The year in fintech had 2 dominant themes. It was an amazing year of growth, innovation, adoption, and acceptance for fintech all across the world.
Big Theme #1: Bitcoin
2016 was the year where the world discovered Blockchain technology, the technology underpinning Bitcoin. Investments and potential uses for the new technology went rampant in 2016 and we are starting to see some of the fruits of that labor.
If 2016 was the year of blockchain, then 2017 was the year of Bitcoin. When an asset goes from $750 to nearly $20,000 on some US exchanges and over 20k on some foreign exchanges returning over 2500% in a single year, people start to take notice. Even at its current price of ~$14,000, we still have returns of 1800% in one calendar year.
It’s amazing for Bitcoin holders (known as HODLers for Hold On for Dear Life). The public frenzy around BTC in the last half of this year can only be described as a mania. Bubble? Maybe. Mania? Definitely. I am in the non-bubble camp with Bitcoin’s market value (16.6 million coin issued X Current Price) is just under $250 billion dollars. When some companies approach a $1 trillion value and currencies across the world are worth trillions of dollars, there’s lots of room for real growth before the overgrowth associated with a bubble and the popping of that bubble takes place.
Two forks in the Bitcoin protocol this year gave hodlers 2 new coins: Bitcoin Gold and Bitcoin Cash. Those coins are currently worth ~$280 and ~$2800, respectively. So a hodler of Bitcoin who had a coin for $750 in the beginning of 2017 got 2 coins worth a combined $3000 each. That’s a pretty good ROI.
One of the fun quotes about Bitcoin circulating around the crypto community is that Bitcoin ‘isn’t the bubble, it’s the pin’ (to pop the fiat economy bubble). Think about that for a second. Do you agree?
Seeing the Futures
- Bitcoin future growth requires institutional money coming in and this is a way institutions can take a position in Bitcoin
- Both futures contracts are cash settled, which means institutions and other contract holders do NOT need to know how to set up a secure wallet, make sure you control your private keys and other smart, sensible strategies that you and I have to do with our coin. Cash settlement means that there is no delivery of Bitcoin. The contract is settled for cash upon sale. This is great news since making it easier for institutions and others to get into the Bitcoin market is VERY important
- The CME is the largest futures exchange in the world. A futures contract like contracts on US Treasuries, the USD, the Euro and other big assets and currencies is a sign of real legitimacy about Bitcoin in the market.
Will Bitcoin ultimately be successful? I don’t know and no one else does either. If anyone gives you the popular but very stupid ‘it’s a scam’ argument, then you can easily point to the issuance of the futures contract as a sign of legitimacy. Remember, legitimacy doesn’t equal success.
Will blockchain ultimately be successful? Probably. It really is a difference-making technology in many areas including trade, voting, and health care, not just in the settlement of financial transactions.
Does blockchain success help Bitcoin success? Likely in my view. Bitcoin is the longest running experiment using the technology. One helps the other.
Big Theme #2: More Debt for all Americans
Americans are carrying more debt all across the board than they did a year ago. This story is mostly swept under the rug due to the 3% economic growth and new stock market highs but more debt is more debt.
Bloomberg reported in November that subprime auto debt is at ‘near crisis levels.’ The 9.7% delinquency rate on subprime loans from non-bank lenders is the highest in 7 years and since the Great Recession. That 9.7% is more than 90 days past due so they are unlikely to recover and get current meaning many defaults and repossessions. Credit is tightening especially for these borrowers. Will that affect p2p lending platforms in the prime market like Prosper or the subprime market like Avant? We will have to wait and see.
Bloomberg notes that subprime loans issued by banks are at a much lower 4.4% delinquency rate so it’s the private finance companies that dominate the subprime space that are hurting the most.
Business Insider calls auto delinquencies at ‘financial crisis levels.’ Between Q3 last year and Q3 this year, here are the numbers:
- Student loan debt up 6.25% to $1.36 TRILLION dollars
- Credit card debt up 8% to $810 billion
- Auto loan debt up 6.1% to $1.2 trillion
- Overall household debt up 5% to $13 trillion (WOW)
Credit card delinquencies, according to the St Louis Fed, is increasing too. Since the Great Recession, the lowest credit card delinquency rate was 2.01% in Q2 2015. Delinquency rates are up each quarter since mid-2015 and Q3 2017 sees the number increasing to 2.57% (a 27% increase off the low (2.57-2.01/2.01).
Debt and Peer Lenders
Is this increase in debt affecting marketplace lending platforms and their performance?
In November, Lending Club made a huge change in their policy by removing F and G rated loans due to high delinquencies in those categories. Prosper’s default rate is up slightly per the most recent 10Q filing (p.17) as the range increased slightly from 1.7%-14.9% in December 2016 up to a range of 2%-15.4% in Q3 2017. My Prosper returns have always exceeded my LC returns and it looks like Prosper is managing their defaults better than LC manages theirs.
American Banker writes that credit card delinquencies are back to pre-recession levels with average balances near $5000 per household, per CFPB. Many in banking, finance, and fintech think that peer lending platforms will mirror credit card performance. We will find out soon if that’s true.
Future of Fintech is Bright
It’s not all doom and gloom, not by a longshot. Lending platforms grew this year including new entrant Marcus from Goldman Sachs who originated $2 billion in loans in just over a year. Platforms are growing. Some take an even longer view.
Ron Suber, President Emeritus of Prosper and the Godfather of Fintech, has a new keynote he started presenting in Q4 called ‘The Golden Age of Fintech’. If you get the chance to go see him speak, make sure you go. Ron talks about how fintech really started years ago with Paypal 15 years ago and we are in the second wave now where we are looking to build the great lasting companies of the future. By comparison, he mentions the tech wreck of 2000 and how out of the ashes of the rebuild we got Amazon, Google, and Facebook. They were able to take the lessons learned and build the great companies that exist today. Ron says Fintech 2.0 is here and the great fintech companies are starting now or may not have even been built yet. Every one of us investing and lending and helping to make the market go are still early in this market.
I’m pretty sure that most people don’t see anything related between these 2 big themes of Bitcoin and Debt, but I think they are related. While traders in Bitcoin made money, the hodler (holder) made the most money in Bitcoin in 2017. Bitcoin the asset, not the payment system, rewards savers since government-issued currencies keep losing value each year with money printing and inflation. Bitcoin’s supply is fixed and requires more than an act of Congress to use the consensus model to make major changes to the protocol. On the other hand, US dollar holders (and Pound and Euro etc) instinctively know that their governments will print more currency and it will lose value in a year’s time, maybe 2 or 3 years at the most. USD holders are encouraged to spend so, not surprisingly, they spend. That spending includes overspending and incurring debt. Our economy is built on debt and that is a pretty fragile foundation.
What did you learn in 2017? What are you looking forward to seeing in fintech in 2018?