Cryptocurrency has been the talk of the town for years. While the digital assets have been incredibly profitable for some, especially those coming early to the party, the recent dive has shown enormous volatility connected to trading digital coins. So is the thrill and promises of investing in crypto worth the potential havoc that it can wreak on an investor’s finances? We had the chance to talk to Dr. Graham Bright, Head of Operations and Compliance at Euro Exim Bank, about the relationship between traditional assets and cryptocurrencies, and how to navigate as an investor in the volatile landscape of digital currencies.
The financial sector is changing at a breathtaking pace. A major change – the biggest according to Dr. Bright – currently taking place is the move from physical currencies to digital coins and services. He says: “The biggest change is the move from notes and coins to digital stores of value and the rise of financial apps. Trust has been moved from banks holding cash to digital wallets holding digital assets, available on platforms such as smartphones, mobile, and laptops, and accessible to a wider audience.”
Along with this move from physical to digital coins, wallets, and banks, Bright mentions a change in consumer demands towards faster processes, real-time access, and, interestingly also, user experience akin to gameplay. With these demands “it is the agile fintechs who are providing the look and feel of future banking”, Dr. Bright says. Especially Gen Z is drawn to the thrill that comes with the gamification of platforms, which contrasts the traditional options and equities that this generation, according to Bright, finds boring.
With the fintech platforms and the consumers – from Gen Z and upwards – on board, Big Tech is also making moves towards digital banking services. Dr. Bright says: “Add to this the prospect and reality of non-banking retail giants such as Amazon, Apple, Google, and Samsung, [entering the sector] through the use of powerful analytics and AI capabilities, and the rise of digital unsecured lenders with instant credit for people who are content to buy now and pay later. All these companies are clearly extending their reach from consumer products to providers of complete financial services, taking on high street banks with levels of competition and cost unheard of a mere five years ago.”
Meanwhile, central banks are exploring possibilities of creating digital currencies, an example being the European Central Bank (ECB) which is in the developmental stage of the creation of a digital Euro. In 2020, President of the ECB, Christina Lagarde, wrote: “As we enter the digital age, the nature of money, but also of goods and services, is changing quickly. Digitalisation and technological advances are transforming all areas of society, accelerating the process of dematerialisation”.
And the Euro is far from the only major currency that’s undergoing a process of dematerialisation: significant global actors such as India, Canada, Australia, Brazil, Turkey
and Iran also have a digital currency in the development stage. 10 Caribbean countries such as Bahamas and Jamaica have already implemented digital currencies, the same being the case as for Nigeria.
In short, the transition from physical to digital value increase and storage is taking place at a sweeping pace and it’s a diverse set of actors leading this historic monetary change: from fintech to big tech, to states and central banks, and, importantly, consumers embracing this change with the use of app-based banks and the enormous interest in cryptocurrencies.
Crypto: navigating potentials and risks
A lot of hopeful cryptocurrency traders have had a rocky year. While both Bitcoin and Ethereum hit historic highs in early November 2021, the subsequent drops are what many investors might remember. While some digital coins have started to regain momentum in July and August, by the time of writing, both Ethereum and Bitcoin are only worth 50% of what they were at their peak in November 2021. In a crypto market with more than 10.000 different currencies, some of them, as Dr. Bright points out, are being traded at just 10% of their peak value.
With reference to the downfall of cryptocurrency, Dr. Bright poses the question: “Was it a crash or merely a cyclical rebalancing, as there is always a limit as to how long speculative markets can continue to rise without some sort of fiscal correction?”
Bright goes on to mention that while enormous price rises are common, in the case of digital currencies, the price hikes aren’t matched by performance or long-term investor loyalty. Bright adds to that, that we also witness stock markets suffering significant events every five to ten years, but that a fundamental difference is that there’s been developed much more sophisticated tools to reduce the overall impact of such downfalls.
When it comes to the future of crypto, Dr. Bright wonders to what extent investors are willing to ride out the storm: “Market corrections will always happen, with more investors accepting that once-rare significant events are becoming an everyday hazard. Without government bailouts or financial scheme cover from regulators, it will be interesting to see how investors are prepared to ride out the storm.”
Bright sees that it’s difficult to avoid a crash, explaining that as he sees it “sentiment and hype-based investments remains highly problematic”. He says: “The overheating of the market for non-asset-backed, purely speculative instruments makes a crash inevitable”. Bright problematises that we have a crypto market where the likes of Elon Musk and Warren Buffet through quick tweets can trigger significant market movements that can disrupt or falsely inflate values. Dr. Bright mentions that these fluctuations may be sustainable for high net-worth individuals or celebrities, who are investing secured funds, but what is a game for the few, can easily become very serious for smaller investors, many committing life savings.
According to Bright, a group of investors that is amply exposed to these sudden sea changes is Gen Z’ers entering the investment market for the first time. He says: “In particular, Generation Z are more inclined to enter the crypto market, ignoring the prospect of potential loss, viewing an unfounded basis for enormous gain, and even enjoying the thrill and recklessness of volatile investment.”
So what to do in this volatile financial landscape, where tweets, hype, and sentiment can make or break a digital coin in the matter of minutes? “In the rush for profit, people ignored the fundamentals such as the principal rule,” Bright says, and reminds us of a simple, but bullet-proof fundament for investing: “only invest amounts you are willing to lose”. He further advises to ignore hype, do the research, and get a proof of concept as well as invest smaller values in a long-term perspective.
War in Europe and its impact on supply chains, trade, and finance It’s not only when it comes to cryptocurrencies, that the world has undergone tumultuous changes. In a hyperconnected world, Russia’s invasion of Ukraine has left its mark on the world, whether it comes to security, geopolitics, finance, or supply chains of energy and food.
In this new global situation, as Bright points out, people desperately need food at economically sustainable prices, all while prices on energy and petrol are on the rise. All this on a backdrop of debt from the COVID crisis, where some governments are at once struggling to provide basic necessities as well as to introduce inflation relief measures resulting in a greater risk of civil unrest.
Euro Exim Bank’s contribution to solutions, Dr. Bright explains, has been to help connect those who need with those who have: “Our efforts and focus have continued in assisting buyers to find bonafide sellers, often in new jurisdictions, looking to complement and find alternatives to fragmented supply chains concerning foodstuffs and basic goods”.
Dr. Bright’s advice for financial institutions to navigate the ongoing crisis:
Flexibility. We live in interesting, dynamic times and our management mindset needs to reflect and be open to react to the unprecedented external challenges presented, i.e. looking for alternative sources of finance, suppliers and transport means, collaborations, and trusted partners.
Agility. Understanding internal pressures, updating our systems, digitising processes for more efficient working.
A tightly controlled cash flow. Controlling costs and rigidly reducing expenses.