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.
