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By Tan Gera, founder of Decentralized Masters
The average person spends almost one month per year, or approximately 3.5 weeks, to pay for the “right to use” their financial system. Banks around the world make an average of $2,700 per user per year, and in NYC, that number skyrockets to $13,500. To put that in perspective, it’s even higher than the annual state taxes paid by many individuals.
Although banks always seem to make money, the markets are starting to signal that disruption is on the horizon. Despite their increased share of GDP (up to 6% in the past decade), the financial services sector is currently valued at a discount in the S&P 500.
This is in stark contrast to the highly-valued Big Tech companies (with P/E ratios averaging over 25x). The reason for this discrepancy is the market’s assessment of future growth prospects.
Unfortunately for financial services, institutional investors are increasingly pessimistic about the sector’s potential for growth, resulting in low valuations and uncertain futures.
The Rise of FinTech and DeFi: Who Will Take Over?
The financial industry is rapidly evolving and traditional banks are facing stiff competition from the FinTech sector. FinTechs are currently valued 20 times higher than traditional banks, which has prompted tech giants like Meta, Amazon, Apple and Google to launch their own payment solutions. The current financial system is ill-equipped to handle micropayments at scale and transactions can take up to three business days to settle.
While FinTechs have made significant strides in improving payment processing, they have yet to solve the issue of access and cost of trust.
This is where decentralized finance (DeFi) comes into play.
DeFi replaces the cost of trust currently represented by banks acting as intermediaries, and is accessible to anyone. By leveraging blockchain technology, DeFi decentralizes trust, enabling users to transact directly with one another without the need for a middleman.
3 Reasons Why FinTech and DeFi will Eat the Banking Market Share
1. Traditional banks struggle to prevent illegal activities
It’s important to remember that while crypto has been criticized for facilitating illegal transactions, the $100 bill remains the primary tool for money laundering worldwide.
The fiat system has long struggled to prevent illegal activities, creating a need for new financial solutions. In fact, global banks have been fined over $55 billion for financial crimes since the global financial crisis. A crisis that they created by selling dangerous financial products to their customers.
DeFi addresses the trust issues inherent in traditional financial systems by offering transparency and accountability. DeFi increases efficiency from transparent records with a single source, improves data integrity, enhances customer experience with faster processing, helps in reducing losses and offers the possibility for higher availability of capital and lower costs of doing business.
2. The largest wealth transfer in human history is underway.
The Baby Boomer generation fueled tremendous innovation and the rise of well-known mega corporations such as Exxon-Mobile, IBM and Microsoft. This innovation led to the creation of massive amounts of wealth.
As the Baby Boomers exit the stage, they will leave a significant portion of that wealth to millennials. Therefore, millennials will be the driving force behind the economy and financial markets in the next decade. And, millennials differ from Boomers and GenX in their view of banks. 92% don’t trust them and 33% of millennials believe they won’t need them in the next five years.
U.S. household wealth currently stands at $145 trillion and $37 trillion of that is set to be inherited by Millennials in the next decade. Additionally, 10% of Millennials’ liquid net worth is invested in digital assets and crypto, representing $700 billion, an impressive 70% of the total crypto market.
As millennials continue to grow richer, where do you think they will keep investing their money? With crypto’s open markets, investing in tomorrow’s unicorns is no longer limited to the ultra-wealthy, and millennials recognize that.
If 10% of the inheritance that American millennials are expected to receive in the next decade is allocated towards investing in the crypto markets, it would amount to a staggering $3.7 trillion, which is approximately four times larger than the current size of the crypto market. And that’s just the inheritance – not overall wealth – of a very small proportion of the global population. Let that sink in.
3. The new age store of value
Crypto’s network value currently ranges from $1-2 trillion, closing in on gold’s $10-12 trillion market cap. This makes it a significant player in the global economy alongside other major asset classes such as art, stocks, bonds and real estate, which are valued at $17T, $100T, $150T and $300T, respectively.
Crypto is already disrupting a $600T market, despite still representing only a small fraction of its total addressable market. With its current growth trajectory, crypto is well on its way to becoming a dominant store of value in the years to come.
The two main crypto concerns are not valid
Many investors are hesitant to invest in crypto due to two main concerns: speculation and volatility. Let’s demonstrate why these two concerns are not valid.
- Speculation: Bitcoin has a low level of speculation relative to other asset classes. In fact, its speculation-to-use ratio is only 2.5x when compared to currency and commodities. On the other hand, the US dollar is much more speculative, especially when you factor in derivatives markets.
- Volatility: While crypto’s volatility is often cited as a concern, it’s worth noting that when gold first became freely tradable, it exhibited similar levels of volatility as Bitcoin did since inception.
Whenever a market is opened up to new owners, there will inevitably be fluctuations in price. Gold, for example, experienced multiple drawdowns of over 50% throughout its history.
As crypto adoption continues to grow, its volatility is expected to stabilize just as it has for other asset classes. While there will always be winners and losers, this healthy competition is ultimately what drives innovation in the marketplace.
Sources: McKinsey, Fundstrat, CFA Institute
About the author:
Tan Gera is the founder of Decentralized Masters. He earned his level 3 CFA at 23 years of age, making him one of the youngest ever to do so. As an Investment Banker, he advised large Asian corporations such as the Tata Group as well as European companies in Food & Agriculture, Luxury, Leisure, and Finance sectors. Since discovering crypto in 2016, he has made that the focus of his endeavors. He successfully navigated the 2018 crash and the 2021 crypto winter. Now, Tan is building a mastermind of people who share the most lucrative investment opportunities within DeFi.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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