How cryptomarkets revolutionised financial freedom

As finan­cial tech­nol­o­gy con­tin­ues to cap­ti­vate retail investors, the first quar­ter of 2021 demon­strat­ed the pow­er and prob­lem of cur­rent finan­cial mar­kets. Gamestop’s mass appeal among retail investors on r/WallStreetBets sub­red­dit sent the stock soar­ing to $348 in Jan­u­ary, forc­ing invest­ment firms to close out short posi­tions at a cost of bil­lions. 

Zero-com­mis­sion trad­ing apps such as Robin­hood received an influx of traders, requir­ing the plat­form to cease trad­ing Gamestop tem­porar­i­ly, lock­ing retail investors out of the mar­ket. The resul­tant wave of crit­i­cism high­light­ed the imbal­ance in finan­cial pow­er.

Cryp­tocur­ren­cies have emerged as a finan­cial instru­ment over the last year, but have reached new heights over the last quar­ter, becom­ing finan­cial equal­i­ty tools and plac­ing pow­er back in the hands of investors. 

Unique advantages of crypto investing

Over the last year, cryp­tocur­ren­cies such as bit­coin and ethereum have become extreme­ly pop­u­lar with retail cus­tomers, reshap­ing how investors inter­act with finan­cial instru­ments. 

Accord­ing to the Finan­cial Con­duct Authority’s Cryp­toas­set Con­sumer Research Report 2020, 77 per cent of those sur­veyed bought cryp­toas­sets through an online exchange and 27 per cent use cryp­toas­sets to pur­chase goods and ser­vices, demon­strat­ing the ease with which cryp­tos can be bought and used as a com­mod­i­ty for exchange.

Appli­ca­tions like Robin­hood, which were cre­at­ed on the basis of democ­ra­tis­ing invest­ing, have shown finan­cial equal­i­ty can only real­ly be had when all par­ties have access to the same lev­el of knowl­edge and con­trol. This has led to a move towards decen­tral­i­sa­tion, a process where a cen­tral author­i­ty is no longer bro­ker­ing the actions of par­ties involved. Instead, users are reliant on blockchain tech­nol­o­gy to deal direct­ly with each oth­er and invest­ments. 

A major ben­e­fit of decen­tral­i­sa­tion is putting pow­er back in the hands of users. Cryp­tocur­ren­cies such as bit­coin were designed as a decen­tralised alter­na­tive to tra­di­tion­al finance and there­fore don’t have a sin­gle point of fail­ure, mak­ing them more resilient, effi­cient and demo­c­ra­t­ic.

By allow­ing agents access to wealth, with­out a mod­er­a­tor, where they can exchange on a vir­tu­al mar­ket with the assur­ance of secu­ri­ty through a blockchain, this acts as a strong tool in empow­er­ing investors to take wealth-build­ing into their own hands. And after the finan­cial cri­sis of 2008, the emer­gence of cryp­tocur­ren­cies has pro­vid­ed an alter­na­tive view of how to build trust in the finan­cial indus­try.

Charles Hoskin­son, co-founder of Ethereum and cur­rent chief exec­u­tive of cryp­to and blockchain com­pa­ny IOHK, explains how cryp­tocur­ren­cies have a unique advan­tage. “Our industry’s tech­nol­o­gy is about bro­ker­ing trust among peo­ple who don’t trust each oth­er,” he says.

Drawbacks of cryptocurrencies

While cryp­to has out­per­formed many tra­di­tion­al invest­ments, its volatil­i­ty is a prod­uct of the mania sur­round­ing the invest­ment, sim­i­lar to that of Gamestop.

Daniel Ahmed, co-founder of Fas­set, a dig­i­tal asset plat­form for fron­tier mar­kets, says: “Cryp­to is cer­tain­ly a democ­ra­tis­er of wealth since it gives the aver­age per­son expo­sure to fast-grow­ing and high poten­tial return on an asset class. In my view, cryp­toas­sets like bit­coin should be a longer-term invest­ment for indi­vid­u­als as day trad­ing can be extreme­ly risky in nature.”

Ahmed makes a point, as volatil­i­ty has shak­en the cryp­tomar­ket con­sid­er­ably. Bit­coin is cur­rent­ly on course to exceed its all-time high of $58,000 per bit­coin, with alter­na­tive cryp­tos such as ethereum, lite­coin and doge­coin mir­ror­ing the market’s pros­per­i­ty, with a rise in val­ue of between 5 and 15 per cent respec­tive­ly. This fol­lows weeks of invest­ment volatil­i­ty, where bit­coin depre­ci­at­ed by 20 per cent in a mat­ter of hours. Evi­dent­ly, such extreme highs and lows can both encour­age and dis­cour­age investors from enter­ing the mar­ket, as both major gains and loss­es can be made with­in sec­onds. 

Ongo­ing mar­ket fluc­tu­a­tions may increase uncer­tain­ty for new investors, who may not be as well versed on mar­ket per­for­mance. One way of mit­i­gat­ing this is invest­ing in asset-backed cryp­tos. “Asset-backed cryp­tos can act as a hedge against tra­di­tion­al, more volatile cryp­toas­sets,” explains Ahmed. “Since they reflect tan­gi­ble eco­nom­ic val­ue from real-world assets.” 

Hoskin­son agrees. “Volatil­i­ty is a big deal and it’s huge­ly chal­leng­ing for com­mer­cial activ­i­ty and retail adop­tion,” he says. “That’s why we have sta­ble coins and reg­u­lat­ed prod­ucts being cre­at­ed.”

This does come at the cost of decen­tral­i­sa­tion. While asset-backed cryp­tos are an asset class, by intro­duc­ing a real-world enti­ty, the unique sell­ing point of cryp­tocur­ren­cies is lost. This is because the asset is at the mer­cy of the cred­i­bil­i­ty, over­sight and reg­u­la­tion of a sin­gle enti­ty or group of actors.

How­ev­er, Hoskin­son believes they still have their place in the finan­cial mix. He says: “You’re able to trade on glob­al mar­ket­places and have access to all kinds of new peo­ple. For exam­ple, non-fun­gi­ble tokens rep­re­sent­ing art pro­vides real util­i­ty. But how do you fac­tor in the insur­ance prob­lem? How do you val­ue a Picas­so?” His­tor­i­cal­ly, mon­etis­ing art has been dif­fi­cult and exclu­sive to those of a high net worth. By pro­vid­ing access to an exclu­sive asset class, it fur­ther high­lights cryp­tocur­ren­cies’ rev­o­lu­tion­ary poten­tial.

Hoskin­son con­tin­ues: “When you’re talk­ing about secu­ri­ti­sa­tion and liquifi­ca­tion of these exot­ic assets, there’s some real val­ue there, but it comes at the cost of decen­tral­i­sa­tion. So while it’s excit­ing, it’s not exact­ly what peo­ple signed up for with cryp­tocur­ren­cies.” It’s a big draw­back to a finan­cial tool deemed to put pow­er back in the hands of the peo­ple.

Anoth­er con­sid­er­a­tion is access to edu­ca­tion. As a new mar­ket heav­i­ly reliant on tech­nol­o­gy, under­stand­ing how blockchain is cen­tral to the finan­cial mod­el will aid investors in mak­ing more informed choic­es. 

Car­los Betan­court, co-found­ing prin­ci­pal of BKCoin Cap­i­tal, a dig­i­tal assets hedge fund, pro­motes using edu­ca­tion as a tool in wealth-build­ing. “Know­ing what’s hap­pen­ing in the mar­kets and edu­cat­ing your­self are all read­i­ly avail­able options. Join­ing an online uni­ver­si­ty-cer­ti­fied course will help investors in under­stand­ing how pow­er­ful cryp­tos can be in cre­at­ing finan­cial equal­i­ty.”

Future of cryptocurrencies

As the finance indus­try evolves, new investors should con­sid­er the ram­i­fi­ca­tions of invest­ing in cryp­tos. As a rel­a­tive­ly young mar­ket, volatil­i­ty is like­ly. Poten­tial investors should be aware of the asso­ci­at­ed risks by bol­ster­ing their cryp­to knowl­edge fur­ther, as well as con­sid­er­ing the lev­el of invest­ment made. How­ev­er, includ­ing cryp­tos as part of a wider invest­ment port­fo­lio can aid wealth dis­par­i­ties through its democ­ra­ti­sa­tion of finance, putting con­trol back in the hands of investors and giv­ing access to asset class­es that were tra­di­tion­al­ly exclu­sive. 

Cryp­tomar­kets need to con­sid­er how to build trust among new entrants. Reg­u­la­to­ry bod­ies pro­vid­ing fur­ther under­stand­ing of how invest­ments are pro­tect­ed will enable the mar­ket to devel­op fur­ther. Abdul Haseeb Basit, board mem­ber of Glob­al Dig­i­tal Finance, sup­ports this. “We must ensure the indus­try does a bet­ter job of embed­ding investor pro­tec­tion through high con­sumer con­duct stan­dards,” he says.

As the future of invest­ing is chang­ing, so are investors. Once exclu­sive to high-net-worth indi­vid­u­als and financiers, cryp­tomar­kets have pro­pelled the democ­ra­ti­sa­tion of wealth. And this is only the begin­ning.