What could kill Bitcoin?

superbtc

Defining what life is has always been a challenge. Scientists and philosophers have come up with many definitions to differentiate the living from the non-living. Are viruses alive? DNA molecules? Computer viruses? The inventor of cryptographic hashing, Ralph Merkle, has made the argument that “Bitcoin is the first example of a new form of life.” If something is alive, then it can be killed. Over the years, Bitcoin has survived technical attacks, internal conflict and outside criticism. Bitcoin has shown a quality that goes beyond resilience, that doesn’t just withstand the shocks, but improves when facing volatility, randomness, disorder and uncertainty. Bitcoin has an “antifragility” quality. But is there Bitcoin kryptonite? Can something kill Bitcoin?

Over the years, people have come up with all kinds of scenarios when they talk about the demise of Bitcoin and how it will eventually die. Recently, I’ve read things like Google’s Project Cache Could Kill Bitcoin, Governments Could Kill Bitcoin, Will China Kill Bitcoin?, The Way to Kill Bitcoin Is to Keep Price Under $1,000 and other stories along the same narrative.

Basically, there are two types of Bitcoin killers: Governments and hackers. You’ll hear things like governments will ban it or hackers will take it down. Technical attacks damage the network, while political hurt Bitcoin holders. potentially both can slow or prevent user adoption, create problems to the existing infrastructure and slow down innovation and development.

Generally these things can affect Bitcoin, but its not clear if they can kill Bitcoin completely. Cryptocurrencies exist today because the traditional financial system has failed. Many people, including myself would like to see an independent form of money emerge, that will force governments to compete. Competition brings innovation and gives consumers more choices and better service.

Bitcoin is apolitical and uncensored money. While nations discourage the use of Bitcoin, any ban is technically unenforceable. Any government control and censorship against Bitcoin, only communicates Bitcoin’s value proposition. Governments that threaten people with jail time, because they want to buy Bitcoin, are only confirming their control over money and the incentive to use Bitcoin becomes. stronger.

The are several stealthy ways to send transactions to blockchain using Tor, SMS, in encrypted emails or even using steganography to encode transactions.

The reality is that Bitcoin has many layers of redundancy and governments con’t really control it. Bans never work, they just lead to black markets situations. Also, censorship and restrictions usually drive innovation, with people trying get around them.

If the political and economic institutions of the gold standard in early 20th century, existed in 2008, would Satoshi ever create Bitcoin?

Bitcoin has thrived because the global monetary system is highly problematic. So far, the status quo has favored Bitcoin. The longer things stay as they are, this gives Bitcoin the time it needs to build more liquidity and become more competitive.

Its is highly unlikely Bitcoin will die.

If governments really wanted to take out Bitcoin, they would need to undermine Bitcoin’s economic incentive. They would need to improve and change their existing monetary policies. But they can’t and they won’t.

In the last 10 years, Bitcoin has gone from a white paper to a global market worth $150 billion. Banks like Bank of America and JPMorgan Chase are applying for patents on cryptocurrencies and blockchain. This ecosystem has been on a rollercoaster ride, with huge price swings, rapid expansion, big time hacks, and of course sensational headlines. On this wild ride, it has been easy to lose sight of what Bitcoin means and what it fundamentally represents, beyond speculation and making a quick buck.

Bitcoin’s community of early adopters is very unique and gave the world a free, private and uncensored single global currency.

Bitcoin is not in danger from any government or anything else from the outside, but only from within. The future of Bitcoin will not depend on the wishes of its early adopters. The fate of Bitcoin and cryptocurrencies will be determine by what the 7 billion people around the world want and Bitcoin’s community should be vigilant.

Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com

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This Week in Fintech 10 Jan

week with pics BL.001

This weekly summary from our 5 experts, brings you insights based on their experience as investors, entrepreneurs & executives.

Ilias Hatzis started his first company, an internet search engine, during the dot-com era & now focusses on crypto.

Efi Pylarinou worked for top tier Wall Street firms and is now a top global Fintech influencer.

Jessica Ellerm is CEO of Zuper Superannuation & previously worked for a top Fintech startup, Tyro.

Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners.

Bernard Lunn is CEO of Daily Fintech and author of The Blockchain Economy.

If you want to continue receiving This Week in Fintech, you can either become a paying Member for $143 per year (and receive all our content in addition to this weekly summary) by clicking here.  If you just want to receive This Week in Fintech for free, you will need to fill in this form. Or fill in the same sign up form at the bottom of this post.

Your Editor is Bernard Lunn. He is also the CEO of Daily Fintech and author of The Blockchain Economy.

Monday Ilias Hatzis @iliashatzis our Greece-based crypto entrepreneur (Founder & CEO at Mercato Blockchain Corporation AG and Weekly Columnist at Daily Fintech) wrote Ethereum Strikes Back

Decentralized finance (DeFi) has literally exploded this year. 2020 is set to be even bigger. DeFi offers a unique way to earn interest on digital assets without a middleman taking a cut. Decentralized finance is evolving and Ethereum based DeFi is at the forefront. While several other smart contract platforms have been taking pot shots at Ethereum’s lead, none of Ethereum’s would be killers have been able to gain significant traction this year.

Editor note: If it is broke DO fix it. Bitcoin was born in the last financial crisis, when it was obvious that legacy finance was broken. When the next financial crisis hits, the alternative DeFi maybe ready to offer pragmatic solutions.

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Tuesday Efi Pylarinou @efipm our Swiss-based Fintech Adviser,  founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019 wrote Facts & Figures, Risks & Challenges in the ETF market

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.

Editor note: An interesting look at how ETFs are monetising after moving into the zero fees world. Passive index funds maybe easy for investors to buy but it is much harder to build successful ones.

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Wednesday Jessica Ellerm @jessicaellerm, our Australia-based Fintech entrepreneur and thought leader specializing in Small Business and the Gig Economy & CEO/Co-Founder of Zuper, a new superannuation startup in Australia wrote Fintech Must Meet Cleantech. Fast.

It’s hard to think about much else in Australia right now, other than bushfires. They are consuming our media and our daily discussions with friends, neighbours and work colleagues. Finance has a unique role to play in this adaptation journey.

Editor note: During the holidays I got a break from Fintech but was obsessed with climate change as I watched the awful fires in Australia via Twitter. This post brings those two threads together. When Jessica writes “We must stop looking at climate change as a detractor from growth, and instead realise that by adapting to it, we will actually sustain growth” my head is nodding in vigorous agreement. 

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Thursday Patrick Kelahan @insuranceeleph1, our US based Insurtech expert (a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners who also serves the insurance and Fintech world as the ‘Insurance Elephant’) wrote Can industry changes soften a hard property insurance market in California?

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?

Editor note: This is a must read if you work in Insurance. Like Wednesday’s post, this post tackles climate change, but from the point of view of the natural disaster gap (between premiums and cost of natural disasters which are worse in California due to bushfires and earthquakes).

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Friday  Bernard Lunn, CEO of Daily Fintech and author of The Blockchain Economy, wrote: The Week ending 10 January 2020 in Security Tokens

Editor note: For busy leaders in Security Tokens, the disruptive force in the equities market, here is the news that mattered this week.

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The Week ending 10 January 2020 in Security Tokens

Announcing the Daily Fintech weekly news curation on Security Tokens

Here is our pick of the 3 most important Security Tokens news stories during the week that just ended:

One. WisdomTree leads $17.6 million funding round for security token startup

Securrency, a provider of compliance tech for digital assets, has raised $17.65 million in a Series A funding round led by WisdomTree, the $44.5 billion exchange-traded fund (ETF) and exchange-traded product (ETP) asset manager. 

This shows traditional financial firms getting in on the security token action. 

Two. SEC seeks to force Telegram to reveal how $1.7bn ICO funds were spent

According to SEC, the encrypted messaging service app provider has so far refused to provide any financial information, including how the money has been spent in the past two years. 

The SEC is the top cop in this space and their actions are watched closely by all players in security tokens.

Three. Security Token Show features ZiyenCoin As One of the Leading Security Tokens in 2019

Ziyen Energy has been featured as “One of the Leading Security Tokens That Launched in 2019” by the Security Token Market (STM) on their latest podcast.

This shows Security Tokens breaking into mainstream markets as Ziyen Energy is in oil & gas, nothing to do with Crypto other than the financing mechanism.


We have a self-imposed constraint of 3 news stories each week because we serve busy senior leaders in Fintech who need just enough information to get on with their job.

For context on Security Tokens please read the chapter on Security Tokens in our Blockchain Economy book and read articles tagged Security Tokens in our archives. 

You get 3 free articles on Daily Fintech. After that you will need to become a member for just US$143 a year (= $0.39 per day) and get all our fresh content and our archives and participate in our forum.

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Announcing the Daily Fintech weekly news curation on Security Tokens

utility security tokens.001Tomorrow’s post will be the first in our weekly news curation on Security Tokens.

Each Friday we will choose the 3 most important news stories during the week (in the opinion of the News Curator for Security Tokens). Daily Fintech believes in constraints, because our mission is high signal to noise ratio. We do not want to overwhelm you by aggregating every news story (which is technically simple to do). We serve busy senior leaders in Fintech who need just enough information to get on with their job.

For each story we offer a) an extract from the news b) a link to the news report and c) a brief commentary on why our News Curator considered it important. 

For context on Security Tokens please read the chapter on Security Tokens in our Blockchain Economy book and read articles tagged Security Tokens in our archives. 

You get 3 free articles on Daily Fintech. After that you will need to become a member for just US$143 a year (= $0.39 per day) and get all our fresh content and our archives and participate in our forum.

The post Announcing the Daily Fintech weekly news curation on Security Tokens appeared first on Daily Fintech.

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’.

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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 Must Meet Cleantech. Fast.

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’s hard to think about much else in Australia right now, other than bushfires. They are consuming our media and our daily discussions with friends, neighbours and work colleagues.

After days of smoke blanketing our major cities, we’re slowly becoming accustomed to the sight of commuters wearing P2 masks and the disconcerting smell of a bonfire that hits us when we step outside in the morning. What we once associated with holiday campfires and summer catch-up BBQs with friends and family, now feels distinctly more ominous.

We know this will pass. The fires will eventually be bought under control, the rain will come and the weather will cool as the seasons change. However the relief will be short lived. Next summer it is increasingly likely they will arrive sooner and threaten more lives. That knowledge has caused a quiet but palpable anxiety to descended upon the nation.  How on earth can we adapt to the upheaval climate change is bringing, and how can we adapt fast?

Finance has a unique role to play in this adaptation journey, and businesses need help moving from the old ways to the new. Small business in particular needs targeted technology help sooner – they are far more exposed to the impacts of floods, bushfires and extreme weather events. Small business is the bedrock of the Australian economy, and already economists are estimating a 0.25% – 1% hit on GDP will occur, as a result of the bushfires. You don’t need an economics degree to understand the flow on impact of this through the economy.

Western economies, especially Australia, must start the process of blending fintech with cleantech now if we are to reverse and prevent this economic downward trend. We must stop looking at climate change as a detractor from growth, and instead realise that by adapting to it, we will actually sustain growth.

While change has been glacially slow at the federal level in Australia around this issue, the good news is that some state governments are already talking about the need to help small businesses adapt to climate change.

Last July the Queensland Government released a media statement announcing they would launch a Small and Medium Enterprise Sector Adaptation Plan, that specifically recognised the challenges nearly half-a-million small and medium sized businesses in the region, which is prone to flooding and bushfires, are facing due to climate change.

The costs of upgrading air conditioning and refrigeration equipment in the face of increasing temperatures is real. The cost of waste levies, for businesses without waste minimisation strategies, will start to hit the bottom line. These are not imaginary future bills small businesses will be faced with – they are starting to become real now. Rising insurance costs are just another nail in the coffin for regional business owners. Fintech and cleantech, coming together, now has a real and important problem to solve.

What those with an eye for a ‘good’ opportunity will see is that financing is a necessary role in this process. Smart financing, that can make this easy for small businesses and future proof them, is squarely within the realm of a proactive and gutsy fintech. One that believes in making cleantech widely available. It’s arguable businesses that do decide to future proof themselves in this way are a better credit risk anyway. Insurers will certainly think so.

Australia, a mostly arid continent, can’t afford to lose the battle against climate change. It’s often true that in the most adverse conditions, the most radical innovation can be birthed. Let us hope that out of the ashes of this crisis Australia and its innovators take the front foot on climate change adaptation, and use all its smarts and the technology at its disposal. And then take it to the world.

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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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Ethereum Strikes Back

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Decentralized finance (DeFi) has literally exploded this year. 2020 is set to be even bigger. DeFi offers a unique way to earn interest on digital assets without a middleman taking a cut. Decentralized finance is evolving and Ethereum based DeFi is at the forefront. While several other smart contract platforms have been taking pot shots at Ethereum’s lead, none of Ethereum’s would be killers have been able to gain significant traction this year.

When we look at the Ethereum ecosystem, 2019 was a year of continued growth and innovation.  Looking at the numbers:

  • 80m+: Total Ethereum accounts
  • 4 million: New active Ethereum addresses
  • 4.7 million: Ether issued his year from block rewards.
  • 8,516: Live Ethereum nodes
  • 520: New decentralized applications in 2019

If you’ve have followed Ethereum’s narrative in 2019, you have likely noticed the growth of the Decentralized Finance ecosystem. DeFi brought in hundreds of millions of dollars in value into the Ethereum ecosystem.

The first killer app for Ethereum was ICOs and raising money for cryptocurrency projects. The ICO was a revolutionary shift in fund raising, which drove a massive bull market. The ICO craze in 2017 raised billions of dollars, peaking in January 2018, and launched the programmable money race and the crypto app ecosystem, we have today. DeFi is Ethereum’s second killer app. In 2019, the DeFi was the most impactful trend in the crypto ecosystem. I expect that will continue to be the story in 2020, as DeFi could be worth $5 billion this year.

The traditional banking system on the verge of collapse, interest rates are negative and people that save are penalized for putting money aside. The story use to be that when you would give your money to the bank, to keep it safe, the bank would lend it to others and charge them interest on the money they borrowed and in turn the bank would pay you interest for using your money, minus the cost of running the bank account.

Well, DeFi lets people earn interest again, this time from their crypto assets.

DeFi is an umbrella concept describing financial services built on top of public blockchains like Bitcoin and Ethereum. DeFi runs on trustless protocols, without the need for financial intermediaries. It lets individuals and businesses borrow, lend, trade, invest, exchange, hedge, and store crypto assets. DeFi includes things like Maker which is both a stablecoin and a collateralized lending system.

Today, just about all DeFi projects are built on Ethereum, making it the gold standard for dApps. DeFi accounts for a substantial share of Ethereum’s ecosystem, with applications like:

 

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Today most of these projects aren’t making money. For example MetaMask processes thousands of transactions every day, but doesn’t have a way to monetize.

The way to measure DeFi’s growth is by the Ether (ETH) that’s locked in smart contracts. Currently it’s worth over $680 million (around 2.5 million ETH), 1_Au2qn792IueXEK0LUUI08A.png

with MakerDAO dominating across the major apps.

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This year several contenders have tried to unthrone Ethereum, like Waves, Cardano, EOS and Tron, but Ethereum’s, network effects and abundance of developers (Ethereum has 4x more developers than any other crypto ecosystem), make it very difficult for other smart contract platforms to sway away DeFi apps, from Ethereum

What about Bitcoin, can DeFi be replicated on Bitcoin?

DApps are possible on Bitcoin, but coding them is much more complicated, than on Ethereum. So far, Bitcoin’s most successful DeFi application is the Lightning Network. In 2019, the Lightning Network had impressive growth, with more than 6,000 active users and $6.2 million locked in the network. Other Bitcoin dApps are decentralized exchanges like Bisq or Sparkswap.

Ethereum is growing and getting stronger. Network activity is up, development is on track, and DeFi is hitting record figures. The only thing not so positive, is Ethereum’s  price. You would expect the price to follow suit as DeFi has been growing and it probably will in 2020.

With Ethereum becoming a programmable store of value, it’s well on track to find the niche that will fuel the next bull run. Because the last bull run was based on ICO speculation, some had written off Ethereum based finance. DeFi could provide a tangible value and an opportunity to build financial infrastructure that is open to everybody, and starts to change how we interact with markets. This is nothing to take lightly and I am excited to watch this growth and the applications that will develop in the coming months and years.

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Decentralized discovery is the missing piece in the blockchain economy

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There are many reasons why decentralized is better than centralized. However there is one reason why centralized still wins – discovery. There is no value being on the decentralized platform that is perfectly open, public, neutral, borderless & censorship resistant if few people find you there. That is why decentralized discovery is the missing piece at the infrastructure level that we explore in this chapter.

This is Part 1/chapter 18 in The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index please go here.

YouTube crypto content ban illustrates the problem

When YouTube banned many crypto content creators in December 2019, many people suggested that the crypto content creators abandon the evil centralised YouTube/Google in favour of one of the many decentralized alternatives to YouTube. This is where two worlds clashed. The crypto content creators believe that decentralized alternatives to YouTube that are open, public, neutral, borderless & censorship resistant are a good thing. But their site requires enough people people to view their content to keep sponsors/advertisers happy. They need to be discovered.

Centralized discovery is a solved problem. All the Big Tech companies do this well. However, decentralized discovery is a tough problem.

Why decentralized discovery is so hard

Think about what has to happen for decentralized discovery to work. Somebody who never thinks for a moment about the difference between centralized and decentralized has to find something that is stored on a decentralized service.

The first problem to solve is technical.

Microservices Swarm meet Blockchain

Microservices – also known as the microservice architecture – is an architectural style that structures an application as a collection of services that are:

  • Highly maintainable and testable
  • Loosely coupled
  • Independently deployable
  • Organized around business capabilities
  • Owned by a small team

The microservice architecture enables the rapid, frequent and reliable delivery of large, complex applications. It also enables an organization to evolve its technology stack.

For more on Microservices please go here.

To understand swarming, think of a flock of geese or other natural adaptive systems – where nobody is in charge. Adaptive systems are naturally decentralized and resilient and antifragile.

Many developers think Blockchain is just marketing hype, a slow distributed database at best. You hear that opinion a lot on sites such as Hacker News where developers hang out online. Much of the criticism is valid – the Blockchain space has more than its fair share of hype masters.  Yet Bitcoin is a great example of an adaptive system that is naturally resilient and antifragile and that already works at scale. 

Technically, swarming uses techniques such as message queues that anybody who has worked on high speed trading systems will be familiar with. For a deeper dive, please go to this hour long video on YouTube.

Once there is a technical way of doing decentralized discovery, the user access problem needs to be solved. For that we need a Duck.

Duck Duck Go could solve the user access problem

I switched to Duck Duck Go a few years ago. It took a few seconds to change my default search engine in my browser and the results have been good enough. That combination of low friction and good enough plus a firm commitment to privacy has got Duck Duck Go a lot of traction. That matters because Google lives off advertising and tracking us, so although they can solve decentralized discovery at a technical level, they are not motivated to do so.

Watch this space, it could get interesting. If you are working on a solution to the decentralized discovery problem please get in touch with us.

Daily Fintech will cover this space as it evolves. To get notified when something happens in this space, become a Member. You get 3 free articles on Daily Fintech. After that you will need to become a member for just US$143 a year (= $0.39 per day) and get all our fresh content and our archives and participate in our forum.

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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.

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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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