HODL – Worse Use Case ?

HODL is a term that got popular through a forum post where a person claimed to hold the bitcoins forever once the markets crashed. HODL stands for Hold On for dear Life on in simple word never selling them. Now either it was intentional or unintentional, HODL did become famous in the cryptocurrency industry. 

 King Leonidas from 300

Out of the total 17M bitcoins in existence, 9M haven’t moved in the last 12 months. This represents around 53% of the total bitcoins but I am confident that this number is close to 75% in actual. It’s not possible to get the data on individual users who store their bitcoins on the exchanges

Source : Bitinfo Charts

While HODLing does promote the message of hope & avoid capitulation in bear markets, it isn’t right for the network bitcoin. Bitcoin network runs due to support from miners who mines bitcoins in hope of getting bitcoins in return.

If the blocks are solved exactly 10 minutes apart, all the bitcoins will be mined by 2140 which is 122 years from now. Margin of difference actually would be +/- 10 years.

I suspect if we go that far but for a moment let’s consider we did. In that case, there are no more bitcoins to be mined so miners make money by validating transactions. Now imagine every one is HODLing and there are no transactions happening at all. There isn’t any incentive for miners to exist because the economic incentive has collapsed. 

Bitcoin network strength depends on the hashpower supporting network and with the departure of miner, there isn’t any network or just a weak network. HODLing is celebrated & cheered upon in the industry, however it’s a threat to the fundamentals of cryptocurrency.  

If you consider bitcoin a instrument for Storage of Value then HODLers are the #1 or Most Valuable Users ( MVP) for bitcoins. 

While HODL certainly make sense to avoid the panic attacks in tough markets, it doesn’t make sense over life time of any other asset that doesn’t generate dividend. Real estate being the #1 fav HOLDing asset. 

So while times are time, don’t panic & when times are great, it’s always good to take off some profits off the table. Capitulate & HODL both are bad from economical point of view 

What’s your strategy when the times are great or when they aren’t that great !

2018-12-14T14:26:09+00:00December 15th, 2018|

Blockchains Tourists – Time to Pack up !

2018 has been the worse year for blockchains if you look at the price. Unfortunately, measurement of success in this industry has been measured by market cap. It has roughly lost 85% of its financial value within12 months which may be among the worst performance for any asset in the modern history. There are many other indicators showing all time worse situation for the industry. Question is it all over for blockchain or we can recover from here.

Capital preservation is the #1 reason behind success of wealthy people. If you look at the chart below, it shows how much gains are required to make up for the loss. Summary is It’s much difficult to make up for a loss.

Gains required to makeup for the loss occured

If you look at the history of bitcoins, it has been pronounced dead 100s of times. I’ll do a blog post on death announcements vs price action some later day. Bitcoin has lost 85% or more around 5 times now in last 6 years. Defying every traditional law of finance, it has however recovered strong every time. This exponential rise isn’t alien in the tech world and hockey stick pattern is fairly common.

I got into bitcoin purely because of FOMO 7 years ago. I couldn’t resist staying out while watching everyone around me flaunting about their crazy gains. For me it was unreal & there was no chance I was going to lose. Sadly, I bought my first bitcoins at All Time High (ATH). Bitcoin crashed the very next day losing 50% of the value. I’ll be honest I was really upset over what just happened and pessimism was at all-time high. Fear of losing everything almost made me sell it, but then I figured I’ve already lost 50%, what if I lose the another 50%. Bitcoin at that time was already up by some crazy 12X or so, so there was a hope it can do it again. That was almost 7years ago when bitcoin dropped from $260’s to $40’s.

Looking back, it seems very easy to make the decision toHODL, but it’s not an easy choice when you’re in that moment.  It’s very simple to classify the early bitcoiners as lucky but as a matter of fact, they’ve scars all over them. Perseverance in the end paid off for majority of them, but it was super difficult back then.

Bitcoin is lucky enough to have a cult following composed of libertarians, economic freaks & tech geeks who’re in for ideology rather than monetary benefits. This bear market has little impact on them. While everyone is hurt, they’ll continue to BUIDL. With every price rise, there has been a new set of people who come in but as things start to fall apart, they’re the first to pack their bags. In case of a disaster, it’s the tourist who leave first. Habitants stay and focus on rehabilitation.

Photocredits ” by James Nachtwey

Cryptocurrency is going through its tough time when it comes to valuations however adoption is all time high. There hasn’t been a time in history when there were this number of intelligent brains working on brilliant ideas. I’ll call it crypto winters where majority of the project don’t have enough resources to survive. It would be a litmus test that’ll differentiate the boys from men. Let’s see how long this survive & most importantly who survives.

Terms Used:

  • HODL – Hold on for Dear Life. A term very popular referring to holding on the bitcoin regardless of whatever is the price.
  • BUIDL – Derived from HODL meaning Build for Dear Life. Meaning keep on building regardless of whatever is the price
  • FOMO – Fear of Missing Out which makes you take an irrational risk without any due diligence in fear of missing on a massive potential upside
  • ATH – All time high means you’re the sucker who bought at a price at which you may not be able to offload.
2018-12-13T21:54:12+00:00December 11th, 2018|

It’s March – but interest rates are stable

Yesterday, FOMC announced that they are not making any changes to the interest rate. Later last year, they made an upward move after almost a decade.

They also changed their stance on frequency of changing the interest rate. Earlier they indicated that they would change interest rate 4 times in 2016, but it was not well received in the market. Now they have backed-off to resonate with their counterparts. While it’s not as exciting, this will bring stability to the economy. Stable interest rates are boring but it is good in the long run. Feds assurity about the stable interest rate will bring confidence to investors so they can plan and forecast better. Low interest rate acts like a catalyst to economy by encouraging people to rotate the money and invest rather than just leaving it in fixed deposit.

The new stanceis similar to what European Central Bank ( ECB) and Bank of Japan are taking to boost their economy. This however would affect the USD strength against other currencies. People will prefer to invest in alternative assets, making USD less in demand as an asset class. There are both pros and cons of weaker currency, but overall there are always advantages for a stable currency. So if you are an importer, you should be unhappy and if you are an exporter you should be happy. Historically, Fed movements can be well predicted in advance, which is a good indication of them being more realistic with the economic condition. In near future, we should be assure that interest rates are going to be stable and FOMC meetings would have no exciting news to share.

2016-03-17T20:02:34+00:00March 17th, 2016|

Weaker Loonie against USD – Who’s getting hammered here ?

From Acuras to iPhone applications, suits to sweet potatoes, Canadians will be paying more for imported products, on account of the loonie’s fall against the U.S. dollar. It has dropped by almost 10% in last 12 months which is a significant drop in a short horizon of time. Although it’s not the highest one, but certainly rank among them.

Weaker Loonie

“Who wins and who loses when the loonie gets hammered”

Obviously it’s the end customer who will be paying more. Increasing costs are passed on the end customers and if they are earning in CAD, too bad. It’s now happening . Food costs have been expanding for quite a long time. Attire, while regularly made abroad, has a tendency to be evaluated in U.S. dollars and has additionally been getting more costly. So too a first-class thing that Canadians are purchasing in record numbers. Automakers have begun to raise sticker costs on Canadian vehicles.

The Automobile Protection Association says Toyota and Honda, among others, brought costs up in the primary week of January. A few extravagance brands, including Lexus, Acura, and BMW have additionally rolled out improvements to their valuing, with Audi purportedly set to follow in mid-January, the affiliation says. The APA says the greater part of the expansions are unassuming, an additional couple of hundred dollars for every vehicle. Be that as it may, it says Honda has raised the proposed retail cost on its 2015 CRV Touring, all-wheel-drive model by an amount of $750.”Auto organizations will take each open door that they can to expand exchange costs or minimize their introduction to the conversion scale,” says Jason Stein, distributer and supervisor of Automotive News.”We do see costs expanding. We’ve seen costs expanding crosswise over North America. Will they build a smidgen all the more quickly north of the fringe, because of the conversion standard? I believe that is presumably the case.”

It doesn’t cut both ways. Stein, a Canadian who lives in Windsor, and goes for work in Detroit, echoes a portion of the disappointment of some Canadians, who feel automakers were much slower to drop costs in this nation when the Canadian dollar was high. “Interestingly, when the Canadian dollar was over the U.S. dollar, a year, 18 months prior, you didn’t see costs dropping.” Loonie oil costs could fall much even further, Don Pittis said.

A week ago, Apple brought costs up in its Canadian App Store. The 99-penny applications will now cost $1.19 Canadian, a 20 for every penny increment. Different applications under $10 went up by around 15 for every penny. Apple says the expansion is connected to the conversion scale. Different countries feel it as well

However, it’s not every terrible new. The loonie isn’t the main cash falling against the greenback. “This is not imagination of a powerless Canadian dollar story. Some of it is a solid U.S. dollar story,” says BMO’s Porter. “The U.S. dollar is inclining against a considerable measure of monetary standards. So a few things we won’t not be paying significantly more for. For example, a few things from Europe or from Japan, won’t not be going up that much in cost in light of the fact that their monetary forms are additionally debilitating.”

In any case, with the U.S. representing about portion of all Canadian stock imports, the dollar’s doldrums will hit most Canadian shoppers in the wallet.

2016-03-09T16:47:55+00:00March 5th, 2016|

Negative Interest Rate Policy (NIRP) – Friend or Foe?

Whenever we borrow any amount, we expect to pay an interest on top of the principal amount. Recently it was increase after almost a decade however buzz word of negative interest rate have started to circulate in financial world. It’s not a new concept and currently exist in multiple EU countries.

Banks - Haseeb Awan

“Consider it as a Tax on your balances without even defining it to offset loss in revenue due to reduced economic activities”

NIRP is a desperate attempt to boost economy in tough times. As the name states, instead of giving the depositors profits, they are punished to hoard the money by returning them reduced amount. As an example if the interest rate is -.03%. In this case banks will start deducing .3% of the total amount from the deposits. Now consider if your cash is decreasing day by day, you are more inclined towards investing it in alternative asset such as real estate, gold etc. Interest rate operate on pure principle of supply and demand however NIRP is like a steroid for the economy.

NIRP is an incentive for individuals and institutes to circulate the money rather than hoarding it. During challenging times, fear leads to cutting down costs and saving as much resources as possible to overcome any unforeseen circumstances. This creates a ripple effect with conditions getting worse and recovery becomes more challenging in such stagnant society.

Here is excerpt from Mises in 1912

[This view of money] regards interest as a compensation of the temporary relinquishing of money in the broader sense — a view, indeed, of unsurpassable naiveté. Scientific critics have been perfectly justified in treating it with contempt; it is scarcely worth even cursory mention. But it is impossible to refrain from pointing out that these very views on the nature of interest holds an important place in popular opinion, and that they are continually being propounded afresh and recommended as a basis for measures of banking policy.

Cash register
NIRP is charged by central bank and in few cases retail banks take the hit themselves without affecting their end users. While negative interest rate does circulate the money, it drives up the valuations of possible investments such as real estate, gold etc. high creating a bubble. Recent hike in stock, tech and private companies’ valuations are by-product of decade old almost zero interest rate.

People take more risks due to availability of cheap debt & have led to economic crashes. People buying houses at high rate and in-experience people starting their businesses are all high-risk loans which are threat to the financial system. While it looks pretty lucrative to implement it, best practice is to leave it as it is, so businesses can at-least be certain about this aspect.

2016-03-06T15:44:34+00:00February 29th, 2016|

11 facts about Cayman Island

I was in Cayman Island recently and was fascinated by how developed it is. Sharing some of the interesting facts here

1 – Cayman has its own currency; the Cayman Island Dollar (CI$). This is tied to the U.S. dollar and does not fluctuate from it. The cash exchange rate is CI$1.00 = US$1.25.

2 – There is no income tax, capital gains tax, or corporation tax. There is a 10 percent government hotel tax and a stamp duty ranging from 7 ½ to 9 percent on the value of real estate at sale. A departure tax of CI$20 is also collected when you leave the Caymans
3 – Grand Cayman is the 5th largest financial center in the world. It ranks after London, Tokyo, New York and Hong Kong.

4 – There are more than 449 banks and 115 trust companies licensed in the Cayman Islands.

5 – There are no casinos on the Cayman Islands.

6 – You will see equal number of left hand and right hand cars.

7 – The world-famous ‘Seven Mile Beach’ is actually only 5.2 miles long.

8 – There are no embassies in Cayman Island but 13 consulates.

9 – The birthplace of recreational diving. There’s over 150 diving sites on Grand Cayman Island. The island will soon have 365; one for each day.

10 -There is a place called Hell in Cayman Island.

11 -The Cayman Island Turtle Farm is home to 16,000 green sea turtles at any given time.

I have posted few pictures at my facebook page.

Cayman Island

2016-03-06T15:44:45+00:00February 10th, 2016|

Three Ways To Stay Current In The Financial Services Industry

The financial services industry is a cutthroat market with razor-thin margins, making it one of the toughest industries in which to generate profit. Yet, for Fintech startups, it is one of the least chartered, most lucrative sectors.

Accenture recently reported that fintech investments grew 201 percent in 2014 compared to the previous year. As a comparison, overall venture capital investments grew only 63 percent in the same period.

There is little doubt that today’s financial systems are inherently complex, outdated and inefficient. The potential to innovate within this sector has never been higher. Because of wide-scale technology adoption, mobility and digital money, banking and financial institutions are facing imminent threat from fintech startups for products such as loans, money transfers and stock trading.

Indeed, customers today have more options with third-party financial service providers when it comes to choosing products. However, running a profitable fintech startup is very challenging.

With higher cost of customer acquisition, most fintech startups are surviving on venture capital funding. Because they are new, Lifetime Value (LTV) is not yet realized. It would be very difficult for a financial institution to survive on a single product, so they must diversify their portfolio of services to maximize LTV.

No one can unequivocally predict the future. However, here three ways to stay current in the financial services industry.

Existing Banks Must Innovate

Banks are not as slow as they are perceived to be. In fact, they are very smart at focusing on revenue-generating sectors and ignoring less-profitable ones, such as money transfers, small loans, etc. While startups in the space are claiming to take over the money-transfer business from banks, this area is purposely ignored by the banks.

As an example, Western Union, a money-transfer company that controls approximately 18 percent of the money-transfer market, had revenues of $5.6 billion last year, while JP Morgan earned $102.1 billion.

Lending, on the other hand, is considered a profitable service, but bank shares within this sector are decreasing. As per a Goldman Sachs estimate, 20 percent of money lending will move to alternative finance companies, costing the banks $12 billion in lost revenue (this is 7 percent of the total profits for the banking sector).

Banking and financial institutions are facing imminent threat from fintech startups.

Banks have the resources to acquire the best talent, infrastructure and whatever it takes to get the job done. However, the scale of business reduces chances of upward mobility. Fortunately the banking sector has an extremely low churn rate when it comes to core products — deposits and lending.

As per a Consumer Intelligence survey report, approximately 3 percent of people change their banks in any given year. Other findings indicate that 57 percent of people have been with their banks for the last 10 years, and 37 percent are trusting their banks even after 20 years.

Banks have the leverage of a huge customer base, experience, licenses and deep pockets. They will try to stay relevant, but if they fail to innovate faster, they could be looking to acquire winners in the niche product markets. In this case, financial companies retain the monopoly.

The Emergence Of Fintech Banks

The biggest challenge for any company is to acquire customers. High acquisition cost can kill any venture. However, once you have acquired a satisfied customer, you can always cross-sell other financial products to maximize ROI. For instance, a lending platform can sell mortgages. Once they are selling mortgages, they can sell insurance and ancillary services, and so on.

Banks initially started with deposits and lending, diversifying their product offerings later on. Most startups are currently focused on a singular niche product to take incumbent market share away from a profitable line of business. Because of the technology-centric nature, they are better at analyzing data and offering better products and a better customer experience.

The key here is to expand horizontally by being equally good at it.

If you are already using a money-transfer company, why not store money with them, as well? Or, if you are a lending platform, why not take customer deposits to strengthen the deposit base? Rather than going through resource-intensive banking licenses, there are many financial institutions open to giving access to their licenses. This will not just be limited to fintech startups, but also social giants like Facebook, WeChat, etc. that are eager to enter the financial space.

In this case, a technology startup can be the bank of future.

3.0 Brokerage Banks

There is no secret sauce to running a financial institution, but the bottom line is always the same: Keep your operations as efficient as possible.

However, it is almost impossible to be good at every product facet. A lending platform might not be able to beat their competition in the money-transfer space, and vice versa. Similarly, the lending company may struggle when it has to issue insurance.

If banks are unable to innovate faster or startups are struggling with distribution, this creates an opportunity for a marketing company to consolidate all the services under their brand name.

There is little doubt that today’s financial systems are inherently complex, outdated and inefficient.

Rather than developing any expertise, they just take the role of an intermediary and route the transactions through the best possible partner. For example, they may direct a money transfer of $150 to Pakistan via one of their partners, whilst they might use another provider for mortgages. It is not an uncommon practice in other industries. However, such an amalgamated model is rarely found in the financial space if you are just a marketing company.

It would not be out of place to say that by 2020 you might be a marketing brand, showcasing and selling repurposed/repackaged products to the consumers — but at the back end, you are neither a technology company nor a bank.

There might not be enough space for multiple players to exist without venture capital in this cutthroat industry. It will be interesting to watch who wants to be the bank of 2020.

But be it a financial, technology or marketing company, the customer will always win.

This article originally appeared in Techcrunch.

 

 

 

2016-03-06T15:45:08+00:00January 27th, 2016|

Interest rates increased after almost a decade

So Finally FOMC increased the interest rates this week by .25% after almost a decade as expected. Though it was fixed since 2008 at 3.25%, June 2006 was the last time it was increased.

Federal Open Market Committee (FOMC) mandate is to determine the prime interest rate & money supply.It was formed through the  Banking Act of 1933 & were supposed to meet four times a year. However since 1981, they are meeting every five to eight weeks at least 8 times a year to fulfill the same mandate.

Federal_Open_Market_Committee_Meeting

Increase in interest rate indicates confidence in the economy by the Feds. Although they would be aiming for much higher increase, this increase would be a litmus test to see how far can they stretch. Higher interest rate means it is expensive to borrow money driving valuations of assets down. For a common man, increased mortgage rate makes it less affordable to own a house.

This increase in interest rate was expected and overdue. A twitter survey indicated mixed result as below.

Screen Shot 2015-12-16 at 7.41.49 PM

Increase in interest rate will strengthen the dollar because it attracts more investment in the country. Investors can earn more money by keeping their money in saving accounts in US and demand of US dollar goes up. Interest rates are still very low. Just as a comparison it was 21.5% on December 19th 1980. Following is the graph of interest rates since 1947.

Interest Rates

We are living in economy of 3.25 prime rate for the last 7 years. Higher interest & dollar rate have negative impact on international loan-burdened economies . They are already struggling with repayment of loans & now they have to pay even more. On the flip side, it will make it difficult for US vendors to sell internationally because their product have became more expensive and the competing products from other countries have became cheaper. At the moment, effects would be minimal but it would be interesting to watch out for their next meeting on January 27 & 28.

Looking forward to post 3.5% economy.

2016-03-06T15:46:03+00:00December 18th, 2015|

Will FOMC end the history’s longest interest rate freeze tomorrow ?

Prime rate is the interest rate at which bank is suppose to lend money to their best customers. It is set as a reference to determine what are the best possible terms at which some one can get interest. In actual, interest rates could either be higher or lower than the prime.

Federal Open Market Committee (FOMC) mandate is to determine the prime interest rate & money supply.It was formed through the  Banking Act of 1933 & were supposed to meet four times a year. However since 1981, they are meeting every five to eight weeks at least 8 times a year to fulfill the same mandate. FOMC is meeting again today and tomorrow to see if any changes are required before the next meeting in January 26-27th.

Federal_Open_Market_Committee_Meeting

Interest rates are frozen at 3.25 since Dec 16th 2008. As a reference, it peaked at 21.5% on December 19th 1980. This is the longest unchanged interest rate in the history.

Here is a historical data on interest rates.

 

Interest Rates

With such low interest rates, it is becoming more and more difficult for banks to offer saving accounts. Margins are shrinking for them and people are looking for alternatives to get higher returns. Lower interest rate is responsible for the higher valuations of companies & real estate.

Technically any deposits in saving accounts is the money lent by banks to lend it further. If they are unable to lend it faster than they are getting deposits, they have to pay interest from their own balance sheet. This is why banks are allowed to lend up-to 9X of the deposits they have. Just as an example for every $10, they can lend up-to $100. Bank with higher lend to deposit ratio will always have a healthy P/L statement.

Higher interest rate will hurt the banks with lower lend to deposit ratio.

There is a high probability that this meeting will end the longest interest rate freeze, it would be a good news for bank stake-holders. It would for sure lower down the demand for capital since it is more expensive to borrow, however will also correct the market valuations. Not correlated, but the oil price have rebounded above $35 for the first time since 2009.

Let’s wait till tomorrow to see if there are any changes announced.

2016-03-06T15:44:51+00:00December 15th, 2015|

FinTech startups don’t want to be a Bank

Banks are boring & claim to be next generation bank is rarely heard in startup world. Banks were born out of need to store the cash safely.  Banks generally have a very good perception of trust & security among masses which led to position themselves as one-stop shop for anything financial related. Over time they built the brand , distribution & resources to up-sell other financial products such as loans, insurance, money transfers etc.

As any other business, competition have started to hurt the banks. However, new entrants are not keen to attack the core competency of the bank i.e holding people’s money. The main reason behind lack of competition is the resource intensive regulatory process. With low ROI. it’s not worth the effort for startups. Although bank fees brings lot of revenue to the bank, holding money is not profitable. It’s more of a liability than an assets.

Startups will take away the profit-making products of banks leaving them with liabilities to hold cash only

When it comes to retention, banks are doing really good job. When was the last time you changed the bank ? As per a survey, approximately in any given year 3% of people change bank. While 57% of the people are with their bank for last 10 years, 37% people are still trusting their bank even after 20 years.

For startups, it is easy to launch other financial products due to less barrier to entry in terms of regulations. In no specific order, popular products are

  • Lending
  • Remittance
  • Bill payments
  • Credit card processing
  • Insurance
  • Hedge funds
  • Credit cards

Lending being the most popular product, FinTech startups are focused on creating the most efficient P2P lending marketplace. As per Goldman Sach estimate, 20% of bank lending will move to alternative finance, costing 12 billion dollar in profit loss for the bank. This is 7% of total profits for the banking sector.

Over next few years, due to regulation burden, number of players in banking will reduce. More and more consolidation will happen in the industry due to shrinkage of profit margins. Industry have already started to search for solutions to sustain their retail locations with reducing operational expenses and innovating to compete with startups in term of products & services. Though they have an edge in term of resources, corporate culture makes it difficult to innovate.

It a race between Innovation vs distribution as beautifully written by Alex Rampell .Will FinTech startups be able to get the distribution first or banks will be able to innovate first ? Race is ON.

2016-03-06T15:46:14+00:00December 3rd, 2015|