Why are fintech companies raving with cryptocurrency stocks? : A research perspective

The world in general has made such tremendous advancements in the tech field that to the younger generations, the concept of legacy systems seems foreign. Though it might seem like withdrawing cash from an ATM is a traditional way of dealing with finances, as opposed to just transacting through e-wallets, it in fact is one of the foundations of emergence of the fintech sector. To many, the Fintech industry is a newly formed industry, but fintech goes as far back in time as the late 1800s. It started with transactional cables and Electronic Fund Transfers, and now the people in this world can get insurance for themselves without submitting any hardcopies or meeting the agent, they can get loans within the matter of few hours, lending money has never been easier, and trading activities can be done though our phones without the involvement of any middlemen. Today, there are 5,779 fintech startups in the Americas alone, stated FinancesOnline.

These products, among many others are all a result of innovations made in the finance arena, using advanced technologies by financial institutions. Hence, the term Fintech seems most appropriate. Companies offering financial products and solutions blended with technology are fintech companies, and these firms have come a long way. Fintech companies today are not just limited to dealing with transactions of money, they are also about securing money, making more of it, utilizing it effectively as well as establishing additional sources out of it. Today, there are fintech platforms, APIs, payment solutions, lending products, insurance and trading systems, along with investment tools, which can all be accessed and utilized by the customers from their electronic devices and not have to deal with heavy paper-work, long procedures, and unreliable sources. The global financial sector is expected to be worth US$26.5 trillion in 2022 with a CAGR of 6%.

“Financial institutions must be able to deliver an easy to navigate, a seamless digital platform that goes far beyond a miniaturized online banking offering.” – Jim Marous, contributor to Forbes and the co-publisher of The Financial Brand.

With technology being at the core of financial products, it has become possible for customers to transact and transfer with extended security and cut down on any additional spending that occurs with traditional companies. One such advancement is Cryptocurrency Stocks.

As of April 2019, there are 4,518 Bitcoin ATMs worldwide, with the United States being the country with the highest number of Bitcoin ATMs.

Cryptocurrency stocks

Cryptocurrency stocks are based on the concept of traditional stock trading, except that here there are no tangible assets involved, the currency is virtual, and there is no need for any middlemen or agents. The trading is done through digital coins, that are developed using the blockchain technology, which makes it de-centralized and secured.

What is it?

The existence of cryptocurrency is only on the blockchain. Think of blockchain as a string of beads of pearls, where each pearl represents a block, which contains the information and details of a transaction. A new pearl requests to be added to the string, but won’t be until all the pearls verify the new information that is coming in. Once it is verified, the new pearl (block) can be added to the chain.

You can start with cryptocurrency trading by purchasing the crypto coins through fiat money, buying and owning the crypto, and selling whenever the conditions are favorable. Cryptocurrency is not like fiat money which you can hold or physically give and take, it only exists on the blockchain which is completely virtual, hence, there are specific wallets designed to store cryptocurrency. Just like you have your IDs in your physical wallet that proves the contents belong to you, wallets for cryptos also store public and private keys of your cryptos, which can be used to prove that they belong to you. Private key is for you to access your money and a public key is for the other people to send money to you.

 There are 24 million Bitcoin wallet addresses in total, stated Leftronic. So, cryptocurrency stocks are nothing but digital assets that hold value and can be purchased and sold on the exchange platforms, responding to the market conditions.

Why fintech companies are thinking about them?

Cryptocurrency stocks being one of most secured and the only decentralized way of trading in digital currency, have grabbed a lot of attention from giant tech firms, especially fintech companies. Fintech companies are already based on the premise of technologically backed financial products, so it is only justified that they lean towards trading in cryptocurrency stocks and make the most out of it. Just like a normal private company decides to go public and open up its shares to the general public, some fintech companies come up with their own cryptocurrencies to list on the exchange and open to trade. The fund raised by 1258 ICOs (Initial Coin Offerings) in 2018 was nearly $8 billion, according to ICOdata.io report,

Generally, fintech companies prefer to trade in crypto stocks because of its far stretched scope. With cryptocurrencies, not only the trouble of double spending is shot down, but also it is very reliable for transacting. There is a ton of technicality involved, but as opposed to making it more complex, these technicalities make the process of crypto trading easier. A variety of cryptocurrencies are available on the exchanges, and fintech companies are analyzing the potential of each and every currency to identify the most promising one and accordingly invest in the same. These investments are opening up different streams of income for these companies along with supporting the commitment of fintech firms to back the advancement in technology facilitating financial products.

Fun Fact

Trading in cryptocurrency stocks has its own advantages that has made it one of the greatest innovations of its time. Though Satoshi Nakamoto, the creator of cryptocurrency had no intentions of creating this product, he did want to create a decentralized digital cash system and ended up creating the first ever cryptocurrency that needed no central authority to come to a consensus, Bitcoin. After this invention, there was no stopping, Fintechs soon began to realize that how a cryptocurrency can provide advantages such as –

Autonomy and Anonymity were the top most discussed advantages of cryptocurrency and its stocks. Fintech companies were fascinated by the fact that they could conduct transactions within a network without having to reveal their identities and having a privacy layer surrounding the transaction, along with being able to self-govern the interactions. This feature resulted in additional confidentiality and less exposure to threats to these companies.

Another important advantage of cryptocurrency stock is its ability to make international trading quite easier. Generally, when there is international trading involved, there are a lot of different factors such as exchange rates, charges to conduct the transaction, any many other aspects that make the process troublesome and a hassle. But with crypto trading, these factors are irrelevant and do not affect the trade, resulting in the process becoming seamless.

According to a report by Mordor Intelligence, the US market is expected to show the most growth as compared to other regions, in terms of cryptocurrency adoption.

Also something of immense interest that I found online was, As of April 2019, total 2141 cryptocurrencies are listed on the coinmarketcap website, with a total market cap of $175 billion in 18080. Bitcoin dominates 54.2% of the market.

What the past taught us?

History of cryptocurrency stocks

The concept of crypto stocks exchange is similar to the stock exchange for shares. Though it is quite prevalent in many nations with roughly 200 crypto stock exchanges available to transact globally (Investopedia), this wasn’t the case when decentralized exchanges had tried to step foot in the industry. Initially these exchanges solely acted as a medium of exchanging fiat for crypto and buying and selling of crypto.

In 2010, the first and most relevant cryptocurrency, BTC was exchanged on BitcoinMarket.com via PayPal in exchange for fiat money. Within a year, i.e., in 2011, Gox went on to become the biggest exchange for bitcoin handling anywhere between 70% to 80% of BTC transactions. This didn’t last for too long, later that year Bitcoin faced a huge security challenge and Gox went bankrupt. But then the market emerged, this time, not just with BTC dominating, but other Altcoins such as Ethereum, Litecoin, and others. This led to the rise of Initial Coin Offerings by fintech companies.

One of the most significant exchanges of cryptocurrencies, Binance, took advantage of this situation, and its founder, Changpeng Zhao rolled out a whitepaper within 3 days of hearing about it at a potluck. The market today has picked up and is moving towards a far better future with Initial Exchange Offerings where fintech startups are raising funds via their tokens. Wei Zhou, the chief financial officer of Binance stated “IEOs are basically the next iteration from the previous ICOs which were a bit like the wild wild west.”

Advancements of Cryptocurrency

When crypto was solely being exchanged for fiat, companies and individuals were tied down by the working hours of their banks and financial mediums. But now companies are carrying out operations round the clock and following the same approach for trading in cryptocurrency stocks too. Cryptocurrency exchanges are open 24 hours a day and 365 days a year. Even the fintechs that function at specified hours, can utilize the changes during different times of the day and buy or sell crypto stocks through these exchanges. In fact, the crypto leader Bitcoin accounts for $6 billion of daily transactions, stated Leftronic.

Cryptocurrency stocks are being used as tokens for taken ownership in companies and investing in it, and are in the process of being used as tokens for day-to-day basis as a variant of royalties. To further accelerate the growth in the prices of stocks, dominant crypto, Bitcoin performs something known as ‘halving’ which is a mining technique to reduce the supply of bitcoins by half, which generally results in an increase in its price, given the demand remains robust. The same Leftronic report stated that 50% of Bitcoin nodes are hosted by the US, Germany, and France, while the UK remains the country with the most number of crypto exchanges followed by the US.

Keeping in mind the security concerns, specific cryptocurrency wallets have also been invented. Since cryptocurrency stocks are dependent on a decentralized system, storing them was a challenge. Today, fintech companies can choose from several wallets that have different features and select the one that best suits them. These wallets securely store these currencies and make use of public and private keys to make transactions. There are hardware wallets as well as hot wallets. Hot wallets are sometimes preferred over hardware wallets due to the complexity of nature. And contrarily, since hot wallets run over the internet, they show a lower capacity of storage as compared to hardware wallets.

Case Studies

The Goldman Sachs Group Inc., is one of the leading investment banks and securities and investment management organizations in the world. It provides a number of financial services and is a giant player in the fintech sector. The company had recently hired Justin Schmidt who formerly was a quantitative trader and now holds a high-level post in the securities division of the company. The company backs a peer-to-peer payments firm, Circle which recently reportedly now has some transactions larger than $100 million. The company went in for the higher returns of the cryptocurrency stocks leader, BTC. The volatility in the market is being taken advantage of by this fintech company by doubling up its minimum ticket size, with the belief that the market will continue to rise. Goldman Sachs is also one of the leading firms that bets big and small on crypto stocks.

It is no secret that the financial services and merchant services aggregator, Square Inc. has immense love for cryptocurrency, especially Bitcoin. Not long back, in 2019, Square Inc. generated around $148 million in revenue from bitcoin which was a whopping 244% increase annually. This growth is a testament to the growth and anticipation of sustainability of cryptocurrency in the industry.

Advantages of Cryptocurrencies for Fintech Companies

1. Automation and Non-Governance

Cryptocurrency stocks are completely automated as the currency exists only in digital form. There are no tangible assets that need to be traded or protected, hence, the process of conducting transactions and storing these stocks is entirely automated. Since there is no centralized authority and just networks of computers, there is not one major player responsible for communicating any key decisions or influencing them. The nodes are all independent about their decision making and the consensus is only based on the actions of actors and not impacted by any governing players. Automation and non-governance make trading in cryptocurrency stocks a credible, unbiased and legitimate source of transacting that is advanced and independent in actions.

“Cryptocurrency is absolutely here to stay. If you can’t see that at this point, it’s time to learn more about it” says Joel McLeod, founder of Premivm.

2. Cost saving

As discussed, the system of trading in crypto stocks is decentralized, it means it cuts out on a lot of costs that are involved and consumed by several parties that usually act as a bridge between the traders and stocks. All the money involved for making any transactions including the fees of writing checks and fees of financial institutions double up on the trading costs. This is all taken care of by the autonomous system.

It also saves on a ton of documentation costs, as cryptocurrency stocks make use of smart contracts that are digital contracts offered by one party and accepted by another and a self-executing code ensures the terms of performance are met. Crypto stocks end up cutting down on the overall cost of transactions.

3. Low Risk High Returns

The trading market for cryptocurrency stocks is quite dynamic and volatile. Any new elements, though adding a small value, can create a huge impact in the entire market. Fintech companies have a huge scope of capitalizing on these stocks due to the changes in their indexes. Which also means that a satisfactory growth is usually not a resultant of crypto trading. Fintech firms place small bets on higher volume and aim for higher returns by speculating on the market conditions. This helps them in lowering their risks and gaining maximum returns on their investments. In crypto trading, the size of trades is standardized which makes them a catalyst for deviating towards higher returns.

In 2017, newcomer Litecoin outspaced Bitcoin by showing an increase in its value by 7,800%, which was 4 times more of what was done by Bitcoin.

4. Diversification of the Portfolio

There are a number of indicators and indexes that are evaluated by fintech companies before deciding about investing in any cryptocurrencies.  With a number of cryptocurrencies available in the market that have different attributes and volumes, companies can choose the best suited stocks that are in line with the mission of the company. Similar to traditional stocks, fintech companies here also have the privilege of diversifying their portfolios, without having to deal with all the hassle that are involved with traditional stocks. They can select from several stocks and place their eggs in different baskets. This further reduces the risk and ensures possible minimum loss. Ripple, Litecoin, Tether, Ethereum among others are some of the top cryptocurrencies in addition to BTC.

As of October 2019, there are 2,957 altcoins available in the crypto market.

5. Reduction in frauds

The process of crypto trading as stated before, is performed within a decentralized network, which means it deploys the distributed ledger technology. DTL is recording the details of one transaction in several different places all at the same time. This makes sure the transaction is authorized by all the parties involved and there is no inclusion of any transaction that is not verified. Frauds are highly reduced with all the verified parties ensuring only legit actions are taking place within the network. Maintenance of anonymity acts as added privacy for all the actors, which means there will be no biased decisions. Entry of any fraudulent matter itself is imposed with a security shield and further encryption decryption processes are an added advantage.

6. Technical Advancements

Fintech is a blend of finance and technology and fintech companies are built on the commitment of supporting technical advancements by supporting them. Trading in crypto stocks has advanced a lot in technical matters and is continuing to do so. One of the recent technical advancements of cryptocurrency stocks reflects in the introduction of an AI-driven solution that offers 7-day predictions of the performance of crypto stocks. This solution is innovated by Nomics, and it brings in additional clarity to the cryptoasset world. These predictions are to be treated as an aid to indicators for forming opinions about any movements in the crypto stocks market. Many other such advancements in technology in the crypto trading arena is a huge benefit for fintech companies.

So, what do we derive?

It is established that fintech companies can gain a lot if they correctly speculate the market conditions on the basis of different indicators and choose the most suitable cryptocurrency stocks for their firms. Now that you have come so far along in the article, let us quickly give the important insights and inferences.

1. Cryptocurrency stocks are here to stay

A recent report stated that the global cryptocurrency market size is predicted to reach $1,758.0 million by the year 2027. The increase in the adoption of cryptoassets and cryptocurrencies is leading to an increase in the level of trading in cryptocurrency stocks. The market is ever-evolving and at a pretty swift speed. We have come a long way from cash transactions to digital money transactions with crypto, and the journey has been commendable. But it doesn’t stop here. With stablecoins, altcoins, and bitcoins, the industry is looking at a greater future for a ton of fintech companies who have and are continuing to choose to trade in crypto stocks.

   2. Fintech companies are reaping the benefits

Not only the companies whose core offerings are based around cryptocurrencies and blockchain are benefitting from the fruits of crypto stocks, but also the other fintech firms that are backed by technology and choose to support the same in return in terms of trading. The market is open to all, but fintechs are utilizing their extensive knowledge and expertise in the field and are making wisest of the wise decisions. From saving up by not double spending, to transacting in a secure environment with no central power, they are doing it all.

   3. Technology is advancing in crypto stocks as well as fintech companies

Since, a number of fintech firms are inventing several solutions to advance the field of fintech, The global financial sector is expected to be worth US$26.5 trillion by 2022. These also include products and innovations in the crypto trading world. This blend of fintech companies and cryptocurrency stocks are leading to the illumination of the pathway towards the commitment of both the entities of working with efforts focused on technological advancements. They are going hand and hand and are in line with each other’s vision and mission.

   4. The volatility is worth it

What great things come without taking some risks? Despite the crypto stock market witnessing a stagnant growth currently, the market will soar up soon enough. As a matter of fact, everybody knows the thumb rule of trading, when the market is slow, buy and hold, and when it grows, sell and earn. All the volatility that goes around in the crypto stock market is worth it, if calculated decisions are taken. Because even a small movement can cause a huge change in the market waves. Peter Thiel, the founder of PayPal believes that “Bitcoin is the first [encrypted money] that has the potential to do something like change the world.”

   5. Disruption in the fintech ecosystem

Initially many countries showed opposition against the adoption of cryptocurrencies and also banned crypto trading in several nations. But today, not only the fintech companies and individuals, but also the governing authorities have begun to realize the legitimacy and power of cryptocurrency stocks and their implications on the fintech ecosystem. This is a testament of the capabilities of crypto stocks and the disruption caused by them.

Bitcoin is the unicorn of the fintech industry or as the great venture capitalist, Chamath Palihapitiya would like to say – “It’s money 2.0, a huge, huge, huge deal.”