Top three trends for 2018

  • Rand Low

Press/Media: Expert Comment

Description

 

Issue 1 - Australia being Amazoned: How will it change the retail landscape? 

1)      What are the biggest changes Amazon will bring to Australia and our retail landscape?

 

To start with, let me say that I am a big fan of Amazon, and my wife and I would not be able to live without Amazon prime with our new born baby in NYC without the amazing services that they provide.  My understanding is that Amazon Prime is presently unavailable in Australia.  I can only speak of my personal experiences with Amazon Prime in NYC and their secret sauce is their unlimited, guaranteed 2-day delivery on all Prime products. 

 

In a sentence, Amazon is an online shopping mall that provides the most cost-effective and time-efficient means of filling your online shopping basket with a whole variety of goods ranging from electronics, clothes, toys, food, detergent, etc. with an unlimited guaranteed 2-day delivery, and returns policy.  As a bonus, Amazon customers also get digital storage for files & photos, movie streaming, music streaming, and e-books for an annual subscriptions fee (i.e., Amazon Prime).

 

Aussies are obviously no strangers to internet shopping and have been making purchases from eBay, ASOS, Kogan, and more.  The value preposition for internet shopping in Australia has usually been about bargain hunting, or easily viewing a wide range of products that you may not have been able to browse in-store.  However, most deliveries for internet purchases would take around 5-7 business days without much certainty around when the item would be delivered exactly, and the return policy for internet purchases were company dependent. Furthermore, as most internet companies specialize in only selling certain types of product, the shopper needs to visit multiple websites to fill a diverse shopping list.

 

Brick-and-mortar retailers could easily defend their turf as consumers would still go to the shops to buy items they needed urgently or when the uncertainty of knowing when the product will be delivered exactly would impact the purchasing decision.  With returns, there is less certainty with brick-and-mortar retailers as all you need to do is drop your item in-store, whereas with online shopping, there are uncertainties around whether your product reaches the internet company, and whether that internet company will assess that your product was eligible for the return policy.  Having to buy product from multiple websites to fill a diverse basket of goods compounds the delivery and return policy problems.  By going to a Westfield shopping mall, you can easily get everything that you need in one place, thus making it mainly a time-efficient, but potentially not cost-effective, activity.

 

By offering unlimited guaranteed 2-day delivery, Amazon removes the shoppers dislike for uncertainty around when products will be delivered.  By offering a whole range of products in one place, there is no need to shop around and worry about the return policies of different websites.  As Amazon solves these problems, Aussie retailers will have to think harder about their value preposition as to why customers would continue to go to the brick-and-mortar shops or buy from other Aussie online retailers.

 

2)      What will this mean for everyday Aussies going shopping?

 

There are two types of shoppers, the casual shopper who is generally window-shopping and may make a purchase if there is something unique enough to pique their interest, and the no-frills shopper who is too busy and needs to purchase a variety of goods in a cost-effective and time-efficient manner.  The experience of the products that could be purchased by both types of shoppers was always limited to what the purchasing managers of Coles/K-mart/BigW/Woolies thought would sell well in Australia.

 

Now, the casual shopper can now browse through a global directory of products and have no concerns about overspending as he/she can easily purchase and return the products easily upon buying from Amazon.  The no-frills shopper who lacks time can easily purchase everything the household needs from Amazon and be guaranteed it will arrive in 2-days with no extra charge. 

 

This is excellent news as the life for the everyday Aussie shopper is greatly improved since they have more time on their hands.  Furthermore, they are able to experience and use a variety of products from all over the world at low risk due to Amazon’s amazing logistical ability to pick up your returns from your doorstep and organize your refund efficiently.

 

3)      Is it likely that bricks and mortar retail spaces in Australia will suffer as a result?

 

It is highly likely that bricks and mortar retail spaces in Australia will suffer, if Amazon is able to meet the logistical challenges of meeting guaranteed 2-day deliveries across the major capital cities of Australia in a cost-effective manner.

 

Shopping malls as a whole will need to be about creating unique experiences that customers are unable to replicate at home.  This is quite a feat considering we can easily stream movies, order take-out on delivery, and do on-line shopping in the comfort of our homes.   So, what can brick-and-mortar businesses do?

 

I believe that they will need to focus on the customer experience and almost make it a joyful, unique, and surprising experience for shoppers to go into their stores.  This mean that brick-and-mortar stores may need to do continuously redecorate by designing a layout where it is efficient to change the products on display, training customer servicing associates to understand the characteristics of a product in-depth and the back story of the design of the product such that it engages deeply with the experience of the walk-in customer, or provide free in-store entertainment/workshops/classes.  Basically, in-store the customer experience is the primary objective.  Whether or not that sale leads to an in-store sale is secondary, as customers can always buy it online if they had a positive experience. 

 

A good example of a store that does a uniquely enjoyable bazaar-like layout that continuously changes products on-sale that gives me a sense of excitement as I never know what I’ll see when I walk in the same store, or a different store is Anthropology.  A good example of a firm that provides workshops/classes and entertainment are LuLu Lemon Athelica stores that have free yoga classes at several of their shops and have DJs playing music with dancing yoga instructors in their 5th avenue store.

 

Products will be not be sold because of how they solve a particular problem, but the story they have behind them on how and why they were created and designed. For example, Louis Vuitton have done an excellent job in New York by having a free exhibit linking their history in baggage design with travelling (i.e., the Volez Voguez Voyagez exhibition).  As it is recognized that consumers are interested in experiences, particularly with travelling, Louis Vuitton seeks to link customer’s positive emotions of travelling with their bags.  The Nike store on Broadway near SoHo dedicates the ground floor as almost a historical exhibit of the design of their shoes, and displaying their latest sneakers/runners in a unique & interactive fashion.  Basically, all of these stores have become interactive show rooms where exhibits are designed to link back to the positive experience of the customer.  

 

 

4)      Will competitive pricing become an even more important factor for businesses?

 

Competitive pricing is already a given in the current business environment. I’m sure that every business in Australia is already working towards continually ensuring that their internal processes and overheads are as efficient as possible.  However, my belief is that you can only streamline a business so much. The most positive way forward is for every business owner is to ask themselves what type of services or experiences they are bundling with the product to justify the higher prices or the efforts of going in-store as opposed to buying online from Amazon?

 

There are no clear answers for how companies should best respond to Amazon’s impact on the retail landscape in the US many retailers are still struggling to compete with how Amazon has changed the whole shopping experience.  For smaller online businesses, their decision centers around whether the best strategy is to sell only on their own websites, on Amazon’s platform, or both.  For larger companies like Woolies and Coles, they may decide to go head-on with Amazon and enhance their internet shopping capabilities or partner up with other internet companies to provide a product base and logistics.  Walmart has decided to do both by purchasing  Jet (an online shopping mall) to enhance the Walmart internet shopping experience, and partnered up with Google to provide a product base for shoppers on Google express (Google’s online shopping mall). 

 

 

 

Issue 2 - Cryptocurrency: Tulip mania or  digital currency of the millennial generation?

1)      There is a lot of talk in Australia around cryptocurrency, particularly bitcoin – for the everyday person, what is a cryptocurrency?

 

To understand cryptocurrency, it may help to have a simplified explanation of how currencies operate.   A currency is a centralized database (i.e., ledger) of transactions that are stored, controlled, and monitored by a country’s central bank (e.g., RBA) and its commercial banks (e.g., NAB, ANZ, Westpac). Central banks create money by printing bank notes that each have a unique serial number.  The unique serial number on each note prevents the occurrence of double spending (i.e., preventing an individual from spending the same amount twice).  Only legitimate notes with the unique serial number are allowed to be entered into the database of transactions such as our bank accounts.  For example, when you deposit cash into your bank account the teller or ATM will confirm that the notes that you have provided are legitimate and record the transaction as a deposit in your bank account. 

 

Cryptocurrencies are decentralized databases (i.e., ledgers) of accounts, balances and transactions. The decentralized database is stored by all participants in the cryptocurrency network, and entries into the ledger can only be made by fulfilling specific conditions. Different types of cryptocurrency require the fulfilment of different specific conditions to be met before legitimate transactions are recorded into the decentralized database.

 

Technically, cryptocurrencies use a Peer-to-Peer (P2P) that uses a block chain as a decentralized ledger of transactions.  Transactions are broadcasted to the P2P network and are verified to be genuine based on a user’s private key (i.e., digital wallet).  Transactions are confirmed by Bitcoin miners who may only add the transaction to the blockchain once they have performed a complex mathematical calculation (i.e., hash function). Bitcoin miners are an essential part of the cryptocurrency as they help to add legitimate transactions into the blockchain, and collect a fee (i.e., mining bitcoin) for doing so.  Blockchains are an immutable record of historical transactions.  The process of mining (i.e., adding legitimate transactions to the blockchain) is the only way that Bitcoin can be created.  Thus, this makes it different from a standard currency where money can be printed by a central bank.

 

2)      What are the other popular forms of cryptocurrency?

 

Other forms of cryptocurrency are Ethereum, Litecoin, Ripple and Dash.

 

3)      Will bitcoin and cryptocurrencies have any effect on other currencies worldwide i.e. AUD or USD?

 

Bitcoin and cryptocurrencies are more likely to impact currencies in the long-term.  Presently, the two primary challenges being faced are the continuing volatility and rising prices of Bitcoin, and the time taken to add new transactions to the blockchain of Bitcoin.

 

Due to its large price swings, businesses are unable to price their products and services in Bitcoin.  This dampens its use as a means of trade and currency.  Presently, the turnover of bitcoin per day is about $100 million, whereas the total amount of forex transactions per day is $5.1 trillion.  As Bitcoin is about 0.002% of the forex market and has a long way to go before becoming a serious contender to the well-established forex market.  Adding new transactions to Bitcoin require the hash function to be calculated by miners that is an onerous task. Bitcoin is able to execute 7 transactions per second whereas Visa can process around 20,000 to 50,000 transactions per second. Thus, as a method of payment Bitcoin needs to be able to process a similar number of transactions as Visa.

 

In the long term, once the price volatility of Bitcoin (and other cryptocurrencies) settles down and new cryptocurrency frameworks/technologies allow for more efficient processing of new transactions, it’s use-case to price and trade goods and services, and become a method of payment becomes more viable.  Even then, Bitcoin will have less impact on developed country currencies (i.e., USD, GBP, AUD, Euro, etc.) that are well established and whose citizens will continue to use their home currencies as a means of trade.  Currencies that might suffer or even disappear as a result of Bitcoin are countries whose currencies are highly volatile and weak (e.g., Venezuelan Bolivar, Zimbabwe dollar) where governments may have imposed capital controls or are perceived as less credit-worthy by investors.

 

4)       Does Wall Street predict bitcoin will reflect tulip mania or become a long-term currency for digital-savvy generations?

 

This is a complex question and has to be discussed on several fronts.

 

For industry experts, the current interest in Bitcoin is often alluded to as irrational market behavior reminiscent of Tulip-mania of the 1600s, and the Dotcom boom of the 2000s.  Theoretically, investments generate returns via periodic payments while an investor owns the asset, and upon the sale of the asset.  For example, when investors purchase a house (i.e., stocks, bonds, currencies), they collect a rent (i.e., dividends, coupons, interest) and hopefully capital gain upon selling the house.  On the other hand, Bitcoin and tulips do not generate any periodic payments when holding these assets, and Dotcom tech stocks did not pay dividends. The return on these “investments” were predicated on the idea that they could be sold for a higher price to another buyer in the future.  If an investment is believed to increase in price in the future, it is important to ascertain what its value preposition.   The future value preposition of all three “investments” are tenuous as it is difficult to value their use, purpose and impact on society.  Traditional investment such as equities, bonds, real-estate are more easily valued by understanding the financial cash flows, products and services of the firms in question.

 

Bitcoin is also referred to as being a safe haven asset similar to gold, however there are several distinctions between both.  Gold is a precious metal as it is a rare element (approx. 3.1 x 10-7% in the Earth’s crust), and current technologies are unable to replicate or re-create gold.  It is also currently used for cosmetic (i.e., jewelry) and industrial (i.e., aerospace, electronics manufacturing) purposes.  There is no theoretical limit on the number of cryptocurrencies that can be formed, thus it does not have that intrinsically rare property that gold has.  Its use-case is as a form of payment where several substitutes are available such as existing currencies and other cryptocurrencies.

 

Generally, cryptocurrencies need to be widely adopted by individuals and businesses as a method of payment to be of value, and they currently face challenges such as (i) high price & volatility (ii) inefficient execution of transactions (iii) regulatory restrictions/bans (iv) cyber threats.  Even if these challenges are mitigated, cryptocurrencies also face formidable incumbent currencies such as the USD, Euro, and Japanese Yen.  However, despite these challenges, cryptocurrencies are likely to become a digital-currency alternative for the future and we can look at history to understand how this may evolve.

 

One of the earliest forms of Peer-to-Peer (P2P) file sharing was Napster (i.e., year 2000) that involved the sharing of music files.  The reaction from several major music labels was that this was piracy and akin to robbing recording artists of their hard-earned royalties. As internet technology improved, P2P sharing expanded towards movies and TV shows. Film studios started to be involved in advertising the negative impacts of movie-piracy and trying to involving internet service providers in apprehending customers who were downloading movies illegally.  

 

Entrepreneurs like Steve Jobs from Apple recognized that it was not so much that the majority of public wanted to break the law and download music illegally, but that the consumption og music was changing such that people did not want to buy whole albums or CDs and were willing to pay a small fee for songs that they liked to curate their own personal playlists.  He negotiated an agreement with the music labels and this functionality of pay-per-song was incorporated in iTunes in 2003.    Fast forwarding to today, we can easily stream music in Spotify (i.e., mainstream in 2012) and movies on Netflix (i.e., mainstream in 2013) for a minimal monthly subscription fee.  The success of these businesses and the size of their subscription base is evident of how they’ve captured and met the needs of the market.  Henceforth, we can observe how recording labels, film studios, and internet firms have been forced to adapt and evolve with customer demands over time and the time span of these events took approximately 15 years.

 

Imposing fines and bans, warning individuals to stay away, and making activities and products wanted by customers illegal are short-term reactions that simply do not work.  History shows us that customers eventually get what they want as corporations or entrepreneurs who meet their wants stand to generate huge profits.

 

Regardless of warnings from financial institutions to the public of the risks in investing in cryptocurrency and attempts by governments to ban cryptocurrency, cryptocurrencies continue to be very popular as indicated by their rising prices.  Cryptocurrencies are valuable as a method of payment as there is a niche market who value a digital currency alternative whose value is not determined by the whims of politicians, governments, or central banks.  The value of a cryptocurrency would be purely market driven as a method of payment, and underpinned by its effectiveness and transparency to transmit funds domestically and internationally.

 

In addition, the concept of decentralized databases and the creation of an immutable record of historical transactions is intriguing as it has applications in politics (i.e., preventing electoral voter fraud), healthcare (i.e., accurate and up-to-date set of medical records for the individual), and government contracts  (i.e., keeping track of  subcontracting entities in large-scale government infrastructure projects).  Thus, the underlying technology of cryptocurrencies is here to stay, but will probably evolve over time in a different shape or form that is more amenable to regulators and the market.

 

 

 

 

 

 

 

5)      If they own bitcoin, what should Aussies do with it?

 

For those owning bitcoin, it really depends on (i) their investment horizon (ii) their Bitcoin purchase price (iii) the amount of bitcoin they have as a percentage of their overall wealth.  It is likely that Bitcoin prices will go down in the near-future due to the supply of alternative viable cryptocurrencies are continuously being developed.  Thus, for Aussies who’ve bought Bitcoin at much lower prices in the past, it would be ideal to sell a portion of their Bitcoin to lock in those profits.

 

Issue 3 - The low volatility regime: Here to stay or the calm before the storm

1)      In lay man’s terms, what is the low volatility regime?

 

The low volatility regime generally refers to the fact that throughout 2017, international share markets (i.e., equities) have been steadily rising without any large drops.  This is evident from the chart below (see blue line) where we can see that in 2017 the VIX (i.e., volatility index) has been pretty flat except for the events that occurred last week (i.e., Mon 5th Feb, Wed 7th Feb) which was when the “storm” occurred.

 

 

 

2)      How long is Wall Street predicting the stock market’s Low-Volatility Regime will last?

 

Prior to last weeks events, medium-term strategists predicted that the low-volatility regime would probably continue as several economists have reported that 2018 would be a year of co-ordinated economic growth across developed and developing nations.

 

3)      What are the warning signs, that the Regime is coming to an end?

 

Even though we had a highly volatile period on the market’s last week, it is not necessarily a portent of an impending financial crisis.  The underlying economic data for the global economy generally looks promising and any volatility spikes should be short-lived unless they are caused by severe political disruption such as wars.

 

4)      What will happen if the regime ends, and what will it mean for Australians?

 

If the regime ends, for most Australians with short to medium-term investment objectives the most pertinent action would be to rebalance your investment portfolios towards less volatile assets such as fixed income or cash.  Most superannuation portfolios should allow Aussies the option to invest in such types of investments.  Other alternatives are investing in multi-asset portfolios where these are investment strategies that will take up portfolio positions in both equities and fixed income to be more diversified and less exposure to downside risk.

Period1 Jan 2018

Media contributions

1

Media contributions

  • TitleTop three trends for 2018
    Degree of recognitionNational
    Media name/outletMomentum
    Media typePrint
    CountryAustralia
    Date1/01/18
    Description Issue 1 - Australia being Amazoned: How will it change the retail landscape? 1) What are the biggest changes Amazon will bring to Australia and our retail landscape? To start with, let me say that I am a big fan of Amazon, and my wife and I would not be able to live without Amazon prime with our new born baby in NYC without the amazing services that they provide. My understanding is that Amazon Prime is presently unavailable in Australia. I can only speak of my personal experiences with Amazon Prime in NYC and their secret sauce is their unlimited, guaranteed 2-day delivery on all Prime products. In a sentence, Amazon is an online shopping mall that provides the most cost-effective and time-efficient means of filling your online shopping basket with a whole variety of goods ranging from electronics, clothes, toys, food, detergent, etc. with an unlimited guaranteed 2-day delivery, and returns policy. As a bonus, Amazon customers also get digital storage for files & photos, movie streaming, music streaming, and e-books for an annual subscriptions fee (i.e., Amazon Prime). Aussies are obviously no strangers to internet shopping and have been making purchases from eBay, ASOS, Kogan, and more. The value preposition for internet shopping in Australia has usually been about bargain hunting, or easily viewing a wide range of products that you may not have been able to browse in-store. However, most deliveries for internet purchases would take around 5-7 business days without much certainty around when the item would be delivered exactly, and the return policy for internet purchases were company dependent. Furthermore, as most internet companies specialize in only selling certain types of product, the shopper needs to visit multiple websites to fill a diverse shopping list. Brick-and-mortar retailers could easily defend their turf as consumers would still go to the shops to buy items they needed urgently or when the uncertainty of knowing when the product will be delivered exactly would impact the purchasing decision. With returns, there is less certainty with brick-and-mortar retailers as all you need to do is drop your item in-store, whereas with online shopping, there are uncertainties around whether your product reaches the internet company, and whether that internet company will assess that your product was eligible for the return policy. Having to buy product from multiple websites to fill a diverse basket of goods compounds the delivery and return policy problems. By going to a Westfield shopping mall, you can easily get everything that you need in one place, thus making it mainly a time-efficient, but potentially not cost-effective, activity. By offering unlimited guaranteed 2-day delivery, Amazon removes the shoppers dislike for uncertainty around when products will be delivered. By offering a whole range of products in one place, there is no need to shop around and worry about the return policies of different websites. As Amazon solves these problems, Aussie retailers will have to think harder about their value preposition as to why customers would continue to go to the brick-and-mortar shops or buy from other Aussie online retailers. 2) What will this mean for everyday Aussies going shopping? There are two types of shoppers, the casual shopper who is generally window-shopping and may make a purchase if there is something unique enough to pique their interest, and the no-frills shopper who is too busy and needs to purchase a variety of goods in a cost-effective and time-efficient manner. The experience of the products that could be purchased by both types of shoppers was always limited to what the purchasing managers of Coles/K-mart/BigW/Woolies thought would sell well in Australia. Now, the casual shopper can now browse through a global directory of products and have no concerns about overspending as he/she can easily purchase and return the products easily upon buying from Amazon. The no-frills shopper who lacks time can easily purchase everything the household needs from Amazon and be guaranteed it will arrive in 2-days with no extra charge. This is excellent news as the life for the everyday Aussie shopper is greatly improved since they have more time on their hands. Furthermore, they are able to experience and use a variety of products from all over the world at low risk due to Amazon’s amazing logistical ability to pick up your returns from your doorstep and organize your refund efficiently. 3) Is it likely that bricks and mortar retail spaces in Australia will suffer as a result? It is highly likely that bricks and mortar retail spaces in Australia will suffer, if Amazon is able to meet the logistical challenges of meeting guaranteed 2-day deliveries across the major capital cities of Australia in a cost-effective manner. Shopping malls as a whole will need to be about creating unique experiences that customers are unable to replicate at home. This is quite a feat considering we can easily stream movies, order take-out on delivery, and do on-line shopping in the comfort of our homes. So, what can brick-and-mortar businesses do? I believe that they will need to focus on the customer experience and almost make it a joyful, unique, and surprising experience for shoppers to go into their stores. This mean that brick-and-mortar stores may need to do continuously redecorate by designing a layout where it is efficient to change the products on display, training customer servicing associates to understand the characteristics of a product in-depth and the back story of the design of the product such that it engages deeply with the experience of the walk-in customer, or provide free in-store entertainment/workshops/classes. Basically, in-store the customer experience is the primary objective. Whether or not that sale leads to an in-store sale is secondary, as customers can always buy it online if they had a positive experience. A good example of a store that does a uniquely enjoyable bazaar-like layout that continuously changes products on-sale that gives me a sense of excitement as I never know what I’ll see when I walk in the same store, or a different store is Anthropology. A good example of a firm that provides workshops/classes and entertainment are LuLu Lemon Athelica stores that have free yoga classes at several of their shops and have DJs playing music with dancing yoga instructors in their 5th avenue store. Products will be not be sold because of how they solve a particular problem, but the story they have behind them on how and why they were created and designed. For example, Louis Vuitton have done an excellent job in New York by having a free exhibit linking their history in baggage design with travelling (i.e., the Volez Voguez Voyagez exhibition). As it is recognized that consumers are interested in experiences, particularly with travelling, Louis Vuitton seeks to link customer’s positive emotions of travelling with their bags. The Nike store on Broadway near SoHo dedicates the ground floor as almost a historical exhibit of the design of their shoes, and displaying their latest sneakers/runners in a unique & interactive fashion. Basically, all of these stores have become interactive show rooms where exhibits are designed to link back to the positive experience of the customer. 4) Will competitive pricing become an even more important factor for businesses? Competitive pricing is already a given in the current business environment. I’m sure that every business in Australia is already working towards continually ensuring that their internal processes and overheads are as efficient as possible. However, my belief is that you can only streamline a business so much. The most positive way forward is for every business owner is to ask themselves what type of services or experiences they are bundling with the product to justify the higher prices or the efforts of going in-store as opposed to buying online from Amazon? There are no clear answers for how companies should best respond to Amazon’s impact on the retail landscape in the US many retailers are still struggling to compete with how Amazon has changed the whole shopping experience. For smaller online businesses, their decision centers around whether the best strategy is to sell only on their own websites, on Amazon’s platform, or both. For larger companies like Woolies and Coles, they may decide to go head-on with Amazon and enhance their internet shopping capabilities or partner up with other internet companies to provide a product base and logistics. Walmart has decided to do both by purchasing Jet (an online shopping mall) to enhance the Walmart internet shopping experience, and partnered up with Google to provide a product base for shoppers on Google express (Google’s online shopping mall).   Issue 2 - Cryptocurrency: Tulip mania or digital currency of the millennial generation? 1) There is a lot of talk in Australia around cryptocurrency, particularly bitcoin – for the everyday person, what is a cryptocurrency? To understand cryptocurrency, it may help to have a simplified explanation of how currencies operate. A currency is a centralized database (i.e., ledger) of transactions that are stored, controlled, and monitored by a country’s central bank (e.g., RBA) and its commercial banks (e.g., NAB, ANZ, Westpac). Central banks create money by printing bank notes that each have a unique serial number. The unique serial number on each note prevents the occurrence of double spending (i.e., preventing an individual from spending the same amount twice). Only legitimate notes with the unique serial number are allowed to be entered into the database of transactions such as our bank accounts. For example, when you deposit cash into your bank account the teller or ATM will confirm that the notes that you have provided are legitimate and record the transaction as a deposit in your bank account. Cryptocurrencies are decentralized databases (i.e., ledgers) of accounts, balances and transactions. The decentralized database is stored by all participants in the cryptocurrency network, and entries into the ledger can only be made by fulfilling specific conditions. Different types of cryptocurrency require the fulfilment of different specific conditions to be met before legitimate transactions are recorded into the decentralized database. Technically, cryptocurrencies use a Peer-to-Peer (P2P) that uses a block chain as a decentralized ledger of transactions. Transactions are broadcasted to the P2P network and are verified to be genuine based on a user’s private key (i.e., digital wallet). Transactions are confirmed by Bitcoin miners who may only add the transaction to the blockchain once they have performed a complex mathematical calculation (i.e., hash function). Bitcoin miners are an essential part of the cryptocurrency as they help to add legitimate transactions into the blockchain, and collect a fee (i.e., mining bitcoin) for doing so. Blockchains are an immutable record of historical transactions. The process of mining (i.e., adding legitimate transactions to the blockchain) is the only way that Bitcoin can be created. Thus, this makes it different from a standard currency where money can be printed by a central bank. 2) What are the other popular forms of cryptocurrency? Other forms of cryptocurrency are Ethereum, Litecoin, Ripple and Dash. 3) Will bitcoin and cryptocurrencies have any effect on other currencies worldwide i.e. AUD or USD? Bitcoin and cryptocurrencies are more likely to impact currencies in the long-term. Presently, the two primary challenges being faced are the continuing volatility and rising prices of Bitcoin, and the time taken to add new transactions to the blockchain of Bitcoin. Due to its large price swings, businesses are unable to price their products and services in Bitcoin. This dampens its use as a means of trade and currency. Presently, the turnover of bitcoin per day is about $100 million, whereas the total amount of forex transactions per day is $5.1 trillion. As Bitcoin is about 0.002% of the forex market and has a long way to go before becoming a serious contender to the well-established forex market. Adding new transactions to Bitcoin require the hash function to be calculated by miners that is an onerous task. Bitcoin is able to execute 7 transactions per second whereas Visa can process around 20,000 to 50,000 transactions per second. Thus, as a method of payment Bitcoin needs to be able to process a similar number of transactions as Visa. In the long term, once the price volatility of Bitcoin (and other cryptocurrencies) settles down and new cryptocurrency frameworks/technologies allow for more efficient processing of new transactions, it’s use-case to price and trade goods and services, and become a method of payment becomes more viable. Even then, Bitcoin will have less impact on developed country currencies (i.e., USD, GBP, AUD, Euro, etc.) that are well established and whose citizens will continue to use their home currencies as a means of trade. Currencies that might suffer or even disappear as a result of Bitcoin are countries whose currencies are highly volatile and weak (e.g., Venezuelan Bolivar, Zimbabwe dollar) where governments may have imposed capital controls or are perceived as less credit-worthy by investors. 4) Does Wall Street predict bitcoin will reflect tulip mania or become a long-term currency for digital-savvy generations? This is a complex question and has to be discussed on several fronts. For industry experts, the current interest in Bitcoin is often alluded to as irrational market behavior reminiscent of Tulip-mania of the 1600s, and the Dotcom boom of the 2000s. Theoretically, investments generate returns via periodic payments while an investor owns the asset, and upon the sale of the asset. For example, when investors purchase a house (i.e., stocks, bonds, currencies), they collect a rent (i.e., dividends, coupons, interest) and hopefully capital gain upon selling the house. On the other hand, Bitcoin and tulips do not generate any periodic payments when holding these assets, and Dotcom tech stocks did not pay dividends. The return on these “investments” were predicated on the idea that they could be sold for a higher price to another buyer in the future. If an investment is believed to increase in price in the future, it is important to ascertain what its value preposition. The future value preposition of all three “investments” are tenuous as it is difficult to value their use, purpose and impact on society. Traditional investment such as equities, bonds, real-estate are more easily valued by understanding the financial cash flows, products and services of the firms in question. Bitcoin is also referred to as being a safe haven asset similar to gold, however there are several distinctions between both. Gold is a precious metal as it is a rare element (approx. 3.1 x 10-7% in the Earth’s crust), and current technologies are unable to replicate or re-create gold. It is also currently used for cosmetic (i.e., jewelry) and industrial (i.e., aerospace, electronics manufacturing) purposes. There is no theoretical limit on the number of cryptocurrencies that can be formed, thus it does not have that intrinsically rare property that gold has. Its use-case is as a form of payment where several substitutes are available such as existing currencies and other cryptocurrencies. Generally, cryptocurrencies need to be widely adopted by individuals and businesses as a method of payment to be of value, and they currently face challenges such as (i) high price & volatility (ii) inefficient execution of transactions (iii) regulatory restrictions/bans (iv) cyber threats. Even if these challenges are mitigated, cryptocurrencies also face formidable incumbent currencies such as the USD, Euro, and Japanese Yen. However, despite these challenges, cryptocurrencies are likely to become a digital-currency alternative for the future and we can look at history to understand how this may evolve. One of the earliest forms of Peer-to-Peer (P2P) file sharing was Napster (i.e., year 2000) that involved the sharing of music files. The reaction from several major music labels was that this was piracy and akin to robbing recording artists of their hard-earned royalties. As internet technology improved, P2P sharing expanded towards movies and TV shows. Film studios started to be involved in advertising the negative impacts of movie-piracy and trying to involving internet service providers in apprehending customers who were downloading movies illegally. Entrepreneurs like Steve Jobs from Apple recognized that it was not so much that the majority of public wanted to break the law and download music illegally, but that the consumption og music was changing such that people did not want to buy whole albums or CDs and were willing to pay a small fee for songs that they liked to curate their own personal playlists. He negotiated an agreement with the music labels and this functionality of pay-per-song was incorporated in iTunes in 2003. Fast forwarding to today, we can easily stream music in Spotify (i.e., mainstream in 2012) and movies on Netflix (i.e., mainstream in 2013) for a minimal monthly subscription fee. The success of these businesses and the size of their subscription base is evident of how they’ve captured and met the needs of the market. Henceforth, we can observe how recording labels, film studios, and internet firms have been forced to adapt and evolve with customer demands over time and the time span of these events took approximately 15 years. Imposing fines and bans, warning individuals to stay away, and making activities and products wanted by customers illegal are short-term reactions that simply do not work. History shows us that customers eventually get what they want as corporations or entrepreneurs who meet their wants stand to generate huge profits. Regardless of warnings from financial institutions to the public of the risks in investing in cryptocurrency and attempts by governments to ban cryptocurrency, cryptocurrencies continue to be very popular as indicated by their rising prices. Cryptocurrencies are valuable as a method of payment as there is a niche market who value a digital currency alternative whose value is not determined by the whims of politicians, governments, or central banks. The value of a cryptocurrency would be purely market driven as a method of payment, and underpinned by its effectiveness and transparency to transmit funds domestically and internationally. In addition, the concept of decentralized databases and the creation of an immutable record of historical transactions is intriguing as it has applications in politics (i.e., preventing electoral voter fraud), healthcare (i.e., accurate and up-to-date set of medical records for the individual), and government contracts (i.e., keeping track of subcontracting entities in large-scale government infrastructure projects). Thus, the underlying technology of cryptocurrencies is here to stay, but will probably evolve over time in a different shape or form that is more amenable to regulators and the market. 5) If they own bitcoin, what should Aussies do with it? For those owning bitcoin, it really depends on (i) their investment horizon (ii) their Bitcoin purchase price (iii) the amount of bitcoin they have as a percentage of their overall wealth. It is likely that Bitcoin prices will go down in the near-future due to the supply of alternative viable cryptocurrencies are continuously being developed. Thus, for Aussies who’ve bought Bitcoin at much lower prices in the past, it would be ideal to sell a portion of their Bitcoin to lock in those profits. Issue 3 - The low volatility regime: Here to stay or the calm before the storm 1) In lay man’s terms, what is the low volatility regime? The low volatility regime generally refers to the fact that throughout 2017, international share markets (i.e., equities) have been steadily rising without any large drops. This is evident from the chart below (see blue line) where we can see that in 2017 the VIX (i.e., volatility index) has been pretty flat except for the events that occurred last week (i.e., Mon 5th Feb, Wed 7th Feb) which was when the “storm” occurred. 2) How long is Wall Street predicting the stock market’s Low-Volatility Regime will last? Prior to last weeks events, medium-term strategists predicted that the low-volatility regime would probably continue as several economists have reported that 2018 would be a year of co-ordinated economic growth across developed and developing nations. 3) What are the warning signs, that the Regime is coming to an end? Even though we had a highly volatile period on the market’s last week, it is not necessarily a portent of an impending financial crisis. The underlying economic data for the global economy generally looks promising and any volatility spikes should be short-lived unless they are caused by severe political disruption such as wars. 4) What will happen if the regime ends, and what will it mean for Australians? If the regime ends, for most Australians with short to medium-term investment objectives the most pertinent action would be to rebalance your investment portfolios towards less volatile assets such as fixed income or cash. Most superannuation portfolios should allow Aussies the option to invest in such types of investments. Other alternatives are investing in multi-asset portfolios where these are investment strategies that will take up portfolio positions in both equities and fixed income to be more diversified and less exposure to downside risk.
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