indeed the cost of Cold Storage makes it a cost to own Bitcoin.
  • “risk-adjusted”. Bitcoin is more like Gold, which also pays no Interest or Dividend and you pay to store it in a vault. Gold has thousands of years of price history, Bitcoin about 5. It is inconceivable that Gold value will decline to zero. It is possible that Bitcoin will decline to zero; unlikely but possible.
  • It is inconceivable to forecast a 10x or 100x return for Gold but one can paint many scenarios in which the price of Bitcoin will be 10x more than it is today (which makes it a 100x return for early speculators and miners).
  • So, you might lose everything or you might get a 10x or 100x return. Does that sound familiar? Or course it does, this is like investing in tech startups.
  • If this is like investing in startups, what stage is the deal? Is this Seed or Series A or B or C or is it IPO stage? I don’t think it is Seed stage. That was investing in Bitcoin in 2010. Today it is more like a Series A deal. You probably won’t lose everything at a Series A stage (a lot of the risk has been taken out by the time a venture gets to Series A). So the upside is also more constrained. Some ventures do get a 100x return from Series A valuation but 10x is a more reasonable expectation.

It is easy to paint the scenario in which Bitcoin declines to zero. Merchant adoption stalls and a better cyber currency emerges to replace Bitcoin. To paint the 10x or more picture, we have to imagine things like:

  1. People in a significant sized economy with a failing currency (think Argentina, more than Zimbabwe which is too small an economy to make a difference) decide to use Bitcoin rather than US$. This sounds plausible enough until you try to imagine the actual scene where the black market guys exchange tourist dollars for Bitcoins and then the tourist offers Bitcoins to the vendor.
  2. Rich people worried about taxation, store their money offshore in Bitcoin rather than in US$. Again this sounds plausible, except for one inconvenient fact, which is that this is viewed as money laundering in most jurisdictions i.e. illegal. If somebody does this illegally, they won’t want to keep it in Bitcoin, they will want to turn it back to Fiat and get Interest and Dividends.
  3. Gold bugs become Bitcoin hoarders. Despite a libertarian bent to both communities, I see this as unlikely. Gold bugs love the fact that it is physical and has thousands of years of history.

If any of the above scenarios pans out, fast money such as Hedge Funds and retail currency speculators will pile into Bitcoin and then there will be “meltup” in price. That will lead to more hoarding and so more price rises.

What I find hard to see is what sort of investor will feel drawn to this type of risk/return. If you like 10x or 100X upside with the possibility of 100% loss, you will be drawn to investing in startups.

If Bitcoin succeeds as a payment network, it won’t have much impact on the price, it will just be an enabler for lower cost payments. For bitcoin to succeed as a currency it needs to become boring and non-volatile, floating up a down compared to Fiat currencies like USD floats up and down compared to EUR. Speculators will find something else to play with.

For Wall Street to get really comfortable with investing in bitcoin, they will want an ability to short bitcoin. That of course will help to stabilize the price and ensure that it is less volatile, which will make it less attractive to speculators.

Of course, the reality is that Wall Street does not need to get comfortable with investing in Bitcoin, they just need others to get comfortable. If Wall Street firms can earn fees and commissions from selling Bitcoin, they will do so and many will become rich from doing this even if investors actually lose money (“where are the customer’s yachts?”). These periods of irrational investing last longer than a rational person might expect, but they do eventually implode.

Personally, I prefer the risk/reward of tech startups and I think that Bitcoin the payment network and bitcoin the currency is fundamentally at odds with the volatility that speculators love. If Bitcoin does become a viable currency, it can be traded just like any other currency and will have similar levels of volatility, which still leaves plenty of room for intra day trading to make money.

This is one of a series called Explorations down the Bitcoin rabbit hole.

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Fintech General

Bitcoin transaction volume through merchants is the single most important metric in the Bitcoin economy

Editor’s Note: this is the 5th post on Daily Fintech, written in 2014 – sadly not much progress on this front in 5 years.

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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The future of Bitcoin as an alternative currency is tied to one simple metric – merchant acceptance and the velocity of money through those merchants.

 

Bitcoin has potential as a) a payment network, b) a store of value that you can invest/speculate in and c) a currency. This article is only about bitcoin as a currency.

 

Like others before me, I have become more positive about the future of bitcoin the more that I learn about it. A few months ago I would have leaned to the view that Bitcoin the payment network had a great future but that bitcoin the currency would be a footnote in history. Today I am more positive, because the trend lines and motivations around merchant acceptance are positive.

 

If mainstream merchants accept bitcoin, it will thrive. If not, anybody owning bitcoin will need to first transfer bitcoin into Fiat currency and the regulatory off ramp problem will kill it as an alternative currency. Without mainstream merchant acceptance, bitcoin the currency will live on only in the shadow economy and become a footnote in history. Forget the headlines about bitcoin price fluctuations or the latest VC deal; these are “noise on the line” compared to merchant acceptance.

 

We have been through two phases of merchant acceptance and we may be about to start the third phase (phases overlap i.e. one does not have to end before another one begins):

 

  • Phase 1. Illegal online transactions, made famous by Silk Road. This got some media attention and confirms the old saying that, “there is no such thing as bad press”.

 

  • Phase 2. Attracting rich Bitcorati for legal products. This is the phase we are in today. The merchant logic here is very simple. If a rich person wants to pay me in some unusual currency, I am motivated to accept that currency. Enough people got rich speculating in bitcoin or mining bitcoin in the early days for this to be a real niche market. These Bitcorati are bitcoin enthusiasts, so if they see two objects they desire equally and one says “we accept bitcoin” then that rich Bitcorati will choose the merchant who accepts bitcoin. This is fundamentally different from phase 1 because a) it is legal and b) we will start to see merchant success stories akin to the merchants who were early adopters on the Internet.

 

The enabler for phase 2 is the elimination of the volatility problem. The same volatility that is a boon for speculators is a showstopper issue for merchants. There is no value in getting rid of those hated 2-3% Credit Card fees if the bitcoin price moves more than that before you can use it to pay your suppliers and live your life.

 

The two leaders in processing Bitcoin for merchants are Coinbase and Bitpay. At time of writing both claim 35,000 merchants. Both have raised a lot of money from top tier investors. Their pitch to merchants is that accepting Bitcoin is as easy as accepting a credit card – with lower fees. Coinbase’s pitch to merchants for example:

 

“When a sale is made, you can instantly sell the bitcoin received to Coinbase to avoid exposure to bitcoin volatility.”

 

A leader in merchant adoption could be the first VC backed Bitcoin success, analogous to the Netscape moment. An IPO would give the venture mainstream visibility and kick-start the next wave of Bitcoin innovation, funding and adoption. It’s a pity that the bar is so much higher for an IPO than it was 20 years ago, but that is another story.

 

The tipping point is simple. It comes when merchants switch from asking, “why should I bother accepting bitcoin?” to, “is there any good reason not to accept bitcoin?” When that happens and consumers see the bitcoin symbol on more merchants checkout (online or offline) they will be more interested in paying by bitcoin.

 

2014 has been a good year so far for merchant adoption with the following big e-commerce players announcing that they are accepting Bitcoin – Overstock, Dell, DISH, TigerDirect and Newegg. Overstock was the bridge from Phase 1 to Phase 2. Patrick Byrne, the founder CEO of Overstock is known as a critic of the establishment while running a large mainstream business.

 

We have to move beyond the Bitcorati to get to the tipping point. Somebody who has not got Bitcoins from mining or speculating early in the game has to be motivated to buy using bitcoin instead of a credit card. I have been talking to some small merchants to ask them what might trigger them to accept bitcoin. These are merchants who do not have an obvious Bitcorati customer base; some may do so and the merchant won’t know until they try which speaks to the “is there any good reason not to accept bitcoin?” story. Most had been totally put off Bitcoin due to the volatility issue and the story that the volatility problem has been fixed has not yet reached them.

 

However in their busy lives, there still has to be a good reason to take the time and trouble to accept bitcoin. One story that made these merchants think about accepting bitcoin came up a couple of times and this could become Phase 3 of bitcoin merchant adoption:

 

  • Phase 3. Micro-multinationals who want to accept international customers. Big businesses have already got doing business globally nailed. Small businesses don’t have very good solutions that are a) easy to implement b) inexpensive. Getting international payments via credit cards is easy but expensive; you pay a lot for the currency transfer back to your home currency. You could accept payment in foreign currencies but that gets complex. First, you have to decide which foreign currencies to offer and Murphy’s Law says that the one currency that you omitted is the one that your ideal customer wants to use (an American merchant may enable EUR and GBP and miss the Swiss customer who really wanted that high margin upmarket product as long as she can pay in CHF). Then you will have the hassle of getting your bank to accept multiple deposits in foreign currencies and when they do that you will find that you lose a lot when your bank converts it back to your home currency.

 

Doing this via bitcoin won’t be simple, but at least Bitcoin will be solving a real problem for merchants. Nobody has sized the micro-multinational market, but anecdotally it is large and tools such as VOIP now make it more natural to transact across borders, so this is likely to increase. This Phase is important because it will get more consumers (who have not mined or speculated) to use bitcoin. Lets say a consumer wants to buy something online that is priced in a foreign currency. If consumers see a simple calculator that tells them how much cheaper it is to pay via bitcoin than their credit card or debit card and it looked as easy as using their credit or debit card, consumers may give it a go.

  • Phase 4. When Bitcoin becomes universal, just another option alongside cash and the usual Credit Cards in main street shops and e-commerce sites. To look at how could Bitcoin to cross the chasm from early adopters (Bitcorati and Micro-multinationals) to a universal payment option, we need to move into some speculative futurology and understand the switchover to EMV Chip and Pin cards in America. This switchover happened in Europe before merchants had any interest in Bitcoin, but will be happening in America just as the Bitcoin story gets more mainstream attention. The switchover to EMV Chip and Pin cards will happen in America for the simple reason that merchants will become liable for fraud from October 2015. Magnetic stripe cards are terribly insecure, particularly if merchants don’t even check the signature. When the POS terminal vendor comes calling about the dreaded switchover, a few merchants will ask them “can I accept Bitcoin with this new device?” It is a logical question. Merchants don’t know if Bitcoin will take off but they would feel annoyed if it did and their neighboring store was taking orders from their Bitcoin-enabled POS terminal while they were stuck in the past. So it is likely that some POS terminal vendors will add bitcoin to their functional checklist. If this happens we will cross the chasm, go past the tipping point or whatever other analogy we use for Bitcoin changing the world. There is a lot of money at stake in this switchover and the established payment companies will be torn between lowering their fees in response to the Bitcoin threat and fighting it at the regulatory level.

 

Moving from speculative futurology to real traction today, there may be a hoarding problem. Adoption is one thing, but what really matters is transaction volume (what economists call velocity of money). I asked both Coinbase and Bitpay to point me towards any data on this. Coinbase responded quickly saying “we don’t share stats around bitcoin transactions”. Bitpay revealed that they “process over $1 million per day in bitcoin transactions” and pointed me towards the Coinmetrics site which shows Daily Transaction Volume ($ value) and Daily Transaction Value. The Daily Transaction Volume at about $44 million is tiny compared to $16 BILLION for Visa; its no surprise that Bitcoin has a long way to go. Looking at the trend-lines shows some spikes that I will be digging into in a future post (I want to find out what triggers these spikes).

 

My next post is about bitcoin as a store of value ie as an asset that you invest in/speculate in hoping that it will go up in price. This is related to transaction volume because one reason for lack of volume is hoarding by people who own bitcoin.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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