A Cryptocurrency Bubble Accelerate The Fintech Revolution?
A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices which are unwarranted by the asset’s natural price, driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate. Bubbles form in economies, securities, stock markets and business sectors because of a change in investor behavior. The impact of economic bubbles is debated within and between schools of economic thought; they are not generally considered beneficial, but it is debated how harmful their formation and bursting is.
The dot-com bubble was a historic economic bubble and a period of excessive speculation that occurred between 1997 to 2001, a period of extreme growth in the usage and adaptation of the internet by business and consumers. The commercial growth of the Internet was sparked by the advent of the World Wide Web and then the release of Mosaic Web Browser in 1993. During this period, many internet-based companies were founded, many of which failed. During 2000–2002, the bubble collapsed. Some companies such as pets.com and Webvan failed completely and shut down. eBay and Amazon later recovered and surpassed their dot-com-bubble stock price peaks. During the dot-com bubble, the value of equity markets grew exponentially, with the technology dominated by the NASDAQ index, which rose from under 1,000 to over 5,000 between 1995 and 2000.
A housing bubble is a run-up in housing prices fueled by demand, speculation, and exuberance. Housing bubbles usually starts with an increase in demand, in the face of a limited supply, which can take a relatively long period of time to replenish and increase. Speculators enter the market, further driving the demand. At some point, the demand decreases or stagnates at the same time as supply increases, resulting in a sharp drop in prices and the bubble bursts. Traditionally, housing prices are not as prone to bubbles as other financial markets are, due to large transactions and carrying costs associated with owning a house. However, a combination of very low interest rates and a loosening of credit standards can bring borrowers into the market (often inexperienced in paying back large loans), and fueling the demand. A rise in interest rates and tightening of credit standards can lessen the demand, causing the housing bubble to burst. The infamous U.S. housing bubble in the mid-2000s was partially the result of another bubble in the technology sector. The high default rates in in the US subprime home mortgage sector encouraged by factors such as Lax regulation and securitization led to the financial crisis and the consequent damage to the world economy in 2008.
Bubbles can be damaging to the wider economy, especially if it occurs in a key market, such as the housing or stock markets. A stock market crash can cause a loss of confidence and lower spending. The stock market crash in 1929 was one important factor that triggered the great depression. However, stock market crashes don’t always cause a recession. For example, the stock market crash in 1987 didn’t cause any slowdown in economic growth.
A Cryptocurrency Bubble?
With a new surge in the cryptocurrency market, opinions have become even more polarized. For several financial analysts, the cryptocurrency race is very similar to the Tulip Mania of nearly 400 years ago. Skeptics hinge on Bitcoin’s first impression as being a black-market currency and call this a bubble, while proponents contend that this is a global currency that is increasingly gaining global acceptance. According to Bloomberg, Bitcoin and other surging cryptos are bubbles that will eventually burst. Aberdeen Asset Management claims that a lot of money will be lost before a lot will be made, calling it a “gold rush” mentality. ICOs have proven to be a successful method for blockchain and cryptocurrency startups to raise funding (though there has been much fraud, and many sprouting startups unable to deliver). At the same time they provide investors with access to highly liquid assets that could potentially double or triple in value in a very short amount of time.
The blockchain technology that cryptocurrencies are based on has tremendous potential. Ethereum as a technology platform has a number of projects such as the DAO, Akasha, and Gnosis that have received an enthusiastic response from the market. Today, hundreds of companies in technology, banking, media, communication, and logistics are places where blockchain technology can be leveraged for profit. The NY FinTech Week Conference, a motley of technology chiefs, funders, and blockchain acolytes has helped to accelerate the process.
Crypto And The Fintech Revolution
Beyond disruption, the mechanisms surrounding cryptocurrency, particularly blockchain and ICOs are revolutionizing the global Fintech landscape. The global crypto-powered ecosystem is uniquely positioned to reshape business transactions and interactions in the global commercial market. The ecosystem enables new channels to power small business growth, employee payroll networks, B2B and B2C transactions, as well as equity and debt financing. Financial institutions are exploring a variety of opportunities to use blockchain, including applications to improve and enhance currency exchanges, supply chain management, trade execution and settlement, remittances, peer-to-peer transfers, and asset registration among others. A 2015 report estimates that blockchain could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance by between US $15–20 billion per annum by 2022.
As banking continues to be disrupted by Fintech startups, the crypto-enabled marketplace aims to reshuffle the financial world with peer-to-peer (P2P) lending, a method of debt financing that enables individuals to borrow and lend money without the use of financial institutions acting as intermediaries. P2P removes the middleman from the process. The emergence of p2p lending platforms built on blockchain technology, particularly on blockchain platforms such as Ethereum, have recently increased. Private blockchain platforms such as BTL’s Interbit allows for the tokenization of loan assets, enabling participants of a p2p lending network to trade their loans with other participants. This will radically improve the architecture of existing p2p systems & processes, as well as open large opportunities in p2p lending. The SALT platform, on the other hand, seeks to streamline every step of the loan process, facilitating a new blockchain-backed lending market. The new lending platform, which is built on Ethereum ERC20 smart contracts, enables borrowers to access capital-on-demand through its network of lenders.
“The P2P lending market is expanding significantly. With these platforms, borrowers with lower credit scores than most financial institutions would allow, can still get access to financing.” ~Stelian Balta, Founder and Managing Partner at HyperChain Capital.
The Getline Network’s innovation has also bridged the gap between lenders and borrowers from different social networks, inadvertently lowering the risk of defaulting within these different classes. The platform is an Ethereum-based, peer-to-peer lending platform that allows for trustless credit scoring, accessible borrowing, and effortless lending. The new and decentralized Getline Network will be operating on the Ethereum platform, to take advantage of their smart contracts. The network is also creating a new digital token called the GET token, which will act as collateral for the borrowers, and as a fraud deterrent against Attesters of Risk Assessment (ARAs — those responsible for giving default prediction ratings) attempting malpractice. The token will help the platform run smoothly. The loans themselves can be funded in fiat or cryptocurrency.
The Getline Network will create an online reputation system, where transactions are conducted among parties that trust each other and the process as a whole.
It’s my opinion that the potential of blockchain technology is now being realized by the global Fintech landscape and P2P lending platforms. Despite their current regulations, ICOs and blockchain technology provide a renewed experience, with 90% of payment companies planning to adopt blockchain as part of an in-production system by 2020.
Even if we’re in a cryptocurrency bubble that ends up bursting, we’ll be back to fundamental values, and we’ll have accumulated a large amount of innovations and technologies such as the blockchain that will continue to be employed in the economy.
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