This article first appeared in Wealth, The Edge Malaysia Weekly on November 29, 2021 - December 5, 2021
Even after quadrupling in value this year, crypto assets make up only a small portion of the total value of all financial assets. The value of all global stocks is US$122 trillion (RM510.5 trillion), according to The Securities Industry and Financial Markets Association (SIFMA), an industry group. With a market cap of just US$3 trillion, can crypto be considered a force to be reckoned with? The answer is yes.
The stock market has existed for centuries while crypto assets have been around for barely a decade.
The value of all US stocks was US$15 trillion in 2010, according to global equity value data provider Siblis Research. By September this year, US stocks had tripled in value to US$48 trillion. Over the same period, the crypto ecosystem added nearly US$3 trillion in assets — almost 10% as much as the world’s largest, most liquid stock market. Again, Bitcoin came into existence only in 2009.
On a more granular level, there are many indications that crypto adoption is nearing the tipping point. Take trading volumes, for example. According to the World Federation of Exchanges, US$78 trillion worth of stocks were traded in the first half of this year. In the crypto world, about US$120 billion in assets change hands every day, according to CoinMarketCap, the most commonly used price tracking website for crypto assets. Across six months, that works out to US$21.7 trillion — a third of the money moving in and out of stocks.
At online brokerage Robinhood, crypto assets made up 23% of all customer assets under custody, which includes stocks, cash and options. That is a significant jump from 2.9% in 2019.
Investors are voting with their money, and Robinhood CEO Vladimir Tenev is listening. Soon, customers will be able to buy Bitcoin or Ethereum on Robinhood, then transfer these assets off-platform and into decentralised applications, Tenev said last month.
The move makes sense. Decentralised Finance (DeFi) applications, or Dapps for short, have fuelled this year’s crypto rally. Built atop “base layer” protocols such as Ethereum and Solana, Dapps use code to automate transactions, match orders and adjust interest rates to maximise investment returns. “This automation may increase the speed of financial transactions, decrease costs and — given enough time — broaden the availability of these services,” says Christian Catalini, founder of the Massachusetts Institute of Technology’s (MIT) Cryptoeconomics Lab.
Between July last year and June this year, DeFi platforms captured half of the nearly US$650 billion in crypto assets sent to US investors, according to Chainalysis, which tracks blockchain transactions. Throughout this period, Uniswap, a decentralised crypto exchange, handled a larger value of transactions than Coinbase, Chainalysis said.
In fact, nine of North America’s 25 biggest crypto asset services by transaction volume were DeFi platforms. More than US$111 billion in investor assets sit in Dapps today as collateral for loans or liquidity for trades. This figure is up tenfold from a year ago, and DeFi did not even exist in 2017.
The Ethereum network — a base layer for much of DeFi — settled US$2.5 trillion worth of transactions in the second quarter of this year, according to research firm Messari. Visa processed just as much over the same period.
In going after DeFi, Robinhood has serious competition. Jack Dorsey, the brains behind Twitter and payments giant, Square, has plans for a developer platform that will make it easy for others to “create decentralised financial services with a focus on Bitcoin”. Twitter has also just launched a new unit, Twitter Crypto, to explore related opportunities.
It is clear that there is demand for DeFi, but just how valuable this opportunity is is up for debate. Excluding the market cap of Ethereum — as it serves as a store of value for many — DeFi platforms were worth US$160 billion as at Nov 11 this year.
In 2017, management consultant McKinsey & Co estimated that financial intermediaries — mainly banks — collected US$5 trillion in revenue for storing, transferring, lending, investing and managing risk for the global financial system. This was equivalent to 6% of global gross domestic product (GDP) for that year — US$81.1 trillion.
Some call this 6% an invisible tax on financial assets. Others see it as DeFi’s total addressable market.
Capturing 30% of this opportunity means Dapps will collect US$1.56 trillion in annual revenue. Importantly, a big chunk of this will flow to DeFi users, such as those contributing to decentralised exchange (DEX) liquidity pools.
Banks, brokers and other financial service providers are currently valued anywhere between two and four times sales, according to data compiled by Aswath Damodaran, a professor at New York University. This implies Dapps could fetch a combined valuation of US$3.12 trillion to US$6.2 trillion. That is assuming global GDP stays flat — and that DeFi players serve only as financial intermediaries. Many Dapps are likely to come as built-in features in virtual worlds, video games or non-fungible token (NFT) marketplaces.
A few years ago, retail investors made up just 10% of US equity market volume. Since the majority of brokers slashed trading fees to near-zero, retail participation rates have doubled. Many have argued that there has never been a better time to be an investor. Thanks to DeFi, this will continue to be the case.
Andrew Vong is chief future officer of EquitiesTracker Holdings Bhd
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