The financial crisis taught the world a lot and among those lessons one proved more important than the rest; that banks and financial institutions of the developed world were severely under-capitalised. They were leveraged to the hilt, investing profits at the expense of saving and it left them with far too little in the coffers to help them survive a period of terminal market decline. After the devastation to both the industry’s operations and reputation it became evident that, if banking as we knew it was allowed to continue, these capital reserves could never again be allowed to slip to such unsatisfactory levels. Off the back of this, Basel III replaced its preceding brothers to form the greatest pillar of post-crisis legislation for banks. Federal Reserve counterparts followed suit swiftly after with legislation on perceived credit risk and leverage ratios. It’s amazing then that seven years on, nations around the world have decided not to adhere to the same strict guidelines they enforced on their respective financial industries. Heeding none of the same warnings, the world’s largest economies are sitting on crumbling reserves, evaporating in the face of crisis and recession.
In the aftermath of arguably the world’s worst financial crisis China stood as a Titan on top of vast reserves and was a saviour to many western nations who had little or none. In doing so and in attempting to revive its economy with blanket injections of stimulus it did, however, accumulate as yet unseen levels of debt that are now proving a thorn in its side. The world’s second-largest economy has sleepwalked into an era of debt, as total levels tripled from 2009 to $31.7 trillion in 2015 according to Bloomberg BusinessWeek. China bulls continue to argue the economy’s continued effort to lend and borrow a sign of corporates willing to invest in a low-interest rate environment, but when you consider the majority of these institutions are simply state-owned companies taking out loans from the state-owned bank it paints a disappointing picture. Bloomberg estimates just under $25 trillion of the current debt in China is government debt, and the repayments alone are eroding China’s vast reserves.
Beijing’s foreign-exchange reserves dropped an unprecedented $107.9 billion in December 2015 alone, completing a consecutive run of falling every month since May of that year, and it’s not just the debt that’s troubling the PBOC. The yuan is split into two currencies; CNY, the official exchange currency for the mainland and the CNH, an offshore deliverable currency in Hong Kong. Beijing historically has influenced CNY through the sale and purchase of US dollars and in previous years, it’s had a lot of those to hand. Fueled by inbound investment from American investors and the nation’s massive export volumes, the exchange was easy to manipulate. Now, however, with the economy entering a phase of structural transformation and lower growth, China is facing huge capital outflows as investors clamber over each other to change yuan into dollars. The easiest way to do this, of course, is with CNH, the offshore deliverable currency and this has created a huge gap between the onshore and offshore exchange rates. The PBOC is channeling reserves daily into closing this gap to stem capital outflows and silence currency speculators, but it’s unclear what the cost to its reserves will be by the time it finishes this campaign.
Beijing has one arrow in its quiver that others do not, and that’s the sheer size of its reserves. They cast a shadow over the majority of other nations available capital, even when combined, and are four or five times the size of the world’s largest sovereign wealth funds. One such fund, Saudi Arabia, is in just as much trouble as the PBOC when it comes to depleting reserves. Low oil prices not seen since the previous oil supply crisis have dragged heavily on the economic prospects of the OPEC heavyweight. At the end of 2015, Saudi Arabia announced a record budget deficit and a projected shortfall for the following year as well. Further austerity measures have been implemented, and the government is underway with a bond offering to support the struggling economy, but reserves are suffering, and there doesn’t seem to be any plug to the leak. Saudi Arabia is hellbent on producing crude oil at maximum capacity to squeeze out high-cost producers, but the supply war is forcing prices to lows where even the world’s top oil exporter is feeling the pain. Reserves dropped from $732 billion in 2014 to $628 billion in November 2015, but this is down from nearly a trillion no more than five years ago.
The bottom line; the economic and political wars that are being fought right now, whether that be a currency war between the developed nations or a commodity price war between oil exporting nations, are draining the reserves the world vowed to keep strong should they ever face a crisis like 2008 again. To take out debt, someone first has to have the money to lend.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
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Cryptos Slide Once More
Bitcoin fell to its lowest level since December as the January selloff continues.
Editor’s Remarks: Bitcoin fell as low as $12,000 yesterday as it continues to struggle in the new year. Other coins fared little better though, with Ethereum down 16% and XRP shedding nearly 25%. Recent stars such as Stellar lumens, which fell 22%, were also hit by the correction. However, NEO managed to weather the proverbial storm; it reached highs of $196 on Monday before dipping as low as $130 before settling at around $160 at the time of writing. So far, NEO is up 300% in the last month, which shows that while the overall market has indeed been choppy, not all coins have performed poorly.
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Cryptocurrency Fever: Why ICOs Are Booming
At its most basic level, an Initial Coin Offering, or ICO, allows investors to exchange fiat currency for digital tokens in a business. Typically, the project or startup’s coins are exchangeable for common cryptocurrencies like Bitcoin or ether. It generally allows a business to create liquidity and growth equity, without having to give up any actual equity. It is wildly different, and much more risky, than the traditional IPO.
In 2017 alone, 235 companies took part in an ICO, almost five times the number in 2016, and over $3.7bn was raised.
Top projects like Filecoin raised $257m, closely followed by Tezos, raising $232m and EOS with $185m. Whilst these figures are some of the largest, raising even a fraction of this capital as a start-up but may never be achieved if traditional equity crowdfunding is used.
ICOs are fast becoming a fashionable way of raising large amounts of capital quickly, and are especially popular in the fintech world.
Growing Investor Pool
An ICO makes investing in start-ups open to the general public. By acting in a way similar to crowdfunding, it allows anyone with a cryptocurrency wallet to buy into a new company or venture. This allows the company to access capital on its own terms, rather than those of the venture capital fund it would otherwise be looking to.
The hype surrounding ICOs has also driven a new kind of interest, that of institutional investors. This new attention has driven firms like CyberTrust to attempt to bridge the gap between traditional and crypto financial markets by creating asset-backed derivatives based on crypto assets; known as Global Crypto Notes. Amongst other things, this will push crypto asset management onto the traditional financial markets.
Venture Capital firm Mangrove Capital claims that a blind investment in every ICO to date would give the investor a 1320% return. The scope of profit available alone is enough to encourage speculative investors to look into ICOs.
ICOs have scope for not just short-term gain, but also long-term profits should the crypto market continue to rise. Because of the huge increases in cryptocurrency value over the last 12 months, ICOs have looked like a more and more attractive way to raise currency which will increase in value as time goes on.
When J.R. Willet launched the Mastercoin project back in 2013, he held a month-long fundraising period where investors could purchase Mastercoin tokens in exchange for Bitcoin. In total, the project received 5000 Bitcoin worth $500,000 at the time. Those funds raised in 2013 are now worth over $60m in today’s Bitcoin prices.
The speed with which an ICO can raise money is also unheard of in previous crowdfunding exercises. When Bancor started selling its tokens in June 2017 it raised $153m in just 3 hours. Traditional crowdfunding would have not only taken much longer, but would have only raised a fraction of that amount.
Little regulation makes raising money easier and faster than ever before.
Using an ICO to raise funds over the traditional IPO also gives the startup the ability to bypass IPO regulation. ICOs allow startups to get IPO-style funding in a fraction of the time and cost than the traditional method would cost.
Whilst companies that hold IPOs are restricted by strict rules and regulations regarding transparency and information exchange with the SEC, ICOs are not governed by any regulatory body, thus allowing the firm undertaking the fundraising to retain and withhold their financial information from the public. By registering the token as a currency on a new software platform, startups can avoid being subjected to the audits, anti-money laundering laws and ‘know your customer’ rules traditional securities are subject to.
How long this will remain the case – given the increased regulatory interest in ICOs – is unknown.
This feverish rush to get involved in ICOs is understandable, given the attractions on both sides of the transaction. As the rest of the world catches up with the crypto bubble, however, the rush may begin to slow. Regulators will eventually begin to respond, both to the cryptocurrency bubble and the ICO, and both will hurt business.
Without a doubt, the rush towards ICOs will eventually slow, however, the benefits of using crypto to fundraise for some startups over traditional crowdfunding is hard to deny. ICOs will need more regulation in future, and numbers may calm down, but with 59 planned for Q1 2018 alone, it is doubtful that they will hit zero any time in the near future.
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