by Vj Angelo, CEO of Inspira Wealth
It’s time for the crypto community to take a moment of introspection and return to school.
In advocating the adoption of the ‘Three Rs’ I’m not suggesting reading, writing and arithmetic (I’ve always found it amusing that education promoted itself phonetically rather practically with the Three Rs). What I mean is research, revenue and returns.
These Rs are the core to the success of any business from inception to business plan to capital raising and execution. For investors they are the core of any successful placement of capital. Unfortunately, the crypto market has been remiss in applying these principals to its operations. As a result, the market has and continues to suffer a potentially fatal practical and existential crisis.
Before delving deeper, it’s important to understand the issues facing crypto that brought us here. It is ironic that crypto is falling prey to exactly the behaviour, from traditional finance, that the birth of the market was designed to resolve.
The crypto pioneers railed against the Global Financial Crisis that started in 2007 and in many ways is still affecting us today. The financial markets never properly solved the issues that created the GFC, they merely swept them under the carpet by printing money and some half-hearted regulatory sticking plasters. After the Greek and EU crisis of 2010 to 2012, Bitcoin started to emerge and get noticed by the banks, governments and treasuries that had caused the conditions for the GFC and its resulting ongoing crises.
Crypto has evolved into yet another financial product plagued by structural, behavioural and regulatory issues, identical to so many financial products over the centuries.
Crypto has created an almost miniature version of the issues that created the GFC; a financial system interdependent on high risk practices and products, a set of behaviours designed to take advantage of market manipulation and ultra-short-term gains by a few participants which has left the larger community left most at risk.
The inexperienced and, I’m afraid to say, ignorant and lazy investors did make a lot of money at various points of the crypto market. However, as is nearly always the case, they have almost certainly lost those gains and much more along the way.
The fight against regulatory interference has been ongoing for some years now and while I have sympathy for the view that, “why would we trust regulators and legislators that nearly brought the world economy down”, regulatory oversight and ‘interference’ must be looked at in a bigger context and with more nuance.
Regulators do learn lessons and often rectify the mistakes they find. Unfortunately, we as a species are slow to learn and often reject the behaviour of previous generations as the current generation always knows better. As both traditional and crypto markets embrace youth, there is always the risk that they will throw the baby out with the bath water.
Ever younger traders and analysts, infused with big salaries and bigger egos, move up the ladder pushing experienced and knowledgeable forefathers out and with them the institutional memory of lessons learnt from past mistakes. As a result, we are prone to make those mistakes repeatedly. Crypto is doing precisely this at the moment.
In the late 90s the arrogant view of the US and UK governments was that the financial markets were strong and well run by very intelligent, highly skilled people. Rocket scientists and MBAs now ran these complex and intertwined markets with more complex products. The economies of the world were in safe hands. The best thing governments could do was get out of their way and let them make loads of money. The politicians would benefit from strong economies, big tax intakes to spend on pet projects and healthy fees as Non-Exec’s when they retired. As a result, the thin end of the wedge arrived with the US permission to allow the merger of Salomon’s and Citibank into the Travellers Group. As part of the regulatory and legislative change to enable this merger, the Glass Steagall Act was removed.
Glass Steagall was an act of congress from after the great depression that separated Investment banking from Retail banking. Banks were no longer allowed the bank to use capital reserves belonging to ordinary depositors as part of their balance sheet to support their Investment banking operations. It took less than ten years for a financial crisis to emerge that dwarfed the great depression and nearly brought the global economy down completely.
The result of the following investigations by the US congress and other governments brought about new legislation, in effect bringing back Glass Steagall in a new legislative form called Dodd – Frank, after the two representatives that ran the investigation and then brought forward the legislation to resolve the market risks.
Today, sadly, just fifteen short years later, the pressure to remove all the regulatory reforms is growing and the UK government, conveniently run by an Ex Goldman-Sachs banker, is already looking to unpick all the safeguards put in place.
So, what was the point of this brief history lesson and one of only many that really needs to be studied? Crypto is in the throes of all the same mistakes and errors and it’s hard to avoid the irony since crypto was born to prevent or circumvent the very people and behaviours that they are now guilty of replicating. This brings us back to the fundamentals of any business environment, the Three Rs. Research, Revenue, Returns although I do believe we need to make this the Four Rs. Research, Revenue, Returns and Regulation. That last R is there because society tries to protect the weakest among us.
Investor protection from smart, unscrupulous and bad actors is necessary for the proper functioning of any market. Like any ecosystem, it is only as strong as its weakest link. The weakest link in crypto is the uneducated gullible investor and, unfortunately, there are far too many of them.
The flip side to regulation Is that it protects the economy from the weakest link. So often it is the foolish investor who loses everything who is the first to cry foul and prompt regulatory and criminal investigations. With proper regulatory oversight and practices, both sides can play the game knowing the rules and those who don’t aren’t allowed to play. It’s time for crypto to become a mature economy and develop all the potential it offers without the constant volatility and crises. So how can we achieve that?
Both sides of the equation, investors and businesses, need to adhere to this basic rule.
As investors, research the investment you are making thoroughly; the business model, the team, the competitive landscape, the target market, the economic model and research the whole with a long-term view – the quick buck can arrive swiftly but it can leave even faster. Make sure the investment has a long-term sustainable business model, a business that constantly requires re-investment with no revenue to sustain it in sight is not going to last long and your investment will almost certainly be gone.
I know the phrase ‘long-term’ is contrary to crypto market investment, but recent events should show that a healthy long-term return is better than a large, short term one that disappears as quickly as it came.
Business owners need to follow the same rules. In doing so the ability to raise capital becomes self-sustainable, making life so much easier.
There really shouldn’t be much explanation needed here, however the number of business models without a clear path to revenue that have been raising or looking to raise capital through ICOs or their more recent equivalents, is quite extraordinary.
Revenues must be the starting point of any investible business model for investors and business owners alike.
Returns must come from the business activity and as a share of the revenue success of the business model and its products. Hoping that people will buy an asset just because you did and where there is a great marketing story forcing that asset up in value with no real underlying value or connection to the business is not a sustainable investment model. There is a place for utility tokens but as just that, a utility, providing real world applications and uses. The raising of capital must be separated from a utility token that is part of the business model. The token must be targeted at those who will use it for its purpose, not to get unrelated parties to invest.
This is possibly the most controversial point in the list. Let’s put this way, if we view the markets as a game with a financial reward or outcome, like any professional sport, it can’t be played without rules and referees or umpires.
We’ve all had a flutter on our favourite sport. Would we be happy to do so if there were no understandable rules or anyone to enforce them? How many times have we heard that a referee or umpire didn’t enforce the rules properly to the detriment of our team or to the sport itself?
Investment is the same game. We need rules to protect the players, the people who support them financially and all the businesses and small players who are there to see big or small returns.
Its time for the crypto market to adopt the Four Rs to ensure the long term viability of the market, let alone a strong growth based future as a contender for an alternative to traditional finance.