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The Global Financial Crisis and cryptocurrencies

The Global Financial Crisis and cryptocurrencies

Lost in the teeth gnashing about Bitcoin from the media and establishment figures is a lack of appreciation of why Bitcoin initially and cryptocurrencies more generally have become such a popular asset class for a globally minded younger generation.

Bitcoin was an innovation unleashed in the wake of the Global Financial Crisis. It came of age in an era of historically low interest rates and asset speculation. It exists in a time where home ownership amongst the young is at record lows, where personal debt is at record highs and where real income growth has been steadily declining across the western world for decades.

It has sprung to popular consciousness as the bubble to end all bubbles, a near decade of 000’s%, if not 0000’s% annual growth year on year. In this telling Bitcoin (and cryptocurrencies more generally) are grossly overinflated.

But what about the wider asset classes? A cursory glance at any established asset class will tell a familiar story – that of record highs. More and more money has been chasing returns, driven by the record low interest rates and bond yields in a decade dominated by quantitative easing on a scale never before witnessed –$12.3tn in printed money up to 2016 alone.

But it is not just overinflated stocks, low yielding bonds and zero to near zero interest rates that has led people to move into cryptocurrencies. Inflation and low wage growth has led to wages failing to keep place with inflation, as per Fidelity:

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Real income growth has been declining for decades amongst the middle class in western countries. House prices have risen to all time highs worldwide, as a result of more and more investors seeking returns in other asset classes. These house and rent prices have outstripped income growth considerably, leading to a situation of near record low home ownership amongst youth, most of whom cannot countenance the thought of ever owning their own home.

The motivations for investing in cryptocurrencies do not end there.

Nearly half of the American population has zero stock holdings, as per the Federal Reserve. Even less own individual stocks (the majority of the remaining 50% will be largely in their pensions). Retail investors in the UK account for just 12% of UK based shares. It is a similar story in most economies. Record stock prices mean nothing to the majority of the population.

Furthermore, most retail investors are now frozen out of investing in the most promising new companies, particularly in the tech sector, owing to the rise of private equity and the increased duration in which companies stay private. Cryptocurrencies, on the other hand, are simplicity personified now. Log onto Coinbase, pay with your debit card, send your money to an ICO or buy a cryptocurrency of your choice, thousands of flavours to suit everyone – and best of all, they’re all going up. Why compete to get your money into a market where the best opportunities are unavailable to you or established companies are priced at record highs?

Finally, the finance industry was irreparably tarnished by the GFC. People use banks because they have to, not because they want to. Banking services remain slow and at odds with the digital experience people expect, despite improvements in recent years. The rise of apps such as Monzo and Revolut, with many using them for their daily activities, speak to this. Costs remain high, experiences uneven, and interest rates remain near zero.

The anti-establishment bent of recent years can be applied to many things, and perhaps it is a stretch to see the move into cryptocurrencies in 2017 (clearly primarily for speculative gains) as an anti-establishment response. But Bitcoin’s creation and initial use was certainly in that vein, and many of the early adopters of the tech were interested in it for this reason rather than the huge riches that were to follow. Much of blockchain speaks to a distrust of central banks; it has a fixed supply (no inflation by central banks), it removes the need for third parties (no banking fees) and it offers an incorruptible ledger of all transactions. Just the goal of a cryptocurrency dominated world is as subversive; by removing participation from fiat supply, holders become hidden from government.

Given the events of the last ten years and the challenges young generations worldwide face, the increasing participation in cryptocurrencies should not come as a surprise. For many people they offer a hope of a lottery win, but with much better odds, a chance to improve their situation radically. The situation, predictably, will not last. But even if cryptocurrencies are a bubble ready to pop, the list of casualties will be fairly small. There have not been, to my knowledge, companies pushing cryptocurrencies on the vulnerable. No-one needs to own Bitcoin. No-one will be left unable to repay their mortgage and left homeless (bar the most foolhardy) as in the GFC. Pensionholders will not face ruin. The government will not need to bail out exchanges. The number of those affected remains minimal -  although it grows every day.

Part 1: Is the market in a bubble?

Part 1: Is the market in a bubble?

The importance of double checking your work

The importance of double checking your work

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