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The Future of Financing: Dawn of the Coin Offering

My observations on the financial markets in 2017 and how cryptocurrency investments could generate value in a low yield environment.

Artificial.Overvalued.Unsustainable.

As an ardent football fan who has had to endure multiple Premier League transfer windows across a decade, these are very familiar terms. Fans are no strangers to witnessing obscenely high valuations thrown about for unwarranted potential and limited substance. However this summer, I can draw eerie comparisons between football and modern day financial markets.

The Bull Run

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The past few years have seen the accumulation of an unprecedented amount of global debt primarily driven by low interest rates set across the western world to counter the impact of the 2008 Financial Crisis.

The access to cheaper debt capital has also seen merger activities boom with large corporations opting to acquire the competition at inflated prices rather than seeking organic growth measures through reinvestment of profits.

Often seen as a positive signal to investors, acquisitions are expected to improve company earnings in the long term due to the creation of synergies. This trend had led to an artificial surge in company share valuations with the FTSE and NASDAQ being home to entities which currently trade at exceptionally high P/E (Share Price to Earnings) multiples. The price reflects the growth potential with the expectation that the claimed synergies will materialize (although this may not be the case several years down the line)

Many believe that the equity bull run (continuous growth in share price over the course of multiple financial quarters) that commenced in 2013 has entered its final phase. Donald Trump’s presidential victory may have temporarily allayed the fears of a bubble with the promise of looser regulations across the US private sector supporting claims for market optimism.

However, there are reasons for investors to be concerned. Worsening geopolitical ties and the rise of populism continue to put a strain on globalization and global trade. Such conditions present economic triggers that could lead to a correction which has the potential to wipe off billions from current valuations hurting economies in the process.

On a related note, it is very tough for investors to find value in this type of environment. As a value investor, I and others within the community get cold feet when assessing a stock with high growth potential, wary of the fact that the entry price is artificially higher in a financial climate still rallying on the effect of the “Trump Pump” and unprecedented M&A activity.

The anticipation of an imminent correction has led Investors to place their temptations to one side and patiently wait for a price drop that never seems to arrive. Hence we are currently observing a lull in the summer markets with prices remaining relatively steady with subdued transaction activities.

Investors are now forced to search for new avenues to seek value. While some are seeking refuge in traditional markets such as real estate, others opt for alternative ventures such as crowdfunding and digital currency.

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Phillip Fisher

Digital Dollars

ethereum

Satoshi Nakamoto (may or may not be the individual’s real name) envisaged the world in which transactions were settled by a peer to peer electronic cash system. In January 2009 as Barack Obama was sworn in as President of the United States, a quiet revolution was set in motion in Japan with the release of the first ever Bitcoin software. The digital currency now claims to be a substitute for gold with both asset classes now widely deemed similar concerning value retention. (Traditionally, gold acts as an “insurance” against global uncertainty and volatility).

With a tumultuous 2016 giving rise to populism, Brexit, and Trump, investors plowed money into their new found haven of Bitcoin seemingly under the impression that the digital currency was immune to the shocks affecting traditional capital markets. Bitcoin soared in value, a dramatic rise which did not go unnoticed by media outlets across the world. (As I write, Bitcoin is trading at  £1,500 per coin, for comparison purposes, on July 16th, 2015, each coin was sold at a value of £186. Lift off)

Bitcoin is reliant on its underlying blockchain technology.  For those unfamiliar with the concept, blockchain is a digital ledger that allows Bitcoin transactions to flow between parties within a network that enables efficiency, speed, and transparency. (perhaps something to discuss in another blog post). The full potential of blockchain is steadily recognized by facets of the technology community with the concept touted to revolutionize society, eyeing a range of industries from food to finance.

I stumbled upon blockchain in 2015 while I was mentoring a Fintech startup through an accelerator program. I came across what I thought was quite an unusual process. Blockchain start-ups were raising funds through issuing cryptocurrency (tradable digital coins/tokens directly related to the start-up project)   to investors across a network, a scheme known as Initial Coin Offering.

The contrarian in me was certainly intrigued. No dividends,  no voting rights and perhaps most importantly, no equity. (You can almost feel the shivers flowing down the spine of  a Silicon Valley venture capitalist)

Coin holders from across the globe can spend their Bitcoin on purchasing these tokens through an exchange with the hope that the value of the asset will rise as the project progresses. The ultimate objective is that the final viable product can add value as a blockchain interface and hence adopted across systems/networks that relate to its industry (Generating a high level of demand for its tokens, subsequently leading to its price increase).

“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”
Warren Buffett

Risk and Reward

crowdfunding

It’s easy to feel skeptical. Given the general averseness to risk in the economic climate, it’s easy to dismiss this new crowd funding craze as a fad that leverages on the momentum built by the surge in Bitcoin over the last 12 months.

The sheer range of applications and industries to which blockchain is relevant is something which warrants the attention of the financial ecosystem. These are no measly sums. The top 10 ICOs of 2017 raised approximately $563m (!) with Bancor (A blockchain project that seeks to set up an effective exchange rate system for cryptocurrencies) alone accounting for $150m (!!) in funding.

Similar to the dot com boom (and bust) that defined an era, the feasibility of such projects are likely to be exposed with only viable cryptocurrencies possessing concrete business cases and sustainable value creation standing the test of time.

Risk seeking investors who believe in the long term potential of the technology look to acquire cryptocurrency tokens at a low price hoping that the price of the tokens rise as the project begins to yield measurable value and gains traction.

Ethereum, a platform that enables developers to build and run decentralized apps (smart contracts) is the most successful ICO to date. The pioneering technology currently has a market cap of $15Bn with growth driven by its viable use case and accelerating adoption rate.

After Bitcoin had rallied in value during the early part of this year, holders chose to diversify by investing their bitcoins across multiple cryptocurrencies. Right now, millions in funds are raised on projects for which no viable prototype has yet been created. The hype surrounding such startups has led to inflated prices across the market, and if the trend continues, we could soon see this market mirroring current financial markets. Valuations which are Artificial.Overvalued. Unsustainable.

“The most dangerous thing is to buy something at the peak of its popularity. At that point, all favourable facts and opinions are already factored into its price and no new buyers are left to emerge.”
Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor

The Fourth Industrial Revolution

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The potential  of digital currencies cannot be overlooked. The technology will create speed and cost efficiencies which will ultimately channel previously lost effort and time into creating better products and value for the end user. Money and employee hours which were previously spent on maintaining existing systems can now be reinvested. The key feature of a blockchain network is that one block of transactions is time stamped and linked to the previous block. This feature could eliminate common fraud altogether.

With the technology having the power to improve society, the ICO funding process enables entrepreneurs across the globe to access capital and fund projects which could bring about far-reaching social changes. Substantial seed funds would now be available in locations where venture capital culture is yet to establish itself.  For instance, an entrepreneur based in India does not need to fly over to Silicon Valley or London to raise funding for their Chennai based Real Estate smart contract start-up. He/She could simply issue a whitepaper and demonstrate a functioning API prototype through his/her website. Within a matter of minutes, they could have access to the funding and intellectual capital they require to grow and scale a business which encourages ethical dealing and minimizes the risk of real estate corruption.

It promises to be one of the most exciting economic experiments in history. Obvious barriers and road blocks include the rate of adoption of blockchain through society, the scalability of these individual projects and the impact of future regulatory interference.

I  believe that there is value to be found within this new landscape for those investors who are willing to accept its inherent risk. I am excited by the opportunities presented by Blockchain. I firmly believe that Bitcoin is here to stay. We will see a whole host of start-ups enter the cryptocurrency sphere in the next few years and from the plethora of new companies funded by ICOs there will be a select few that survive, scale and eventually go onto revolutionize our everyday lives.

“Know what you own, and know why you own it.”
-Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

In future blogs, I plan to expand on some of the key themes discussed in this post.

I hope you were all able to endure my ramblings on some of the things which I have observed as a capitalist millennial seeking growth in an environment where a 1.5% annual savings return is considered acceptable.

I  sincerely thank you all for spending a few minutes of your day reading my post (This is my first ever blog). If you have made it this far, I believe the chances are that you (like me) are interested in learning more about current trends and emerging concepts within finance. Therefore, I  would appreciate and value all your thoughts and comments.

Till next time. Over and out.

Yours truly,

Sree Nair

 

 

 

Rich Grad, Poor Grad: An honest observation on Millennial financial health

A brief review of recent financial developments affecting millennials and its impact on future economic and social landscapes.

 

Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information in this blog.

Contrary to the media narrative that labels us as lazy and entitled freeloaders, millennials have it tough. Having lived through the Nineties and the Noughties, we have witnessed real wages decline, property prices propel and felt the burden of inheriting a broken financial system.

The modern-day cost of further education leaves the average student dazed and bruised well before they enter the ring to compete in the bloodbath that is the job market. With a higher proportion of young people opting for a university degree, employers are favoring candidates with concrete work experience as they sift through homogeneous honor rolls and degree certificates.

This trend which has been observed globally  has led students to pursue further education in a bid to improve their CVs to appeal to their potential future employers. The pursuit of academic accreditation has led millennials to compromise income and workplace skills for the promise of enhanced earning capacity in later years. This leaves the average young person with little to no savings during the early part of adulthood.

Education is the most powerful tool on earth. In the information age in which we are currently living in, it’s of the utmost importance that millennials are continuously learning and developing new skills to keep ahead of the wave of technological and social developments coming our way.

In a world of cut-throat competition, individuals who do not prescribe to this way of thinking put themselves at risk of being unable to create value, subsequently swept aside by employers and clients  as a result of skill obsolescence and knowledge stagnation. Change is afoot.

While I am immensely supportive of further education, and perpetual learning, prevailing economic fault lines and a lack of financial education could pose a serious threat to our generation of a similar magnitude to that of the 1930’s Great Depression. Below, I have highlighted a few general economic patterns, and the associated impact on millennial financial health (For this blog, the commentary below reflects trends  observed in Europe and North America)

Asset ownership

Image result for college students broke

Young people have faced financial difficulty since time immemorial; most of us have juggled college, social commitments and part-time jobs at some point in our younger years. There are some romance and nostalgia in the process of growing up and having to awkwardly navigate adulthood with accomplices through pot noodles, borrowed Netflix passwords and unpaid TV licenses. There is beauty in the struggle.

Although the halcyon days of university and early adulthood account for memories with incredible replay value, there are some harsh truths waiting to be laid bare.

More of us are owning less.

Property prices have significantly outpaced income growth in big cities ( the hotbed of graduate employment) as a result of high demand driven by corporate interest, infrastructure development, and economic growth. Those seeking jobs in these regions are priced out of the housing market during their peak years of career growth. Millennials are left with no option but to rent and put off housing commitments till future years giving rise to a “rent culture.”

Our parents earned comparatively lower (inflation-adjusted) wages during the early part of their careers. However, they were able to benefit from acquiring assets at lower prices relative to their income. (I acknowledge that at a much higher interest rate and lower disposable earnings in the decades gone by, there is a valid argument for a higher relative cost of acquisition for the previous generation ). Wages have risen over the years, but the cost of living has (so far) overtaken that growth as middle-class goods and services have soared in price.

In the UK, a graduate who deposits £1000 in a savings account can expect a total around the range of £1015-£1030 (subject to rates offered) by the end of the year. To put this in some perspective, In London, an average cost of a happy hour pint of beer is £6.50. By the law of opportunity cost, none can blame millennials for opting to spend the money immediately rather than investing it to earn paltry returns. This brings about another challenge in the form of mustering an adequate deposit amount for a property.

Besides, as mentioned later on in this blog, the government’s continued persistence with quantitative easing (printing money to promote economic growth) will mean the precious cash saved up by millennials could have far less spending power in future retirement years.

The lack of capacity to purchase assets and an inability to get onto the property ladder till later in life would lead to a far-reaching strain on disposable income (for the individual and/or the family) wading through the middle age and trickling through to the current retirement age. Not owning a property would limit retirement funding options and inheritance planning.

Overall this trend risks to inhibit the quality of life, cause wealth inequality to widen and place further reliance on the government to prevent large-scale relative poverty.

Great Expectations 

The economy is not the only reason millennials are saving less.

Living in a hyper-connected society has also led to a change in consumption patterns for the average young person. With social media platforms such as Instagram and Facebook being used as marketing platforms for brands and influencers, users are bombarded with images and posts of latest fads and products tailored specifically to the individual through algorithms during each minute spent online.

With pressures to maintain and document a particular image repeatedly promoted by models, athletes, and entrepreneurs who have embraced the internet (and internet money), young people are inclined to give into the hype and spend funds that they scarcely have.  Money is spent on products and services we don’t need to impress people we don’t like. (Champagne flair on a  lemonade budget)

Time is precious. You are only young for a handful of summers. The tourism industry has thrived through social media with images and videos of exotic holiday locations across the globe taking over display screens instilling a (justified) fear of missing out among millennials. Savings balances are depleted through seeking these new experiences for leisure and self-development purposes.

Investing in experiences is never a bad idea, however casting a cautious eye to what one can afford with regards to leisure is advisable in an era where corporations are spending millions on ad revenue and artificial intelligence to distract us and make us give into our temptations.(Handy Tip: If you can’t buy 5 of product/service X with your total bank savings, you can’t afford 1 of product/service X!)

Diminishing Returns 

'Why are we labeling a bunch of insulated self-indulgent whiny cry babies 'millennials'?'

I remember it very well. Everyone in our generation was either directly or indirectly affected by the 2008 recession. If we thought the financial crisis of 2008 was bad, I sadly feel that it was just a precursor to the imminent pension fund bailouts that await us in the coming decades.

This comes at a time when the existing pension systems in many countries are not yielding an adequate level of assets to pay out future pension liabilities to employees. This is primarily due to years of historically low-interest rates in an environment where medical advancement is allowing people to live far longer than what was previously conceivable by actuarial models. It is reasonable to expect some form of government intervention in the future.

Without getting too technical, across Europe and Northern America there are two types of pension schemes, one where your employer guarantees a steady income throughout your retirement years; Defined Benefit, and a scheme in which your employer matches your annual contribution to by a set contribution percentage of your income across your working years with no employer liability during the employee’s retirement; Defined Contribution.

DB schemes are being slowly phased out due to increased concern by corporations over future liabilities. As you would expect, the majority of the current millennial workforce is enlisted on DC schemes where the individual is solely responsible for funding their lifestyle during retirement.

The potential future bailouts of DB schemes (a scenario where a government provides assets to Pension companies to fund the retirements of individuals to whom corporate employers were initially liable to) could also require the government to print more money as part of the funding process. A scenario where the public loses out further due to money supply led inflation, and future spending cuts can be envisioned causing income inequality to widen as the lower and middle classes bear the brunt of the changing landscape.

Once the implications are factored, to have sufficient resources to cover costs and living expenses during later years,  millennial workers (largely DC holders) will be required to work longer, spend less and set lower expectations for retirement. (a far cry from the visions of spending your summers in Monaco, sailing into the sunset in your  yacht)

I hope most of that made sense to you, dear reader.

To prevent the narrative of this blog from being the most depressing story ever told, I would like to suggest that it is not all bad news. Due to the economic growth that we have observed over the previous years, millennials would seem to gain significantly through the greatest wealth transfer in history from an inheritance perspective. Acquiring estates (houses, shares, cash reserves) which have grown in value over decades gone by will soften the blow of an uncertain economic future for those individuals who had the blessing of being born to asset-rich parents.

Ultimately I believe it is paramount that young people actively look to invest and save from an earlier age to achieve some level of autonomy and leverage over their financial situation in future years. As millennials approach prime consumption and spending years, consumption and investment patterns can have a significant impact on the economy. In my next blog, I will look to list a few ways in which millennials can go about taking the first steps into investing.

Once again, thank you for reading my blog. This topic has been playing on my mind since I took my first accounting classes back in 2012. The process of writing this article has been beneficial to me as I have attained more knowledge on the areas expressed above (Always in appreciation of  the process). It was bothering me that the majority of my generation was blissfully unaware of certain worrying emerging trends  which led to the  inspiration behind this piece.(Through no fault of their own, blame the lack of financial education being taught in schools/universities).

As always, I would sincerely appreciate and value all your thoughts and comments.

Till next time.

Yours Truly,

Sree Nair

 

Image credits: http://www.fintechnews.sg, http://www.newyorkercartoonsexplained.tumblr.com, http://www.buzzfeed.com,www.cartoonstock.com,www.twitter.com

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