DeFi – Democratizing Finance for All

Democratizing financial solutions for all tends to be the northern light for many new
cryptocurrency projects. Our society does a great job of finding out what is not working and
developing a technology that will help all, not just a few influential individuals in Washington in
tandem with the help of the FED. DeFi will substantially evolve how traditional commerce is
carried out for many reasons. These reasons include reducing the amount of unbanked/
underbanked, equitable access to financial services, access to permissionless financial products,
and the lack of central control by for-profit companies.

Graphic Explaining High Level Decentralization Versus Legacy Financial System – The Medium

First, what is DeFi? It is a movement whose mission is to decentralize standard financial services
(e.g. borrowing, investment, trading, payments, and more). Below, I showcase an example
(borrowing and lending) of how it works, alongside how it will transform traditional commerce
and lastly, I go over some current obstacles DeFi needs to overcome.

Democratizing payments solves many problems that traditional financial services has not
solved. For example, many people in our society are either unbanked or underbanked and do
not have the same access to financial services as other individuals. From a Report on Economic
Well-Being from 2018 to 2019, 21% of U.S. citizens are Unbanked or Underbanked[1], which
leads to approximately $68.9M of the U.S. population facing financial challenges when it comes
to getting access to traditional financial services and products.

Federal Reserve Graphic – Conceptualizing the Under/Unbanked versus the Banked

Decentralized finance aims to make it, so payments are available to anyone in the world no matter what income level, net
worth, minority group, or where one is located. If one has an internet connection, they can
participate in today’s modern, fast, transparent, secure, and forward-thinking DeFi world.

Statista – Internet Users Worldwide – Out of 7.8 Billion Global Population

While much of the world still doesn’t have a reliable/consistent internet connection, this is
continuously being reduced and thus allowing citizens to participate in this new global financial
system. This new financial system is not just limited to peer to peer payments, but it also
expands into other areas in which individuals use financial services or products. These include,
through smart contracts, everything from high-interest savings accounts, loans, asset trading,
asset management, staking, tokenization, derivatives, insurance, and more.

Tezos is a competing project with Ethereum, and has integrated Smart Contracts, Staking and More – Contributing to the DeFI Ecosystem

Ethereum is the primary blockchain for smart contracts, but Tezos is another large competing
DeFi project that has been gaining momentum in the past couple of years. On these
blockchains, developers have created smart contracts which are essentially hard-coded
contracts in which certain conditions are or are not met. There is no ambiguity or
misinterpretation as there may be in the standard court of law. For example, let’s say a
borrower defaults on a loan that they took out with a smart contract. Depending on the terms
of the smart contract, if he misses a few consecutive payments, the collateral the borrower put
up will automatically go to the lender due to their failure to uphold the contract. How the
contracts are written is almost completely airtight and does not execute until the initial
conditions are met, which helps mitigate risk for lenders, insurance companies, investors, and
more.

These smart contracts (often referred to as DeFi apps/DAPPS) are not centralized and managed
by any for-profit institution, bank, etc. They are essentially rules that are written into code by
the developers of the given project. Since there is no centralized institution managing the smart
contract there is reduced bias on any individual or organization. Since the code is visible for
anyone to see, if there are any bugs/issues with contracts or anything, developers working on
the project can implement updates if necessary. The power is in the hands of those using the
protocol, rather than a for-profit institution looking to maximize profits for themselves.

Centralized Versus Decentralized Network

There are some noteworthy obstacles in the way of DeFi taking over as our new financial
system. Foremost, many people in the world do not have internet access. Specifically, 19 million
Americans do not have an internet connection[2], and worldwide, there are 3.22 Billion people
who do not have access to the internet.[3] Many of the individuals who are under/unbanked
are those who are poor, and can not afford internet, or maybe in an area of the world that is
more rural and has a less developed infrastructure. These very people that would stand to
benefit the most from DeFi, cannot access the platforms/networks to participate. Next, as DeFi
is currently in its infancy, there are still rare cases where there have been flaws in the code of
smart contracts, and if this were to occur it could cause a contract not being executed properly
or, the worst case, a loss of funds overall[4]. Next, while there aren’t financial institutions
running DeFi projects, developers are. It can be more challenging to assess the motives of a
developer/team as much as we can assess the motives of a financial institution (especially
those publicly traded). The developers have a large amount of control of the code. Even with
proper voting on the network, there is always the potential for missteps. Finally, not pertinent
to just DeFi, but many governments around the world have or are putting regulations in place
to limit their citizens’ access to DeFi, due to lack of control. While it is unfortunate, this is a
reality that DeFi is facing and is something that can impede its full potential.

There are numerous benefits to DeFi that we have already seen, and even more beneficial use
cases to come. With billions of dollars moving in, many individuals, critics, and institutions alike
witness how this can revolutionize the world we live in. While it is not without its flaws, these
issues are continuously being worked out by talented teams who aim to make the financial
world more permissionless, secure, and less controlled. With the erosion of trust amongst the
FED policies, and for-profit financial institutions’ antiquated ways of finance, the future holds
many pros for DeFi, and it will change the way humans transact for the better.


References
[1] https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-
in-2018-banking-and-credit.htm
[2] https://www.fcc.gov/reports-research/reports/broadband-progress-reports/eighth-
broadband-progress-
report#:~:text=Notwithstanding%20this%20progress%2C%20the%20Report,lack%20access%20
to%20this%20service.
[3] https://www.statista.com/statistics/617136/digital-population-worldwide/
[4] https://news.bitcoin.com/DeFi-protocol-bzx-loses-8-1-million-in-third-hack-this-year/


Disclaimer

Disclaimer: Nothing stated in this video is a recommendation from PieceofPaul to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.

The Two Most Popular Cryptocurrencies This Month by Market Cap

In this article, we are going to look at the two largest cryptocurrencies by market cap, and discuss both the factors at play as to why, but also the importance of relying on additional metrics to make a purchasing decision in this space.

An important metric to determine when purchasing cryptocurrency is the market capitalization (or cap). While this factor is important, please note, when purchasing in this asset class to consider other important investment factors. At a minimum, some factors to include with one’s decision is to analyze the volume, technical trends, previous price, use cases, and non-circulating supply.

You can determine the market cap with an easy to remember calculation. To find this, take the current price and multiply this by the number of coins in circulation (Market Capitalization = Current Price x Circulating Supply).

Over the previous ten years, several hundred billion dollars have entered the cryptocurrency space. Per a popular source for Crypto research, CoinMarketCap[1], there is $430.34 Billion in the crypto asset class, with 7,600 cryptocurrencies.[2]

Before we get started, it will be beneficial to address non-circulating supply, because this is such an important factor when understanding market cap. Many cryptocurrencies have large amounts of crypto that have not been mined yet or released from the early adopters/founders. This can dramatically impact the price of the currency downward once the crypto is released on the exchanges.

It is important to know how much circulating, non-circulating supply there is at a specific point in time, but also long term whether there is a hard-coded finite supply or an infinite supply.

Forehand Financial

Below, please see the top two most popular cryptocurrencies by market cap!

  1. Bitcoin (BTC) – Since Bitcoin was launched at the beginning of 2019, it has been the most widely used with the largest market cap.

The supply of Bitcoin is finite.

With the circulating supply being $18,536,750 and the current price being $14,908.68, this has a market cap of $276B which is 5.57X higher than the second coin by market cap. There are many reasons behind this price point, and a major reason for this high market cap is because of the limited total supply.

What are the major factors at play in driving up the price? Plain and simple, the primary factor is scarcity. As mentioned, currently there are ~18.5M BTC in circulation. The total available supply is 21M. Something important to note is that these remaining 2.5M Bitcoins are becoming progressively harder to mine.

The way one could look at it would be digging into the earth with a shovel. At first, it is easy to dig into the soft moist ground, as you dig deeper the earth gets harder and colder which makes it makes one much slower at digging. Eventually, around a thousand meters deep, you hit bedrock which is extremely thick and next to impossible to dig through. With Bitcoin, approximately every two weeks, the mining difficulty increases to ensure the stability of the verified blocks in the blockchain, thus fewer rewards per week, and eventually, Bitcoin mining will not be profitable anymore from a production standpoint.

Besides just scarcity, there is quite impressive liquidity, an ever-growing acceptance of it as a payment method, privacy, and independence from any central agency. While this is not every factor, most of these factors help drive up bitcoins value.

Bitcoin is a haven asset for countries experiencing hyperinflation.

While we know Bitcoin historically has had many dramatic swings, and many critics don’t look at it as a store of value, relatively it is stable, many countries such as Zimbabwe, Venezuela, or South Sudan stand to benefit significantly from the adoption of Bitcoin.[3] Each of these countries has experienced significant hyperinflation. Even with 20-50% swings in bitcoins value, these countries stand to benefit from the adoption of Bitcoin because you cannot just print more bitcoin, but central governments can always print more fiat currency.

From inception to present, Bitcoin has remained at the top in popularity by market cap. Entire books, articles, and research papers have been written on the countless use cases of bitcoin, and many calling it the digital form of gold. But unlike gold, the market cap for Bitcoin can be potentially more volatile, like we saw in the crash of December 2017 shedding hundreds of billions of dollars of value.

Debates can be made on both sides on the future of Bitcoin’s use as an everyday currency, but at this time, and the foreseeable future it will be the leader from a market cap perspective because of its current market price, wider vendor acceptance, and scarcity of coins available.

2) Ethereum (ETH)

In February 2016, Ethereum (ETH) took the second-place token by the Market cap.

Foremost, how scarce is ETH (the token sitting on top of Ethereum)? This is important to note because many often confuse the difference from the platform Ethereum versus the cryptocurrency ETH. We commonly understand it that there are 21M Bitcoins that will be or are in existence, but how much ETH is there, or will there be?

At this time, the supply of ETH is not finite, but this can change with further iterations of the protocol.

ETH never set an upper limit on the total coin supply to be mined. What this means is inflation might occur at points in the future, and the asset is not as scarce as Bitcoin. This is an important point to bring up from a market cap perspective because more supply can be rolled out through mining. If more supply gets rolled out, and there is not as much demand, it will harm the price thus lowering the market cap.

Looking at the current price and circulating supply we have 113,332,093 ETH circulating at $437.46 per coin. The total market cap of Ethereum is $49.577B.

With an impressive market cap, what gave ETH the trajectory to achieve second on our list in terms of most popular cryptocurrencies by market cap? What drove larger-scale adoption to the usage of Ethereum?

Ethereum’s protocol has numerous use cases and adoption amongst many important stakeholders. 

Ethereum was built to address many of the things that Bitcoin could not do or was not programmed for. The most widely known and well-accepted uses of Ethereum would be the use of Smart Contracts and dApps(decentralized application). Having this functionality has helped propel Ethereum in popularity because it increases the use cases several times over. Use cases involve everything from market predictions, legal contracts, financial contracts, crowdfunding, web hosting, and more. With all these use cases, large banks, developers, individuals, and institutions alike are using the protocol’s technology to drive the adoption of the Ethereum network, which drives the price up higher.

The secondary function of Ethereum is the use of the cryptocurrency ETH, but since it is not as widely accepted across vendors, this is not the primary use case. Unlike Bitcoin, it can be a challenge trying to find those who accept the ETH currency. A route many holders of ETH take would be to convert ETH into BTC to make a purchase or to just move into cash.

Ethereum also has adoption through diversification, correlation trading, and retail investors.

Something that is not as investigated with Ethereum is the spillover from Bitcoin by retail investors. This plays into increasing the market cap because if investors see the price of Bitcoin go up, correlated assets are another way to capture upside potential. The correlation between BTC and ETH remains positive averaging 50% over a year’s time frame (correlation coefficient). While the correlation can swing dramatically, on average, the prices have a generally positive correlation in the long run.

Also, with the rise in the adoption of cryptocurrencies, many individuals purchase altcoins to diversify and speculate on different products that may take off. Since Ethereum is listed at the top of many exchanges, and it has the power of network effects, without doing ample research, many individuals drive up the price and market cap just through speculation.

Nevertheless, it is without a doubt that Ethereum has earned its place as the second-largest crypto by market cap. With the adoption of smart contracts/dApps, with countless use cases, adoption, and use by larger institutions, this protocol will be here to stay and even evolve into further iterations such as Ethereum 2.0.

My call to action to everyone today is to look at market cap as an important investment criterion, but it needs to be analyzed through several other factors concurrently.

Forehand Financial

When trading stocks, one will not base a decision solely on the price, it is important to understand how all the factors work together. There are currencies out there with very large market caps but under $1,000 trading volume a day. By just looking at the market cap, one may think a coin has a strong foothold in the cryptocurrency space, but often you do not want to trade coins with such low volume because liquidating can be very challenging, but also, these projects have the potential to be scams.

While Bitcoin and ETH reign at the top of cryptocurrencies by market cap, only time will tell if they hold the top two positions well into the future. While these coins are not without their flaws, the network effects are critical when it comes to the mass adoption of a new currency to replace or coexist with fiat money. The cryptocurrency space is still young and evolving, and with the underlying technologies and unique characteristics of these two coins, many are confident they will hold their dominance for years to come.

Key Points

When looking at the market cap, please try to remember the points below:

  1. Market Capitalization = Current Price x Circulating Supply (MC= CP x CS)
  2. Bitcoin & Ethereum Market Cap = Bitcoin has the second-largest Market Cap at $276.35B, and Ethereum has the second-largest Market Cap at 49.577B
  3. Supply = Identify both circulating and non-circulating supply, and long term whether there is a hard-coded finite supply or an infinite supply
  4. Price = Realize the factors that drive up the price on the cryptocurrency being analyzed
  5. Interconnected Factors = Know how each factor plays into each other (Price, Market Cap, Supply, Volume, Etc.)
  6. Unique Crypto Characteristics = Each cryptocurrency has unique characteristics that give it unique qualities, do your best to understand the protocol and what sets one apart from another

Do you think Bitcoin and Ethereum will stay at the top in the popularity of cryptocurrencies by market cap? Please feel free to let us know in the comment section below.

Resources


[1] https://www.coinmarketcap.com/

[2] Data Pulled as of September November 7th

[3] https://news.bitcoin.com/venezuela-bitcoin-use-hyperinflation-crypto-adoption/#:~:text=The%20firm%20elaborated%3A-,The%20country%20has%20reached%20one%20of%20the%20highest%20rates%20of,preserve%20their%20savings%20against%20hyperinflation.


Disclaimer:
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.