Changing financial mechanisms in the coming decade
Fundamental changes in the financial mechanisms impact your investments.
The benefits of the changing financial environment are being redistributed. Institutional asset managers and custodians are currently not prepared to enter a disruptive market such as the cryptocurrency field, neither are governments equipped for it. Nevertheless, the change in the fundamental financial mechanism has already been accomplished, but mass adoption is just commencing. Curse and blessing. Groups of start-up entrepreneurs are working night and day to get a head-start once the dam, which will be explained in the following, bursts. The new leaders of tomorrow exchange the hard-working hands against IT skills.
And now here we are, financially reasonably wealthy investors, middle-aged and well-educated according to the standards of our time. Why should we make an effort to understand a new financial system, when it is so complicated? Because it will change everything! It is like a breaking dam and you need to be capable to swim in this flood.
In short, crypto is nothing but an unmanipulable chain of data. Like a book, where you write down line after line and you can never erase anything. Every minute, you show this book to your wife and kids, so they can witness, that no page was added or taken out. That is the entire basis of a blockchain. As simple as that. The main result of an unmanipulable “book” is that you do not need a third “book-keeper authority” to prove that your blockchain is authentic – it does it by itself or better with its members (in this case with your kids and your wife). More members witnessing your book-blockchain will even add more trustworthiness – and this is called decentralized finance. Today´s ruling trust- authorities (banks, notaries, escrow agents, credit card payment services, and so on) may become obsolete.
Blockchain Applications Have Powerful Impacts Once You Have Business Models Connected With Them.
Cryptocurrencies are business models based on blockchains, which cause disruption in the established financial mechanisms and take away the benefits of today´s owners. Working in the “Crypto Valley” – Zug, Switzerland, where about 100 different crypto-focussed companies, as well as the first crypto-bank, is based, gives you insights about how far this technology is already advanced. The technologies are definitely good-to-go and have entered already the stage of optimization (such as much lower energy consumption than Bitcoin). We are at the edge of mass adoption commencement.
And this is where the numbers come in to realize that we are facing “a breaking dam” at any moment. The world-equity market capitalization was up to $95 trillion at the end of 2020. There are leading research companies that summed it even up to $115 trillion, of which the United States accounts for about 26%. The New York Stock Exchange is globally the largest financial marketplace. All this capital has been accumulated in different forms of equity and stocks over decades and centuries. $95 trillion equals $95,000 billion (just to explain to the non-American-readers).
Crypto Market Sums Up To Only 2.4% Of the Capital Market
Cryptocurrencies on the other hand total up to $2,3 trillion (sep of 2021). That is only 2,4% of the entire capital market. No more than that.
If only a fourth of all the investments were shifted from conventional stocks into crypto-finance models, you would have a capital-in-flow into the crypto-market of almost 20 trillion USD. That is a factor of X8.
Maybe now we have a true understanding of why people involved with crypto get so enthusiastic about it, Although, they can never really give you a well-founded statement why. Apart from the state-of-the-art technological capabilities, there are four key elements that influence the timing of the breaking of the dam.
The Four Obstacles
The first one is that banks and related institutions do not benefit from crypto-concepts as many of their services are being substituted. Their customer base is difficult to preserve as customers do no longer need them as a third authority and trustworthy asset-keeper. Many banks thus currently work on concepts of “bank-controlled” access to the new crypto-market in order not to lose their assets under management. Crypto-focussed creating companies have recently realized to join forces with the banks than rather revolutionize everything so that one of the biggest barriers will be cleared out any time soon.
The second-largest obstacle for an investment-in-flow into crypto is today´s high volatility. Bitcoin hitting the $50,000 mark at an ATH (all-time-high) can be followed by a deep fall, disabling the currency to be a consistent and steady operand to base prices and services upon. There are many concepts to overcome this deficiency so that this obstacle may most likely disappear first.
The same relates to the third big factor, which is the lack of user-friendliness in operating taking into consideration that the level of knowledge in how to operate with crypto specifics of an average investor is less than basic. Nevertheless, the efforts that are being injected into easy-to-use App creations that are more suited to a regular investor and user.
The fourth and non-negotiable obstacle is the prohibition of non-government-controlled-financial- systems in some regions. Strong authoritative governments face a severe trade-off of their influential power, why a restrictive position is very likely and has to be anticipated. This part of the “crypto-potential” will thus probably not be available in a short or mid-term perspective, which might reduce the growth factor a bit under “8 times”.
Capital, if in cash, in conventional assets/stocks, or in cryptocurrencies always tries to find a new balance and flows accordingly. As soon as the above three obstacles are solved, the capital will break the dam and overflow the crypto-investments.
Detlef H. Hulverscheidt
(CSO of 18digits and G/B/C), 28.09.2021