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THE NASDAQ INDEX IS NOW WORTH DOUBLE THE VALUE OF THE DOTCOM BOOM – HOW LONG BEFORE THE BUBBLE BURSTS?

by Cameron Dean of Oakmount Partners Ltd, a globally recognized financial institution.

It is almost impossible to think of a trillion dollars – a sum that could be distributed with a worth of £130 per head for every man, woman, and child on the planet – and yet Apple and Amazon are both valued at a trillion dollars each.

But Apple and Amazon are just a slice of the pie in the Nasdaq index, the favourite index of US tech. If one were to hypothetically distribute the value of the Nasdaq, it would come to around £790 per head for the global population. (And £17,170 for every US citizen.) The unprecedented growth of the Nasdaq is now twice as big as the Dotcom bubble was before it came crashing down, and for this reason, people can be forgiven for asking: “When will the current bubble burst?”

No one likes to listen to critics – especially when things appear to be going so well. After all, markets thrive on confidence and optimism, and can implode if the negative voices grow too loud. The engineers in Silicon Valley certainly won’t want to hear about it – recent market dynamics have afforded them the opportunity to make tremendous advances in electric cars, smart start ups (“smart ups”), artificial intelligence, and even private sector space exploration enterprises. Without the incredible success of the Nasdaq it is hard to see how much of this would be possible.

What goes up must come down

It is hard to remember to bring a coat when there’s no a cloud in the sky. When bubbles are on an upswing everybody wins. Those who sell at the right time can amass huge amounts of money – just think of the fortunate Bitcoiners who sold single ‘coins’ of the digital currency for $20,000. One man, Peter Saddlington from Atlanta, made a 250,000 per cent profit on the sale of his Bitcoin – buying for as little as $3 per coin and selling at around $7,500. As the Nasdaq has gone up, it has hoisted up the credit of the whole economy along with it, with more paper wealth.

But as the history of tech-driven stock market bubbles tells us, there’s a good chance things will take a turn for the worse. And we need to start thinking gingerly about the fact that the bubble could soon burst.

One only has to look at the classic vertical share price climb in the Nasdaq, that has soared since 2008. If the bubble bursts soon, I’m sure many will think the crash in hindsight to have looked inevitable.

Why the Nasdaq bubble might and might not crash anytime soon

Overlooking the extreme prices of the products and crafts engineered in the tech sector, one also has to consider the policies of central banks around the world.

The US Federal Reserve bank for one is slowly reversing out of its easy money policies that helped to inflate share prices to begin with. The Federal Reserve has been magicking money out of thin air ever since the 2007-08 financial crises, and is slowly reducing this by pulling dollars out of circulation. This is hurting the emerging markets because it means the tide of dollars that they need for funding is no longer there – meaning they will have to pay up a lot more in their local currencies to roll their dollar debts.

This magicking of money is known as ‘quantitative easing’. If QE made stocks go up, then reverse QE stocks will go down. That is the reality of the Nasdaq situation. You might remember back in February 2018, the markets quickly got angry with the Federal Reserve Bank’s decision to reverse its QE practices. If the Federal Reserve listens to the complaints again we could be in for a bumpy ride of up and down hiccups – but we could also head into a full on crash. Bubbles do not like to deflate gently – not in market societies – they go out with a bang.

But I would like to end on a positive note, because I don’t wish to abet a self-fulfilling prophecy on the world – we all know optimism is important. (As the saying goes, one shouldn’t bet against a bubble as it can keep inflating long after all rational reason to drive its growth has dried up.) I would like to think the Federal Reserve will take the sensible approach and manage its reverse QE practices so that the market keeps well within arm’s reach. Let it wait for economic growth to replace the dollars that the Federal Reserve is now withdrawing from the system.

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Business

BACK TO SCHOOL – CEOS NEED TO LEARN A NEW LANGUAGE, FAST!

By Simon Axon, Financial Services Industry Consulting practice lead in EMEA, Teradata

 

Chief Executive Officers of banks know all about change. Leading responses to new challenges, new opportunities, new regulation and new markets is all in a day’s work. But the existential challenge posed by Big Tech requires a totally new set of skills. It is an entirely different beast that inhabits a totally new environment and speaks its own language. CEOs now need to learn the language of data to survive in the emerging digital world.

Learning a new language later in life is hard. CEOs need to fully commit to accomplish it. Becoming data literate means mastering the basics of vocabulary and grammar. Gartner defines data literacy as the ability to read, write and communicate data in context, including an understanding of data sources and constructs, analytical methods and techniques applied — and the ability to describe the use case, application and resulting value.” Extending the language analogy: the building blocks are an understanding of logical data models – the basic vocabulary; meta data providing rules and information about data is the grammar.  Learning needs to go beyond parroting a few key phrases and acronyms. To really communicate in this new language CEOs must not only be data literate – but data cognitive. Language shapes thinking, and to succeed, today’s CEOs need to think data like digital natives.

Simon Axon

As anyone who has learned a language will recognise – practise makes perfect. This means rolling up your sleeves and getting into the data ‘lab’. Run some queries, experiment with data to test theories and learn how data can, and should, inform all aspects of business management. It is daunting, and different functions are fiercely protective of their data. But that’s one of the big cultural shifts the CEO needs to lead. Data is more valuable when it is used across the business. Developing safe and secure ways to combine, refine and analyse data at an enterprise level is fundamental to competing with Big Tech. The Chief Data Officer can help. Spend time with them and use them as a teaching-resource to get more familiar with what can and cannot be done with your data.

As you practise you will build confidence and move from school-level conversations to business-class data fluency. Spending more time looking at and working with data and you will begin to recognise ‘quality’ data, identify attributes and flag anomalies. This will build confidence and essential trust in data. Last year KPMG found just 35% of CEOs trusted the data in their organisations. This shocking stat undoubtedly stems from a data skills deficit among CEOs themselves. If they don’t know what to ask for, and can’t recognise what they get, they won’t trust it. To stretch our linguistic analogy, if you are not confident in the language then you’ll be anxious ordering food in a restaurant!

Ultimately, no one expects the CEO to personally implement data-analytics programmes across the business. But unless they have the confidence and the skills to accurately communicate what’s needed, to sit at the head of the table and ask the right questions about the menu, then the organisation is unlikely to put the right emphasis on the data strategy.

In How Google Works, former Google Chairman Eric Schmidt outlines how every meeting revolved around data – it is simply how Big Tech works. Banks need to adopt the same approach. Exploiting data in all scenarios must become second-nature. By modelling the use of data across the business – dissolving silos rather than sticking to narrow data sets that reinforce them, the CEO can define a powerful data culture. Operationalizing data strategy will, just like using language skills, stop data literacy from becoming rusty.

Entering any new market requires investment in understanding the language, culture and business environment. In the Big Tech world, data is the lingua franca informing every decision. Bank CEOs need to learn from them and invest in building their knowledge to become data fluent. There are no short cuts. Throwing money, bodies and tech at the problem will not get you there.

 

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Business

REVITALISING THE TOKEN MARKET

By Gavin Smith, CEO at Panxora

 

With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?

 

Seed investor scepticism

Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.

During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.

Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.

To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.

 

Bridging the gap between token projects’ needs and early stage investors

To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.

Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.

 

Two sides of the coin

So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.

On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.

On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.

 

Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:

  • What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile. 
  • How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
  • How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.

Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.

But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.

Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.

And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.

 

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