Development of Fintech and Bitcoin
Fin-tech and disruptive technology is currently one of the hottest discussed topic. While other countries are moving towards regulating or outright banning cryptocurrency, Singapore is aggressively positioning itself to be the industry leader in this disruptive technology. Now, project Ubin is announced and significant support is given by the government and major financial institutions to support this cause. It is indeed an exciting yet troubling development that will affect how banking operations will function in the future. My understanding of bitcoin is of 2 discreet components. I will be focusing on the technological part followed by the valuation part.
The technology portion of bitcoin's distributed ledger is top notch. Operating from my circle of competence, it is a way to move information from one organisation to another in a transparent way whereby everyone can see the evidence of the movement, but the information is encrypted so that no one can know the exact contents, merely evidence of that movement. From a payments and securities settlement perspective, this involves the partial replacement of the traditional SWIFT framework.
From a payments perspective, financial organisations can cut down on the financial intermediaries which take a cut from processing cross border transfers or for-ex costs. Distributed ledgers can replace authorised SWIFT instructions which dominate a large segment of payment instructions at a very low cost. Even the email correspondence can be drastically cut down, as you can see through the distributed ledgers that whether the payment instruction has been received and acted upon immediately.
From a securities settlement perspective, the impact is far greater. Securities settlement has been transiting to STP models which allow automated trades settlement and cutting down of settlement cycle from 10 to 2 days. Distributed ledger technology will further reduce the downtime as there is no need to wait at designated timings (batch processing) for the messages to be sent to and fro. Rather, they can reach a higher STP rate by real time settlement.
In Hong Kong, CMU bonds settlement has been improved in June 2017 from a batch mode to a Real Time gross settlement model whereby individual trade instructions out in the market theoretically can be straight settled almost immediately (subject to technological limitations). With distributed ledgers, there will not be even email correspondence required as you can see the trade being set up, matched and settled instantaneously.
In my humble opinion (I could be completely off), the cost benefit to develop this payment and instruction infrastructure is staggering. It can dramatically cut down on manpower costs, transaction costs and downtime for transactions to be settled. This is what that is driving MAS and these financial institutions to put so much money, efforts to support this cause. The government is bent to be migrating from cash and cheque payments to electronics payments. Ironically, the biggest beneficiary to these changes may not be the banks or the consumers, but rather the telecoms that is selling the fuel to drive the flames (bandwidth and internet access).
For the actual valuation of bitcoin, I have controversial and strong opinions against the present insanely high valuations. I may be wholly wrong and missing out on the biggest asset climb in my lifetime. Nonetheless, I will continue to widen my circle of competence but only work from within it.
Bitcoin /Ether-um is not backed by any fundamentals, earnings, book value, cash flow, monetary authority or pegged to any exchange rate. It is backed by the integrity and transparency of the inbuilt system and people's faith that it is incorruptible.These are the key assumptions that underpin and justify the high valuations, or that is why the proponents like to claim. These assumptions can be breached as the market is notoriously fickle minded, or it will reach a point whereby PHDs will find a way create new cryptocurrency (Doge-coin), to crack or attack the entire system, or pump the valuation of cryptocurrency to greater heights before dumping them. If doge-coin which has unlimited supply has actually market value tagged to it and justify a market cap of $147,929,596.57, this is a worrying time as people are certainly chasing after the hype and lost all sense of fundamentals.
Supply and Demand
From the laws of supply and demand, proponents of cyptos claim is similar to gold in many ways. There is only a finite supply in this world. Until someone has creates a new crypto with a better story to tell. Dosen't hold water. Demand side, it is even more fickle. There is no minimum demand for cryptos as it is not used to produce anything. There is no intrinsic demand and wholly speculative demand.
Technical analysis
Market Sentiment, greater fool theory. You just aim to profit off market sentiment and hope that the next guy will be the greater fool and buy what you own. Nonetheless, you might end up to be the greatest fool and cannot find anyone to unload, and forced to cut loss when price plummets. It might be a good trading tool to profit off fluctuations, but it is too abstract and fluffy for me.
Asset valuation models
Is bitcoin an asset? Does it generate any cash flow or income? Can you use discounted cash flow models to predict how much it is worth? Even fiat currency and earn a miserable rate of return of 0.05% in Singapore. Bitcoin doesn't do that.
Is bitcoin a commodity? Bitcoin can be considered a hard commodity as there is finite amount in this world. People liken it to gold. However, gold has intrinsic value as it can be used in electronic component parts and conducting metal and thus has a minimum price floor tagged to it. What does bitcoin contribute to producing? Apart from the brokerage fee and commissions for the brokers? Is it even an asset? A commodity? A currency? What is bitcoin anyway?
Relative Valuation Models (Exchange rate / relative performance)
Is bitcoin a good currency? What can it be used to exchanged for? It certainly fits some of the traditional criteria of currency, but far from being generally accepted, achieving stability of value, and is as durable as long as hackers havent found a way to reverse engineer and crack the technology.
1. Generally Accepted - Many people must accept the money as a settlement of debt or as a discharge of obligation.
2. Durable - Its quality/value does not deteriorate over time, which is why we do not tend to use food products as money.
3. Divisible - If you divide the money in half, each half should be worth 50% of the whole. This is why we tend not to use diamonds or artwork as money.
4. Stable/Consistent - The value does not fluctuate substantially with time.
5. Transportable - It is easy to move from one place to another.
6. Scarce - It is difficult to acquire.
Payback ratios
P/E - No earnings
P/BV - Not backed by assets. Only by things like transparency, goodwill and trust.
P/CF - No cash flow
P/S - NO sales
PEG - No earnings growth
Links
http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/cmu.shtml
https://docs.oracle.com/cd/E74659_01/html/MS/MS13_SWIFT_Messages.htm
https://www2.swift.com/uhbonline/books/public/en_uk/us1m_20160722/us1m.pdf
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Project-Ubin.aspx
https://www.youtube.com/watch?v=K8kua5B5K3I
https://www.youtube.com/watch?v=t5JGQXCTe3c
The technology portion of bitcoin's distributed ledger is top notch. Operating from my circle of competence, it is a way to move information from one organisation to another in a transparent way whereby everyone can see the evidence of the movement, but the information is encrypted so that no one can know the exact contents, merely evidence of that movement. From a payments and securities settlement perspective, this involves the partial replacement of the traditional SWIFT framework.
From a payments perspective, financial organisations can cut down on the financial intermediaries which take a cut from processing cross border transfers or for-ex costs. Distributed ledgers can replace authorised SWIFT instructions which dominate a large segment of payment instructions at a very low cost. Even the email correspondence can be drastically cut down, as you can see through the distributed ledgers that whether the payment instruction has been received and acted upon immediately.
From a securities settlement perspective, the impact is far greater. Securities settlement has been transiting to STP models which allow automated trades settlement and cutting down of settlement cycle from 10 to 2 days. Distributed ledger technology will further reduce the downtime as there is no need to wait at designated timings (batch processing) for the messages to be sent to and fro. Rather, they can reach a higher STP rate by real time settlement.
In Hong Kong, CMU bonds settlement has been improved in June 2017 from a batch mode to a Real Time gross settlement model whereby individual trade instructions out in the market theoretically can be straight settled almost immediately (subject to technological limitations). With distributed ledgers, there will not be even email correspondence required as you can see the trade being set up, matched and settled instantaneously.
| Trade instruction | Settlement confo |
| MT540 | MT544 |
| MT541 | MT546 |
| MT542 | MT546 |
| MT543 | MT547 |
In my humble opinion (I could be completely off), the cost benefit to develop this payment and instruction infrastructure is staggering. It can dramatically cut down on manpower costs, transaction costs and downtime for transactions to be settled. This is what that is driving MAS and these financial institutions to put so much money, efforts to support this cause. The government is bent to be migrating from cash and cheque payments to electronics payments. Ironically, the biggest beneficiary to these changes may not be the banks or the consumers, but rather the telecoms that is selling the fuel to drive the flames (bandwidth and internet access).
For the actual valuation of bitcoin, I have controversial and strong opinions against the present insanely high valuations. I may be wholly wrong and missing out on the biggest asset climb in my lifetime. Nonetheless, I will continue to widen my circle of competence but only work from within it.
Bitcoin /Ether-um is not backed by any fundamentals, earnings, book value, cash flow, monetary authority or pegged to any exchange rate. It is backed by the integrity and transparency of the inbuilt system and people's faith that it is incorruptible.These are the key assumptions that underpin and justify the high valuations, or that is why the proponents like to claim. These assumptions can be breached as the market is notoriously fickle minded, or it will reach a point whereby PHDs will find a way create new cryptocurrency (Doge-coin), to crack or attack the entire system, or pump the valuation of cryptocurrency to greater heights before dumping them. If doge-coin which has unlimited supply has actually market value tagged to it and justify a market cap of $147,929,596.57, this is a worrying time as people are certainly chasing after the hype and lost all sense of fundamentals.
 | |
| Such Price. Much Wow. |
Supply and Demand
From the laws of supply and demand, proponents of cyptos claim is similar to gold in many ways. There is only a finite supply in this world. Until someone has creates a new crypto with a better story to tell. Dosen't hold water. Demand side, it is even more fickle. There is no minimum demand for cryptos as it is not used to produce anything. There is no intrinsic demand and wholly speculative demand.
Technical analysis
Market Sentiment, greater fool theory. You just aim to profit off market sentiment and hope that the next guy will be the greater fool and buy what you own. Nonetheless, you might end up to be the greatest fool and cannot find anyone to unload, and forced to cut loss when price plummets. It might be a good trading tool to profit off fluctuations, but it is too abstract and fluffy for me.
Asset valuation models
Is bitcoin an asset? Does it generate any cash flow or income? Can you use discounted cash flow models to predict how much it is worth? Even fiat currency and earn a miserable rate of return of 0.05% in Singapore. Bitcoin doesn't do that.
Is bitcoin a commodity? Bitcoin can be considered a hard commodity as there is finite amount in this world. People liken it to gold. However, gold has intrinsic value as it can be used in electronic component parts and conducting metal and thus has a minimum price floor tagged to it. What does bitcoin contribute to producing? Apart from the brokerage fee and commissions for the brokers? Is it even an asset? A commodity? A currency? What is bitcoin anyway?
Relative Valuation Models (Exchange rate / relative performance)
Is bitcoin a good currency? What can it be used to exchanged for? It certainly fits some of the traditional criteria of currency, but far from being generally accepted, achieving stability of value, and is as durable as long as hackers havent found a way to reverse engineer and crack the technology.
1. Generally Accepted - Many people must accept the money as a settlement of debt or as a discharge of obligation.
2. Durable - Its quality/value does not deteriorate over time, which is why we do not tend to use food products as money.
3. Divisible - If you divide the money in half, each half should be worth 50% of the whole. This is why we tend not to use diamonds or artwork as money.
4. Stable/Consistent - The value does not fluctuate substantially with time.
5. Transportable - It is easy to move from one place to another.
6. Scarce - It is difficult to acquire.
Payback ratios
P/E - No earnings
P/BV - Not backed by assets. Only by things like transparency, goodwill and trust.
P/CF - No cash flow
P/S - NO sales
PEG - No earnings growth
Links
http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/cmu.shtml
https://docs.oracle.com/cd/E74659_01/html/MS/MS13_SWIFT_Messages.htm
https://www2.swift.com/uhbonline/books/public/en_uk/us1m_20160722/us1m.pdf
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Project-Ubin.aspx
https://www.youtube.com/watch?v=K8kua5B5K3I
https://www.youtube.com/watch?v=t5JGQXCTe3c
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