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FinTech

How Will FinTech’s Strong 2017 Performance Evolve in the Future?

 7 min read / 

The global FinTech industry has enjoyed remarkable growth in 2017, in terms of deals and VC invested capital. Among the most notable events of the year have been the rapid expansion of ICOs worldwide, the inception of numerous new companies, mega-deals and the emergence of several highly valued unicorns.

According to the research portal CB Insights, the second quarter of 2017 saw the highest VC funds raised by FinTech companies. Assuming continuous growth, deals and funding could increase by 5% and 19% by the end of 2017, respectively. The FinTech sector is expected to continue expanding globally, with Europe and Asia reaching record deals and funding, while US funding grows steadily, amid a declining number of deals.

CEOs of numerous FinTech companies worldwide, engaging in various different activities believe that the future three-five years will bring unprecedented changes to the industry. As most users shift to mobile, blockchain becomes ever more ingrained in the digital transactions processes, cryptocurrencies use increases and AI data analytics improve the client experience, among other technological changes.

Financing Trends

Global VC funding of FinTech companies set its quarterly record in the second quarter of 2017, increasing by 83%, to reach $5.2bn, through a five quarter high of 251 deals.

This was mostly attributed to 18 large deals worth more than $50m each, which cumulatively amounted to $3.8bn. The biggest transaction in the second quarter was a $1.4bn corporate minority investment to mobile internet unicorn One97 Communications, the parent of the Indian payments giant Paytm. The deal, backed by the Japanese investor SoftBank group, increased the company’s total funding to $2.8bn and valuation to $7bn, making the largest investment in a VC-backed FinTech company since the first quarter of 2012.

Among the other more notable and most active investors in the period there were 500 startups, NEA, Ribbit Capital, and Index Ventures. Corporate investors and their venture extensions continued investing in VC backed FinTech deals in the second quarter of 2017, increasing their participation rate to 31%, a 2 pp. rise in comparison to the second quarter of 2016.

Emerging Unicorns

One of the biggest drivers of FinTech growth in 2017 has been the emergence of new unicorns, which (together with the existing ones) form a group of 26 companies valued at $83.8bn. Within these, North America has 15 registered companies, Asia has 7, while Europe has just 4.

4 of the 5 new FinTech unicorns that emerged in the second quarter of 2017 are North American, while 1 is Asian. The start ups that reached valuations exceeding $1m are the North American invoice and payment company AvidXchange ($1.4bn), online investment platform Robinhood ($1.3bn), health insurance start up Clover Health ($1.2bn), cloud-based communication platform Symphony Communication Services ($1bn) and the Asian online lending site Tuandaiwang ($1.5bn at the time of its unicorn round)

North America

The second quarter of 2017 marked a five quarter low in the number of deals, which dropped to 96. However, the emergence of the 4 new unicorns and 12 mega-rounds, exceeding $50m, led to a five quarter peak in funding of  $1.9bn. Deals are expected to continue declining in North America and might drop by 15% for the whole 2017, while funding activity will continue growing by 11% in comparison to 2016.

Europe

European deals also declined in the second quarter of 2017, in comparison to the first quarter, but were nevertheless higher than the 2016 quarterly totals. The 56 deals conducted in the period raised $49m, of which 1/4 was attributable to a $12m strategic investment by Naspers’ PayU to Kreditech. If the current growth rate is maintained, deals in Europe are expected to set records and surpass the 2016 total by 40%, with funding exceeding $2bn.

Asia

Asia recorded a five quarter high in deals and funding in the second quarter of 2017, with 67 deals raising $2.7bn. The biggest contribution in the spike came from the funding of the unicorns One97 Communications and Tuandaiwang. If the growth in investment activity persists, the Asian FinTech deals and funding are also expected to hit record highs in 2017.

Trends according to CEOs

According to more than 30 CEOs from different positions of the global FinTech spectrum, including banking, data analytics and microfinance, the next 3-5 years will bring rapid transformations, technological and demographic shifts to the industry.

Banks and Financial Institutions

Banks and other financial institutions are expected to continue collaborating with FinTech start ups and acquire their skills and ideas. For example, due to FinTech disruption, clients will move online and visit branches less often, thus meaning that financial institutions will have to offer a high level of online and completely automated personalization.

Blockchain

In the same vein, incumbent companies will have to accept blockchain, in order to remain efficient and effective. Blockchain will influence the payment processes and redefine financial services for many causes. Innovative technologies like biometric identification and AI will additionally help simplify online and offline payments and shopping for the average consumers.

Bitcoin and cryptocurrency are expected to evolve and become an integral part of the online payments and transactions, although it is still unclear which technologies will exist in 5 years time.

Mobile

Mobile shopping and payments have only recently evolved from mobile browsing, evidencing that retailers will have to optimize the mobile experience and the checkout process, by providing consumers faster and easier mobile options. Nevertheless, even though there are predictions that cash payments will decline by half in some countries, such as the UK, cash transfers will still continue to exist as a means of payment.

The payments industry has generally been aligned with the shift in mobile trends, with the exception of remittances and money transfers, which are expected to also become mobile in the next 5-10 years. Emerging and developing economies will be leading this mobile technology adoption, as additional 2 billion people in Africa and Asia will have smartphone-centric mobile wallets, while mobile transactions in the developed economies will reach their saturation point. Due to the expected increase in mobile users, money transfer companies will have to balance among user experience and security.

Investment and Wealth Management Advisory

In the future, investment advisory and financial planning will increasingly move online and provide convenience by offering complete user mobility from one service provider to another. The increased use of AI and data analytics will also improve the client experience, as the costs of creating client-centric solutions decline. In addition, commission-free investing is expected to emerge as a consequence of the higher proportion of financially literate people between the ages of 25 and 40 engaging in investing activities.

Financing and Lending

Instant financing will enable faster sending, lending and borrowing of funds, at lower costs. The speed of micro transfers and payouts will also increase in the next few years. More advanced data analytics, big data and AI will contribute to better credit scores. An example of advanced analytics would be a potential reformulation of their calculations using alternative data, such as monthly rent payments which are highly correlated with the debt repayment ability.

Exciting Times Ahead

The global FinTech sector is continuously evolving on the back of technologies such as blockchain, cryptocurrencies, payments infrastructure, mobile channels and data analytics, which have the capacity to dramatically change the way in which people use financial services. Considering the current activity in the global market and the CEOs predictions, the next 3-5 years will undoubtedly bring new start ups, eventually leading to value creation for all financial sector stakeholders.

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Cryptocurrencies

Ripple and MoneyGram: A Proof of Concept for the Use of XRP?

 3 min read / 

Ripple

Realistically and logically valuing cryptocurrencies is a fraught task. There is often no way to use traditional valuation metrics such as cash flow or earnings power because cryptocurrencies are generally thought of as potential means of exchange or stores of value rather than entities with earning potential. The most straightforward way of trying to understand a cryptocurrency and come to an understanding of its utility is to assess the use case put forward by the designers or founders of a crypto asset and to try and logically assess whether the claims made are realistic.

Ripple and its cryptocurrency XRP have for some time presented one of the more coherent cases for the utility and long-term value of its systems, the fundamental value of proposition essentially being that international payments suffer from liquidity and timing issues. Ripple’s systems solve these problems, and the XRP token is a vital part of these system working optimally.

Until very recently, the final part of that simplified explanation did not have much evidence to support it. Many partner institutions have trialled the use of Ripple’s underlying software and systems but not used the XRP token while doing so. But now, finally, there is a concrete case of Ripple partnering with a financial institution and integrating the use of XRP during the trial.

Ripple has announced that they are partnering with Moneygram to trail the xRapid liquidity system with the use of the XRP token integrated into the trail. This is a significant milestone for Ripple, with the company and the XRP token having been portrayed in a negative light due to the previous lack of XRP use among trial partners. By announcing this trial, Ripple can dampen that specific line of criticism and give more strength to the argument that XRP has real-world utility and potentially long-term value.

What is important to consider is that this is just a trial and though it shows there is interest in using XRP as part of Ripple’s systems, XRP usage is by no means widespread even among the companies partner institutions. Furthermore, though this development adds strength to the general value proposition of Ripple and XRP, it does not provide much more concrete evidence when it comes to trying to assess a reasonable value for XRP individually and in terms of overall market cap.

There have been some interesting pieces of analysis attempting to value XRP as a percentage of the global payments market based on projections on Ripple’s potential market share of this market in the future, but these are speculative at best.

Conclusion

Ultimately, Ripple is showing that it is executing their stated strategy of working with established financial institutions to bring their systems and XRP into the mainstream through this avenue. This has generated a significant degree of scorn and derision among much of the cryptocurrency community, due to its obsession with decentralisation and aversion to established financial firms. But it does seem to be working and progressing at a reasonable pace, and Ripple does look to be establishing itself as one of the few companies operating in the cryptocurrency sphere with a logical route to widespread adoption.

Keep reading |  3 min read

Companies

Crypto Briefing: Bitcoin Futures, Scams and ICOs

 11 min read / 

Ethereum price

 The Week of the Altcoins

This graph show how prices have changed since the midnight December 7th with prices at that point being rebased to 100
Prices as of 11:59 PM UTC 13/12/17 (Source: coinmarketcap)

The cryptocurrency market has seen another week of volatility. Litecoin’s market cap has increased by over 200% as it becomes a popular alternative to bitcoin, as the latter has faced fears of increased regulation. XRP has also been riding the wave, seeing a 50% price hike from last week.

1. Bitcoin Futures Live on Cboe

The Story

Plans to launch bitcoin futures contracts on the Chicago Board Options Exchange have gone ahead as contracts began trading at 23:00 GMT on Sunday. The contracts will allow investors to bet on the future value of bitcoin. On the news bitcoin’s price rose significantly.

Why It’s Important

The contract allows individuals to bet on bitcoin’s price at a specified time in the future. Given bitcoin’s rise of over 1,000% this year, many investors are keen to get in on the action; CBOE’s  Bitcoin futures contract will enable investors to do so without actually owning the cryptocurrency. Additionally, it will be possible to short sell the digital asset for the first time, allowing investors to profit from price falls.

The move suggests the cryptocurrency is now becoming a mainstream investment, however, Bitcoin remains to be traded on unregulated markets. Consequently, its price is likely to remain volatile.

High Volatility

In an effort to ease volatility, the CBOE decided it would suspend trading for two minutes for price fluctuations of more than 10% and five minutes for more than 20%. In the contract’s first session, trading was stopped twice: once for two minutes and once for five minutes. While bitcoin remains traded on largely unregulated markets, it is questionable whether this policy will have any effect on the underlying cryptocurrency’s volatility.

The Future

Bloomberg’s Adam Haigh said the futures contracts was “an incremental step that allows Wall Street and indeed the professional finance community to make a bet either way on bitcoin.” The Chicago Mercantile Exchange is expected to list a similar contract next week, and Nasdaq has announced plans to host such trading too.

Last week Revolut’s decision to facilitate the trading of bitcoin and other cryptocurrencies could increase demand for the underlying asset.

Allegations that 1,000 people own 40% of all bitcoins in circulation suggest its price could be manipulated by a relatively small number of individuals.

2. 1,000 People Apparently Own 40% of Bitcoin

The_Winklevoss_twins

The Winklevoss twins invest $11m in bitcoin back in 2013. (Attribution: By cellanr [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons)

The Story

Roughly 40% of the cryptocurrency is owned by 1,000 people, claims Aaron Brown, head of financial markets research at AQR Capital Management. In such an unregulated market, Brown said large holders of bitcoin could potentially be working together to orchestrate price changes. Given bitcoin’s recent spike, now could be a great opportunity for these users to part with a portion of their bitcoins, locking in the near 1600% price increase since the start of the year.

BTC price

Source: Coinmarketcap.com

Why It’s Important

Bitcoin appears to be making its way into mainstream investing. Last Friday the US regulator gave the CME group and CBOE Global Markets the green light to launch bitcoin futures. Just yesterday, London-based digital banking company Revolut launched Bitcoin, Litecoin and Ether trading for their users.

As the cryptocurrency becomes a more mainstream investment and demand for it rises, these bitcoin ‘whales’ will be able to part with their bitcoins for a hefty profit. This could leave new investors with an asset in the midst of a bubble.

Roger Ver, a well known early adopter of bitcoin said, regarding ‘whales’ working together, “I suspect that is likely true, and people should be able to do whatever they want with their own money.”

While the question of whether Brown’s allegation is true must be approached with scepticism, there is evidence of some very large investors in the space. Bloomberg recently reported that on November 12th, “someone moved almost 25,000 bitcoins, worth about $159 million at the time, to an online exchange.” Bitcoin’s market cap is roughly $270bn at the time of writing, but if this investor was to sell on a single exchange, it could potentially crash the market.

Large Bitcoin Investors

Cameron and Tyler Winklevoss, who gained fame for attempting to take control of Facebook, invested $11m in bitcoin back in 2013. This amount has many times over.

Tim Draper, a billionaire venture capitalist best known for his investment in Skype – during the companies early days – bought 30,000 bitcoins back in 2014. He has since invested in Tezos’ ICO.

Barry Silbert, the founder of the Digital Currency Group, picked up 48,000 bitcoins when the cryptocurrency was worth $350 a piece.

3. Ethereum Wallet Scam Closed Down

The Story

Digital wallet provider myetherwallet.com announced yesterday that it had no affiliation with an iOS-based cryptocurrency wallet app using its name. The app, which became the third most popular on the finance section of the App Store, allows users to import and open a digital wallet to store ether. Fake digital wallets could lose investors their cryptocurrencies permanently, so it is important investors (and app stores) keep an eye out for scams.

Security and Ethereum

In July, a developer error on the ethereum network meant a hacker pocket $31m worth of ether. While the technology is still in its infancy mistakes are bound to be made. However, several digital wallet hacks have emerged since cryptocurrency prices have skyrocketed and users need to take security seriously while safeguards are not in place.

When it comes to cryptocurrencies security, the owness is with the users. Sending ether from a digital wallet means I am responsible for my transfers. If I make a mistake when typing in the amount, or address of the receiver, I cannot call my bank and ask them to void the transaction. Consequently, user’s wallets are being targeted by scammers.

So far there have been no reports that the fake wallet stole from anyone. The company may have simply used the name for its familiarity in the ethereum community.

Myetherwallet.com have since announced the removal of the app from the iOS store.

4. San Francisco ICO Closed Down by SEC

The Story

San Francisco-based restaurant reviewing app Munchee has been forced to stop its initial coin offering (ICO) and reimburse investors after regulators raised concerns over the company’s tokens not meeting securities regulations. Munchee was looking to obtain $15m to “improve an existing iPhone app centred on restaurant meal reviews and create an “ecosystem” in which Munchee and others would buy and sell goods and services using the tokens,” according to the US Securities and Exchange Commission (SEC).

However, “in the course of the offering, the company and other promoters emphasized that investors could expect that efforts by the company and others would lead to an increase in value of the tokens,” they added. The regulator felt investors were led to believe they would gain a return on their tokens, however, the tokens did not meet the authority’s standards. The company was not fined due to its quick response to the SEC’s requests.

Why It’s Important

Last week PlexCoin’s founders were charged with defrauding investors. This was the first time the SEC’s newly established Cyber Unit filed charges. The regulator issued a statement back in July saying ICOs will be subject to US security laws.

Both cases suggest a serious commitment to ensuring investors are not mis-sold securities, particularly in the ICO space.

5. Goldman Sachs: Bitcoin Not A Substitute for Gold

Source: Tradingeconomics.com

The Story

The simultaneous rise of bitcoin and relatively poor performance of gold has provoked many to ask whether the two assets are in competition. The short answer is no, they are not.

“Bitcoin has real potential, if it were to become digital gold it might have tremendous space to grow,” said Gabor Gurbacs, Vaneck Securities Director of Digital Asset Strategy. It is this sentiment which has put the two in contest. However, the investor pool for each is “vastly different”, according to Jeffrey Currie, head of commodities research at Goldman Sachs.

Gold based exchange-traded funds are currently at close to their highest since May 2013, suggesting the metal remains part of investor’s portfolios, and not that investors have not cashed out and moved over to bitcoin. The reason this is not the case lies in comparing the function each asset serves and the investors it attracts.

Comparing Bitcoin and Gold

Bitcoin attracts more speculative investors looking for quick returns, while gold is often held as a portion of investment portfolios to spread risk. In times of economic downturn gold tends to go up in price, balancing any losses from stocks and bonds. The two assets currently serve distinct purposes. Consequently, bitcoin’s price rise is unlikely to have turned investors away from gold.

6. Jamie Dimon Eases Hostility Towards Bitcoin After Futures Contracts Go Live

Source: By Steve Jurvetson (Flickr: Jamie Dimon, CEO of JPMorgan Chase) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

The Story

Source: CNBC

“I remain highly skeptical of it,” said JPMorgan’s CEO Jamie Dimon, when recently asked about bitcoin. “I’m open-minded to uses of cryptocurrency if properly controlled and regulated,” Dimon added. The executive, who famously called bitcoin a “fraud” appears to have softened his opinion just days after the bitcoin-based futures derivative began trading on the Chicago Board Options Exchange.

Why It’s Important

This is the first time Dimon has spoken about bitcoin for two months. The timing of Dimon’s comments might suggest JPMorgan will offer the bitcoin derivative to its clients. The contract would allow clients to take long or short positions on bitcoin’s price.

Similar contracts will trade on the CME and Nasdaq exchanges in the near future.

7. Cryptocurrency as Collateral for Loans 

The Story

A growing number of early cryptocurrency adopters, who have seen astronomical gains, will now be able to use their cryptocurrencies as collateral for loans. London-based Nebeus is helping third-party lenders create loans guaranteed by cryptocurrency collateral. The company created 100 of these loans on its first day and has made 1,000 more since says Nebeus’ Managing Director Konstantin Zaripov.

Given bitcoin’s market cap of almost $300bn, and a total cryptocurrency market cap of over $500bn, the market for these loans could be colossal. However, some worry that these assets are in a bubble, and their collapse makes these loans hugely risky for lenders.

Why It’s Important

Around 40% of all bitcoins are held by 1,000 people, Bloomberg reported last week. Prior to this innovation, these users would only be able to cash in on their gains by selling their cryptocurrencies. “I can see a lending industry in the tens of billions of dollars,” said Aaron Brown, former managing director at AQR Capital Management.

The loans could attract attention from cryptocurrency miners, who earn tokens for processing blockchain network transactions. This group are typically ideologically attached to the idea of decentralised currencies, and such loans could allow them to hold on to their cryptocurrencies while they cover their overheads.

However, bitcoin’s 1700% rise since the start of the year has caused many to stay clear. A collapse of these digital assets would leave lenders in a tough position.

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Companies

Cryptocurrency as Collateral for Loans: Risky Business?

 2 min read / 

Cryptocurrency Loans

The Story

A growing number of early cryptocurrency adopters, who have seen astronomical gains, will now be able to use their cryptocurrencies as collateral for loans. London-based Nebeus is helping third-party lenders create loans guaranteed by cryptocurrency collateral. The company created 100 of these loans on its first day and has made 1,000 more since says Nebeus’ Managing Director Konstantin Zaripov.

Given bitcoin’s market cap of almost $300bn, and a total cryptocurrency market cap of over $500bn, the market for these loans could be colossal. However, some worry that these assets are in a bubble, and their collapse makes these loans hugely risky for lenders.

Why It’s Important

Around 40% of all bitcoins are held by 1,000 people, Bloomberg reported last week. Prior to this innovation, these users would only be able to cash in on their gains by selling their cryptocurrencies. “I can see a lending industry in the tens of billions of dollars,” said Aaron Brown, former managing director at AQR Capital Management.

The loans could attract attention from cryptocurrency miners, who earn tokens for processing blockchain network transactions. This group are typically ideologically attached to the idea of decentralised currencies, and such loans could allow them to hold on to their cryptocurrencies while they cover their overheads.

However, bitcoin’s 1700% rise since the start of the year has caused many to stay clear. A collapse of these digital assets would leave lenders in a tough position.

Keep reading |  2 min read

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