An astonishing array of high-yielding alternative investments were on display at the Alternative Investment Conference last week. From Moneyweb.

Given the flaccid returns from JSE stocks over the last decade, it’s little wonder that yield-hungry investors are scouting an incredibly rich landscape of alternative investments yielding 20% or more a year.

There were some astonishing products on display at the Alternative Investment Conference last week. They included private equity, hedge funds, cryptos, structured products, venture capital and 12J investment funds.

One of the problems with traditional private equity – investing in the non-listed space – is lack of liquidity. Investors only get a return once the investment is exited after five or seven years.

Sasfin’s new venture Scott Street One has solved this by creating a secondary market for pre-existing private equity investments, and is currently raising R750 million with a target return of more than 15%.

Developments like this could unlock huge amounts of capital for otherwise neglected though promising companies.

There has been some criticism of 12J investment funds for delivering below-par returns, but that’s certainly not the case for Infinity Anchor Fund, whose Infinity Performance Fund was the top performing fund in its class for the last year with an annual return of 15%. “We invest in asset rental businesses that have asset backing and regular rentals. The risk is low and this allows a clear exit strategy,” said Gaurav Nair, the company’s CEO.

Read: Understanding the benefits – and risks – of alternative investments

Reka Borole and Ross Tasker of Khulisa Investment Partners pointed to the yield-rich opportunities lurking in 12J and structured finance products (sometimes wrapped in options to protect capital or sweeten returns) offering internal rates of return of up to 25%.

It is returns like these that that are capturing the attention of serious investors around the world.

“SMEs [small and medium-sized enterprises] in SA lag those in Europe due to lack of funding, and the effect is to lower employment and contribution to GDP,” said Tasker. “With strategic advice, the economy can have an entirely different trajectory.”

SMEs finally get some love from investors

There’s a swarm of companies now pouring money into SMEs, perhaps the most neglected segment of the SA economy.

“SMEs are the engine room of the economy and generate the most GDP, but only thrive when investors make liquidity available,” said Stephen Greenwood of Valloop Management. “Alternatives [investment] will dominate the investment space, and it will drive the need for product with a blending of risk and return.”

Valloop has solved the SME funding drought by providing a single portal for the types of debt typically required to grow a business: asset finance, working capital, private equity and vanilla debt.

Traditional sources of funding can cripple an SME with interest costs. They may pay 10% on private debt, 7.5% on asset finance, and 6.5% on real estate finance. Valloop starts generating a return on its various financing products as soon as the deal is concluded. This means it earns fixed annual income of about 3.5% and annual capital growth on about 16% – a total annual return of close to 20%.

This investment approach also eliminates the need to exit an investment after five years. As long as the returns are coming in, the fund can elect to stay invested for the long term. Workers are given a share in the business to align corporate goals with that of management and owners.

Read: Alternative investments can ward off lacklustre portfolio returns

It’s a similar story at Aurik Capital, which has found a way to connect investors with SMEs in search of growth capital. It targets SMEs with turnover ranging from R12 million to R300 million, a good growth story and seasoned entrepreneurs.

“We have a pipeline of about 338 SMEs that have grown 28.9% annually in revenue, though this will likely drop to 25% post-Covid,” said Pavlo Phitidis of Aurik Capital. “Most of our businesses are not start-ups. They have a history of more than 17 years and are growing. SMEs have trouble accessing capital for growth, and investors are unable to tap into this market.”

Businesses can sign up online with Aurik and load up business information for assessment. If successful, they are put on a growth programme to make them investment-ready.

Targeting bigger SMEs

Caleo Private Equity takes a slightly different approach, targeting companies with turnover of between R20 million and R200 million. The fund looks for growing companies capable of either dominating their sector or being purchased by another player.

“Our investor base is made up people who built their own businesses and have good networks to other opportunities,” said Caleo director Glen Scorgie. “We have an aversion to funds which have a finite life – this means you’re selling because the fund is coming to the end of its life. This may not be the best time to sell.”

All private equity fund managers take an active role in the development of the investee companies, and bring their networks and capital to bear to get the best out of their investments.

The rise of hedge funds

Some hedge funds have delivered returns of 100% and even 200% during the year of Covid, and while these are exceptional, fund managers have found a ready ear from investors on the hunt for yield at a time of extraordinary volatility.

According to Jacques Conradie, MD of Peregrine Capital, the ability of hedge funds to adopt a bi-directional approach (profiting from rising as well as falling stock values) has helped these funds withstand the whiplash of the last few months. “A bi-directional investment strategy means we can back expected winners and bet against losers. In this year it was especially important to protect capital,” he said.

Long short list

“When did you last see a short list this long?” asked 36One fund manager Cy Jacobs, pointing to the trove of opportunities for hedge fund managers to profit from JSE companies that have tanked over the last five years, such as Steinhoff, Brait and Nampak. Previously only available to institutions and the wealthy, retail investors can now get involved through unit trust-type funds offered by 36One and others.

“We delivered a positive return when the rest of the market was falling, through the strategies we can apply; R1 million invested with us in 2005 would have given you R8 million today,” said Jacobs.

Source: Bloomberg via 36One Asset Management

Hedge funds cover a broad range of investment appetites. Some are very low risk, others quite aggressive. Some are highly geared, others have no gearing at all.

Given erratic returns on the JSE and declining bond yields, competition for investment capital will inevitably circle around to alternatives that can protect capital, outperform benchmarks and beat inflation. And there were plenty of those on display last week at the Alternative Investment Conference.

A succession of carpetbaggers has tried to deprive the Bafokeng of their ancestral endowment. From Moneyweb.

It was the Bafokeng’s great fortune – or misfortune, depending on who you talk to – to occupy land holding some of the richest deposits of platinum in the world.

The platinum lay undisturbed for several decades until a commercial use was found for it, first in industrial applications and later in autocatalysts. It sparked a new round in a centuries-long campaign to dispossess the Bafokeng of their ancestral rights.

Few South Africans today are aware of the struggles the Bafokeng nation, now numbering some 350 000 people, endured throughout South Africa’s storied political history.

As detailed exhaustively in the book ‘Platinum Man’ by Ciaran Ryan and a University of North West academic study entitled ‘People of the Dew’ by Andrew Manson and Bernard Mbenga, the Bafokeng have fought for more than 100 years to retain title to the land their ancestors occupied for hundreds of years. They have had to defend their land and ancestral rights against a succession of predators, from Mzilikazi (then fleeing Zulu King Shaka’s carnage) to the British colonists and the Boers.

Title deeds were entirely foreign to the Bafokeng concept of communal property rights, but the tribal leaders were fast learners. With the arrival of the Boers in the 1800s, the Bafokeng found themselves with no land to call their own. The then head of the Bafokeng, Kgosi Mokgatle, despatched hundreds of young men to work in the Kimberley diamond fields and return with cash in hand.

This cash was used to purchase farms, one by one, until the Bafokeng accounted for 20% of all land owned by black communities in the then Transvaal.

Under apartheid, most of its ancestral land disappeared into the now defunct homeland of Bophuthatswana, and with that the royalties to which it was entitled from platinum mining. It was a brazen act of grand larceny.

When the ANC came into power in 1994, it chose to separate surface from mineral rights and vest the latter with the state. The Bafokeng – often dubbed The Richest Tribe in Africa – had to contend with yet another attempt to relieve it of its ancestral endowment.

Some 84% of Impala Platinum’s mining lease area was on Bafokeng land on which it earned royalties – which anyone in mining knows is a fluid and fabulously creative concept.

Profits can disappear at the stroke of a pen, and in the Bafokeng’s case, they often did. Impala started mining its land in 1966 but it was only in 1978 that it received its first royalty payment. There were many years after that when no royalty payments were received.

It was the late Steve Kearney, then CEO of Impala, acting against the wishes of his seniors within the then Gencor group (later acquired by BHP Billiton), who decided to restore some trust and cordiality to the relationship between Impala and the Bafokeng.

“We remember him with gratitude and love,” says Kgosi Leruo Mologleti, head of the Bafokeng. “Steve was nearly fired by Gencor for seeking an accommodation with the Bafokeng. However, when the Impala share price rocketed, trading at R1 200 or more than 17 times from when he took over, Gencor looked the other way with a smile.”

Until then, Impala was content to rely on apartheid-era courts and tribal administration contrivances to prevent the Bafokeng from having access to details of mining activities on its land.

The Bafokeng might have owned the land, but they were not allowed to know what was happening below its surface.

Says Molotlegi: “It was Steve Kearney who opened up the Impala books for our perusal, who acknowledged the one-sided nature of the royalty agreement we then had with Impala, and who respected us as a people with legitimate rights and expectations. It was Steve who negotiated a much improved royalty agreement and reframed the relationship between us. The royalty was increased from a mere 13.5% of taxable income, to 22.5 % plus one and half million shares and one board seat.

“So significant was the Impala-Bafokeng fight that Kearney ultimately helped to resolve, that former President Nelson Mandela would comment at the funeral of my father, Kgosi Lebone I, in 1995: ‘The current legal battle between Bafokeng people and the mining houses is a stark reminder of the awkward economic legacy we inherited. Government will not interfere in the legal process, but it is not disinterested in the case, whose outcome, we believe, will have wide impact.’ We reached settlement in 1999, after 15 years of litigation.”

It was the start of a new era, with Royal Bafokeng Holdings (RBH) being formed through the amalgamation of two companies: Royal Bafokeng Resources (RBR) established in 2002, and Royal Bafokeng Finance, established in 2004.

Steve Kearney was the founder chairman and CEO of RBR, which housed Bafokeng stakes in:

• Impala Platinum Mine (Implats);
• Bafokeng Rasimone Platinum Mine (BRPM), later rebranded Royal Bafokeng Platinum (RBP); and
• Merafe Resources.

These three Bafokeng legacy assets would account for more than three-quarters of the value of the RBH portfolio. Kearney also played a fundamental role in the initial negotiations with Impala and for the BRPM mine with Anglo American in the Bafokeng’s quest for an equitable deal.

RBR and RBF were amalgamated to form RBH, by which time Kearney had sadly passed on. The final piece of the Bafokeng mining story involved the conversion of its royalty agreement into an equity share in Impala, which was executed in 2007. The Bafokeng did this because there was talk of the government appropriating mining royalties for its own benefit, on the basis that mineral rights are part of national patrimony for the benefit of all South Africans.

Through RBH, the Bafokeng managed to diversify its portfolio from relying solely on mining, to a diverse asset base in financial services, property, infrastructure and telecommunications. Mining accounts for less than 15% of the portfolio.

It is all thanks to the labours of Bafokeng men and women, and the wisdom of tribal leaders and friends such as Steve Kearney, who had the foresight and the willingness to resist a succession of carpetbaggers who would deprive the Bafokeng of their ancestral rights.

The ultra-poor have become poorer; the rest are on the rebound. From Moneyweb.

We learn from Transaction Capital’s results for the year to September 2020 that 77% of unsecured loans across the economy are overdue, as are 23% of vehicle and mortgage loans.

These should be frightening figures to anyone paying attention, and show the devastation caused by the lockdown. With SA’s unsecured lending valued at just over R300 billion, and mortgage and vehicle loans at R1.4 trillion, that’s a sizeable proportion of financial sector assets now in some level of distress. Part of this would be accounted for by the repayment holidays extended by the banks at the start of the lockdown in March this year.

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What’s also alarming is the plight of the ultra-poor, defined as those households living on less than R8 000 a month.

Figures from University of Cape Town’s Liberty Institute of Strategic Marketing show the number of ultra-poor adults has climbed to 77% from 56% of the population in just over three years.

Transaction Capital’s business – focused around financing and servicing minibus taxis, debt collection and more recently the used car business, following the acquisition of 49.9% of WeBuyCars – withstood the Covid lockdown with some dignity. For the five years to September 2019, the company delivered blistering compound annual growth of 23%. That trend was interrupted by the events of the last few months with a 66% drop in core headline earnings per share.

Read: Transaction Capital swoops on WeBuyCars

Though the poor have been hardest hit by Covid, they are also least likely to qualify for credit.

Non-performing loans may increase

Transaction Capital’s CEO David Hurwitz says collection rates on non-performing loans are back to roughly 90% of pre-Covid levels. “At the start of the lockdown, the banks were primarily focused on providing debt relief to customers. We saw very little evidence of customers being handed over to their legal departments, but we expect to see an increase in non-performing loans coming out of the banking sector.

“Our experience is that there has been a rather sharp recovery in customers’ ability to service outstanding loans.”

There are 27 million credit-active consumers in SA, of which almost 40% or 10 million had impaired credit records in June 2020.

Transaction Capital’s Consumer Credit Rehabilitation Index (CCRI), which measures South African consumers’ propensity to repay debt, had deteriorated 3.4% at September 2020 compared with the prior year. This was the largest annual decline since the CCRI’s inception in June 2017.

“The 2.2 million jobs lost in the second quarter of 2020 alone, will escalate economic strain in the consumer sector with concomitant reductions in credit extension and retail sales,” says the Transaction Capital results statement.

The economic outlook for the coming years gives little cause for optimism.

SA Taxi, WeBuyCars

“The recovery of South Africa’s fragile economy is in any event likely to lag that of the global economy, with GDP only expected to reach 2019 levels by 2024, says the results commentary for the 2020 financial year. “Although SA Taxi, (Transaction Capital Risk Services (debt collection) and WeBuyCars are well placed to return to their long-term track records for growth, further sharp downturns in socioeconomic conditions in South Africa remain the primary downside risk to our expectations for growth and returns in the years ahead.”

Transaction Capital is arguably the largest taxi-focused business in the country, providing finance, insurance, auto repairs and loyalty programmes to taxi operators. Hurwitz told Moneyweb the R1.8 billion purchase of a half-share in WeBuyCars was executed with speed when it became clear that South Africans faced with lower disposable incomes would switch from purchasing new to used cars.

This was a prescient move: WeBuyCars increased monthly sales to more than 6 250 in the last three months, up from 5 900 at the start of the year.

This will make a substantial contribution to profits going forward.

The SA Taxi division offered repayment holidays to taxi owners at the start of the lockdown, and longer relief measures to some 3 000 taxi clients engaged in long-distance travel, which had been prohibited from operating in the early months of the lockdown. The cost of this relief was about R400 million.

The previous high of $20 000 is now in sight. From Moneyweb.

Technical analysts have been pointing out all year that bitcoin is in overbought territory, but that hasn’t stopped its incredible ride since the beginning of 2020.

It’s fun looking back at some of the forecasts made at the beginning of the year, and how desperately wrong they have been, but allowance must be made for the hazards of forecasting something as volatile as bitcoin.

Remember that bitcoin started 2020 at $7 179, and this week traded at $18 380 – a gain of 156%.

In February, when it broke $10 000, the overbought signals started flashing on screens everywhere, then again in September when it punched through $12 300.

Back in July, the options market gave bitcoin a 7% probability of hitting its all-time high of $20 000 by the end of 2020. Now it seems like a virtual certainty.

Bearish signals

Earlier this month, crypto intelligence firm Santiment pointed out that signals of a sell-off event are appearing. One of these signals is the number of daily active addresses (DAA) versus price divergence. DAA is the number of unique crypto addresses interacting with (sending or receiving) a particular coin on a daily basis. These are active users rather than holders, and there is a strong correlation between the number of DAAs and bitcoin’s price action.

A sharp divergence has emerged between the number of active bitcoin addresses interacting with the network, and bitcoin’s price – which is a bearish signal.

Another interesting indicator is social sentiment, which is positive versus negative mentions of bitcoin on social media. Mentions of bitcoin have been heavily weighted to positive in recent months, which is often a signal of a trend reversal. This is not to say bitcoin will drop like a stone, though some correction should be expected as it reaches its previous all-time high of $20 000.

Also notable is the relative strength index (RSI) shown in the graph below, which is now seriously overbought. RSI is a momentum oscillator that measures the speed and change of price movements, and oscillates between zero and 100. The RSI is considered overbought when above 70 and oversold when below 30.

But bear in mind that bitcoin hit seriously overbought territory on the RSI signal on no less than three occasions in 2017, the first time when it hit $5 000. It punched through that level with ease and only corrected on the third RSI overbought level at $20 000. If you sold on the first signal, you would have missed the elevator ride to $20 000.

In a newsletter to clients, Stansberry Research advises treating bitcoin like any other tradeable asset and avoid the hype, being careful to allocate no more than 5% of your investment assets to crypto.

It says one simple strategy for those gripped by the trader’s worst enemy – fear of missing out, or FOMO – is to take some profits when cryptos as a basket (such as that offered by Revix and EC10) rise 10% or more, and to buy when they drop 10% or more. This has proven more profitable than a buy-and-hold strategy.

Another workable strategy is rand cost averaging, which is a way to accumulate bitcoin over time by making regular purchases, either weekly or monthly. Since January 2018, this strategy would have yielded an overall return of more than 50%, notwithstanding the 84% drop in price in December 2017 and November 2018.

Then there are those who see bitcoin at seriously higher levels over the next year, so a buy-and-hold strategy might suit them better.

As Moneyweb previously reported, Citibank head technical analyst Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. On this basis, he sees bitcoin at $318 000 by the end of 2021.

This rise will be peppered with “unthinkable rallies followed by painful corrections,” he adds.

Yes, but some smart technologies are already in the works to defend against this. From Moneyweb.

There’s a lingering fear among crypto investors that their bitcoin might get swooped by a hacker.

That’s not very likely, but it’s not impossible either, particularly once quantum computing gets into the wrong hands. Last year Google’s quantum computer called Sycamore was given a puzzle that would take even the most powerful supercomputers 10 000 years to solve – and completed it in just 200 seconds, according to Nature magazine.

That kind of processing power unleashed on the bitcoin blockchain – which is a heavily encrypted ledger of all bitcoin transactions – is a cause for concern.

Read:Crooks and crypto in SA

Regulation of crypto assets moves forward in SA

The encryption technology used by the bitcoin blockchain has proven itself robust enough to withstand any and all attacks. That’s because of its brilliant design, and ongoing improvements by an ever-growing community of open-source cryptographers and developers.

A report by research group Gartner (Hype Cycle for Blockchain Technologies, 2020) suggests blockchain researchers are already anticipating possible attacks by quantum computers that are perhaps five to 10 years away from commercial availability. It’s a subject called ‘Postquantum blockchain’ which is a form of blockchain technology using quantum-resistant cryptographic algorithms that can resist attack by future quantum computers.

The good news is that quantum-resistant algorithms are likely to remain several steps ahead of the hackers, but it’s an issue that is drawing considerable attention in the financial, security and blockchain communities.

Postquantum cryptography is not a threat just yet, but crypto exchanges are going to have to deploy quantum-resistant technologies in the next few years, before quantum computers become generally available.

Phishing is probably a bigger threat

In truth, you’re far more likely to be hit by a phishing scam, where identity thieves use emails, text messages and fake websites to get you to divulge sensitive personal information such as bank account or crypto exchange passwords.

As a user, you should be using LastPass or similar software to generate complex passwords, along with two-factor authentication (requiring the input of a time-sensitive code before you can access your crypto exchange account). Most good exchanges are enabled for this level of security.

There are many sad stories of bitcoin theft, but these are usually as a result of weak security on the part of the bitcoin holder, much like leaving your wallet on the front seat of your car while you pop into the shop for a minute.

Like all tech breakthroughs, quantum computing can be used for good and bad.

On the plus side, it will vastly speed drug discovery, molecular modelling and code breaking. It will also be a gift to hackers and online thieves, which is why financial services companies are going to have to invest in defensive technologies to keep customer information and assets safe.

Most crypto exchanges invest substantial amounts in security. The vast majority of crypto assets (about 97%) are stored in encrypted, geographically-separated, offline storage. These cannot be hacked.

The risk emerges when bitcoin are moved from offline (or cold storage) to online, such as when a client is about to transact.

But even here, the level of security is usually robust. A further level of protection is the insurance of all bitcoin that are stored in online systems. They also have systems in place to prevent any employee from making off with clients’ assets, requiring multiple ‘keys’ before a bitcoin transaction is authorised.

There have been hacks on crypto exchanges in the past (though not on the blockchain itself), and millions of dollars in crypto assets stolen. In more recent years, this has become less common as exchanges moved to beef up their security systems.

In 2014 Mt.Gox, at the time responsible for about 70% of all bitcoin transactions in the world, suffered an attack when roughly 800 000 bitcoin, valued at $460 million, were stolen. In 2018, Japan-based crypto exchange Coincheck was hit with a $534 million fraud impacting 260 000 investors.

As the value of bitcoin and other crypto assets increases, the incentive for hackers rises proportionately, which is why problems such as quantum-enabled thievery are already being addressed.

Economist Dawie Roodt of The Efficient Group explains what’s ahead for banks – and it isn’t necessarily good. From Moneyweb Crypto.

FSCA proposes regulating crypto intermediaries as financial advisors. From Moneyweb.

It’s been a long time coming, but it looks like the sheriff has finally arrived to the Wild West that is the crypto market.

On Friday, the Financial Sector Conduct Authority (FSCA) published a ‘draft declaration’ that defines crypto assets as a financial product under the Financial Advisory and Intermediary Services (Fais) Act.

This means that anyone giving advice or acting as an intermediary – such as a crypto exchange – would have to register as a financial services provider and comply with the requirements of the Fais Act.

This will include crypto asset exchanges and platforms, as well as brokers and advisors.

The FSCA declaration proposes improved disclosure to customers to highlight the “high risks in investing in crypto assets”. Those involved in crypto assets will have to adopt a more robust advice system, including proper risk assessments, when giving advice to purchase crypto assets such as bitcoin.

Crypto exchanges and other crypto intermediaries will henceforth be licensed as financial services providers. This licensing process will also improve the quality of data for policymakers and regulators about the crypto environment, “and to consider whether there is a need for further regulatory interventions,” according to a FSCA statement.

“The draft declaration in no way impacts the status of crypto assets in the context of other laws such as exchange control regulations, requirements under the Pension Funds Act and Collective Investment Schemes Act and so forth, nor does it attempt to regulate, legitimise or give credence to crypto assets.

“The draft declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment, pending the outcome of broader developments currently taking place through the Crypto Assets Regulatory Working Group (CAR WG), which will inform future policy interventions to be implemented across a variety of regulators and laws.”

Virtually all crypto exchanges in SA, anticipating such regulation was on its way, pre-emptively adopted Fais-type standards, including ‘Know Your Customer’ (KYC) processes prior to on-boarding new customers.

Position paper progress

The Intergovernmental Fintech Working Group, involving government, regulators and industry players, published a position paper in May 2020 to develop a regulatory framework for crypto assets, focusing on areas such as:

• The implementation of an anti-money laundering and counter-terrorism financing regime,
• A licensing and supervisory regime from a conduct of business perspective, and
• A regulatory regime for the monitoring of cross-border financial flows.

The FSCA’s latest declaration on crypto assets gives partial effect to some of the recommendations contained in the May 2020 position paper.

“The FSCA acknowledges the impact that the draft declaration will have on businesses that are currently furnishing financial services in relation to crypto assets, and more specifically the fact that such business would not be able to operate legally unless they have obtained a FSP licence in terms of section 8 of the Fais Act,” says the FSCA. For this reason, various “transitional arrangements” for businesses already operating in this space will be put in place before publication of the final declaration.

Commenting on the proposed regulations, Jon Ovadia, founder and CEO of crypto company Ovex, says this will have a beneficial effect on the crypto sector

Industry comments

“We’re not surprised by this, as we knew it was coming. We’re excited by it. A big hurdle for us is not being regulated by the FSCA, which has deterred many people from getting involved in this sector.

“I think regulations will help bring credibility to the crypto sector and help weed out those involved in crypto scams,” said Ovadia.

“At present there is no sure way of knowing who is legitimate and who is operating a scam, and the people are understandably confused by this, so we see this as a positive development.”

Farzam Ehsani, co-founder of crypto exchange VALR, comments as follows: “VALR will always welcome prudent and appropriate regulation, particularly as it relates to consumer protection. We have been working with the South African regulators for many years to inform a regulatory framework that does exactly this. It is important to note, though, that today’s draft declaration of crypto assets as a financial product under the Fais Act by the FSCA was not one of the 30 recommendations in the Position Paper on Crypto Assets that was published by the regulators in April this year.

“Furthermore, all of the products in the Fais Act have a central issuer and crypto assets such as Bitcoin do not. Gold, for instance, is not classified as a financial product under the Fais Act. We look forward to engaging fully with the FSCA during the comment period to ensure a fair, relevant and appropriate regulatory position for the benefit of all South Africans.”

The public has until January 28, 2021 to comment on the draft regulations. Tweet

Though Citibank sees it at $318 000 in 2021. From Moneyweb.

As bitcoin burst through $16 500 this week and with $17 000 now in sight, the euphoria of 2017 – when it briefly hit $20 000 – has returned with a vengeance.

A weaker US dollar index and expectations of further monetary stimulus to prop up ailing economies around the world are behind the latest price surge in the benchmark cryptocurrency.

In a recent report entitled Bitcoin: 21^st Century Gold, Citibank MD Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. When former US President Richard Nixon abolished the gold standard in 1971, the dollar devalued and gold surged.

“Bitcoin’s move happened in the aftermath of the Great Financial crisis (of 2008) which saw a new change in the monetary regime as we went to zero percent interest rates,” says Fitzpatrick.

Governments today have responded to the Covid crisis with massive monetary stimuli, creating an environment similar to gold in the 1970s. Fitzpatrick, who worked at Nedbank in Johannesburg in the 1980s before rising through the ranks at Citibank, sees bitcoin at $318 000 by the end of 2021, and gold between $4 000 and $8 000 an ounce.

But a lot can happen before then – and two developments may spoil the party.

First, news that US biotech firm Moderna has achieved 94.5% efficiency in its Covid vaccine trials and the likelihood of an imminent return to something approaching the ‘old normal’.

Second, a drop in the number of active addresses interacting with the network. This is a signal that holders are trading rather than holding their bitcoin, though it does not necessarily mean they are preparing to sell.

The news of another possible Covid vaccine from Moderna comes barely a week after Pfizer announced its vaccine had achieved success rates of 90% in trials. The Pfizer announcement was accompanied by a sharp, though short-lived, drop in the bitcoin price on the presumption that such a development meant that fears over the pandemic may start to fade and this would benefit the world economy and the US dollar. The Moderna announcement had no such effect, with bitcoin surging towards $17 000.

According to analytics firm Santiment, the number of active addresses hit a 33-month high two weeks ago, the largest since January 2018 before bitcoin crashed by 85% after its massive spike to $20 000 in December 2017.

Read: Bitcoin is the bubble that keeps on giving

Comparisons have been made between bitcoin and the dotcom bubble that came crashing down in the early 2000s. Out of that crash came Facebook, Amazon and other tech giants.

But bitcoin has just emerged from a major crash that began in early 2018 and ended in 2019. It is prone to volatile swings, and is due for a correction after its amazing run in 2020.

But not everyone is convinced the current bull market is anywhere near running out of steam, Citibank among them.

Bitcoin tore through resistance levels at $15 700 in recent weeks and could see support building at this level as it makes a push for its previous high at $20 000.

Read: Bitcoin on the brink of fresh year high following PayPal embrace

The election fiasco in the US has added to the general sense of uncertainty, with sentiment remaining firmly with safe haven assets such as gold and bitcoin.

This might prompt disbelief among more conventional analysts, but Citibank’s Fitzpatrick notes that bitcoin has been in an ascending parallel channel since 2013.

He writes: “You look at price action being much more symmetrical or so over the past seven years forming what looks like a very well defined channel giving us an up move of similar timeframe to the last rally [in 2017].”

And it’s about time – traditional transfer costs via banks can swallow more than 20% for small amounts. From Moneyweb.

The World Bank runs a useful web page showing the cost of money transfers between African countries.

Sending R1 370 between South Africa and Kenya, for example, will cost an average of 11.68%, and as high as 29.67% if you’re using Absa.

Africa-destined remittances totalled $40 billion in 2019, with nearly 12% of that going in fees.

If ever there was a market begging for disruption, this is it.

That disruptor is Paxful, a company founded in 2015 targeting the four billion people worldwide who are unbanked or underbanked. In five years, Paxful has accumulated more than 4.5 million customers and slashed the cost of money transfers.

Sending bitcoin to another Paxful customer is free of charge for the first five transactions per month.

After that, it costs $1 or 1% of the sending amount, whichever is the greater. This type of peer-to-peer transaction, bypassing the banks, will do more than slash the costs of money transfers, it will speed up the development of some of the poorest areas of the world by inducting them into the world of digital assets, says Paxful CEO and co-founder Ray Youssef.

Read: Banks’ cash-send fees, services compared (Jan 2018)

A recent report by the blockchain research group Chainalysis shows that monthly crypto transfers under $10 000 to and from Africa jumped more than 55% to $316 million for the year to June. The number of monthly transfers nearly doubled – surpassing 600 000 transactions, with most of the activity taking place in Nigeria, South Africa, and Kenya.

Practical, cost-effective, global

“Many Africans living abroad face difficulties when it comes to remittances or payments, as modern money transfer operators are often expensive and time-consuming. We are now providing our users with a practical and cost-effective process offering them a global financial passport.

“For true financial inclusion to happen, a free market for money transfers is required,” says Youssef, who was born in Egypt but grew up in New York.

Using cryptocurrencies like bitcoin and tether (backed by the US dollar), Paxful is starting to eat into the traditional money transfer business.

Youssef met fellow co-founder Artur Schaback at a bitcoin conference in 2014 and the pair started to come up with solutions for some of the most pressing problems facing the world’s poor – such as how to untangle themselves from increasingly worthless local currencies and send remittances at low cost to families back home.

Read: Why emerging markets love crypto

“We have people in South Africa who are using the Paxful network to build their own versions of Western Union, so they can send money to family and business associates elsewhere in the continent for a fraction of the usual cost,” says Youssef.

“The other benefit we provide is that the remittance is instant.”

Paxful allows customers to use local fiat currencies (like the rand or Zambian kwacha) to purchase cryptos such as bitcoin and tether, and then convert these back to fiat currency again.

Options

It currently offers more than 300 different payment options, and recently added the Zimbabwean-developed Uhuru Wallet to the network. Uhuru was developed on the Stellar blockchain, and provides escrow services to buyers and sellers of goods and services. It is accessible via WhatsApp, catering to the growing number of people in Africa with smartphones.

In practical terms, this means you can buy bitcoin with local cash and use it to pay a bill on Alibaba, or purchase air time, electricity vouchers, lottery tickets and other services without having to go through the banking system.

Read: The future of money and payments

One of the problems slowing wider crypto adoption in countries such as Nigeria is the variety of Know Your Customer (KYC) regulations. Paxful is planning to solve that by introducing a localised KYC platform to speed the onboarding of millions more customers.

Youssef believes Africa is ripe for the type of payments solution Paxful is offering. “If you consider that some debit cards in Nigeria only allow the users to spend $100 a month, while many merchants are unable to get registered for Visa and Mastercard, we can bypass all of that and provide a payments mechanism for everyone.”

All Paxful’s growth has been achieved organically, without any venture capital funding. This alleviates any pressure from funders to see quick returns, and allows profits to be funnelled back into growing the network.

Bigger picture

One feature that sets Paxful apart from many others in the crypto space is its investment back into communities. So far it has built two schools in Rwanda with a total of about 400 students, and one school in each of Kenya and Nigeria. All schools come with modern equipment and water wells, and are located in some of the poorest parts of these countries.

Says Youssef: “I am putting the challenge out to other companies operating in the crypto space to give back to the community, either by joining us in our quest to build 100 schools in Africa over the next decade, or to build a school of their own.”

The company launched an education drive starting with universities in east and southern Africa to provide practical insights into the true-use cases of bitcoin, how to avoid falling prey to bad actors in the crypto-space, and tempering the overemphasis on bitcoin speculation.

Peer-to-peer networks are sometimes seen as convenient avenues for money laundering, and less than 1% of Paxful’s transactions fall into dispute. The attention over the next year is to get this down to as close to zero as possible, while reducing the time it takes to handle support queries from the current eight minutes.

The crypto becomes largely invisible

The fact that Paxful uses bitcoin and tether as payment mechanisms is a sign of the changing financial order, but these will become largely invisible to users who are able to switch between a variety of different currencies, from fiat to crypto and back again, without having to pay attention to the mechanics behind it.

“Most of the volume traded on crypto exchanges is speculative,” says Youssef. “Ours is a real-use case, especially in emerging markets.”

He adds: “The network we are building gives millions of people access to an army of friends and colleagues around the world. Our aim is to break the system of financial apartheid, and we’re solving a problem of financial exclusion that has existed for the last 100 years.”

The company has seven offices around the world, one of them in SA.

“And we’re always hiring – especially if you’re super-talented,” adds Youssef.

Like Uber and Facebook, it generates returns as more people join the network. From Moneyweb.

One of the oldest criticisms of gold is that it earns no dividend or interest, which banishes it from the investment mandates of most fund managers.

With the recent launch of AuBit and its Alpha Gold Bullion crypto asset, that’s now a thing of the past. AuBit earns investors a return on gold by redistributing 80% of transaction revenues back to holders. That means any time that anyone, anywhere in the world, buys AuBit-networked gold, as a holder you get a cut.

There are no ongoing platform fees, so all gains users make are theirs to keep.

This is a far cry from the traditional asset management model, where value leaks out of the system to service providers through annual fees.

It’s early days yet, but simulated models show it could be possible to earn up to 1-2% additional asset gains per year as users join and trade on the network. This can yield total additional returns of up to 70% a year after five or six years of compounding, based on historical asset price data. All this is based on less than 200 000 users adopting the system over the next five years.

The power of the network effect

The network effect AuBit leverages to generate additional returns is the same kind of network effect that has powered the valuations of companies such as Facebook, Apple, Google and Uber. Network effects occur when each additional customer adds value to existing customers. One study estimates that over the past 23 years network effects have accounted for approximately 70% of the value creation among tech companies.

These seem like extraordinary returns, and they are, though they rely on continued network activity. This forms the AuBit USP (unique selling proposition), as the downside is the ‘normal’ performance of the underlying assets, in this case gold, but the upside is enhanced as the amount of gold in each user account is designed to increase over time.

Read: Why emerging markets love crypto

And it’s not limited to gold. “The same network effect enhancements can be applied to any asset to boost returns,” says AuBit founder Peter Neilson.

“My view is that AuBit has the potential to revolutionise the global asset management industry as much as John Bogle’s passive index funds did 50 years ago.”

Joel Krueger, global chief investment officer at Aon and AuBit’s chief investment advisor, agrees: “The network effect has revolutionised just about every industry. However, no one has yet used the right tech to leverage its potential in the world of finance and asset management, until AuBit.”

In traditional asset management, the volume of assets in your account remains static, though the value of those assets may rise and fall. AuBit is changing this model by redistributing revenues to asset holders and continuously increasing their total volume of assets.

AuBit co-founder Graham Doggart says AuBit represents a paradigm shift from the traditional investment model to a new model based on asset volume, and with that, enhanced risk-adjusted alpha (outperformance of a benchmark index) through network effects.

Read: Bitcoin on the brink of fresh year high following PayPal embrace

The same network effects can be applied to traditional equities such as Apple, where many high-performing annual stock returns can be sweetened by about 6%, or the US Bond Index, where the AuBit network-enabled model simulations show a potential for an additional annual gain of 25-51% without changing the risk profile of the underlying assets.

Tokenisation – is it the future of finance?

The ETF (exchange-traded funds) market is worth $5.3 trillion today and Bank of America forecasts it will grow to $30 trillion by 2030. The World Economic Forum estimates that tokenised markets (where assets are issued on the blockchain) could potentially grow from $1.7 billion today to $27 trillion by 2027.

Joachim Godet, CEO of London investment bank 01 Capital, believes programmable securities like AuBit represent the future of asset management because of the benefits they provide in automation and cost reduction.

The AuBit network rests on what is known as the Freeway platform, which is a downloadable app that will offer an expanding range of financial products. The more people that sign up, the bigger the network grows, and so too does the asset wealth of the network participants, who will be able to purchase and trade individual stocks, bonds, commodities or the leading ETF projects from the likes of Vanguard, BlackRock and State Street.

Bridging the traditional investment world with the new world of digital and decentralised finance, AuBit’s first product, the Freeway Token (FWT) listed in November and has already seen over 200% appreciation in value. FWT is now available on digital exchanges Bithumb Global and Uniswap.

Institutions are also starting to back the venture.

Last week, AuBit announced that Canadian merchant bank GreenBank had acquired 400 million FWTs for about $3.2 million. Greenbank CEO David Lonsdale says the multi-trillion-dollar global asset management industry, though growing, has barely changed in decades and is ripe for disruptive technology such as AuBit.

“One of our declared objectives is to invest in companies whose business can be scaled globally and have the potential to be worth at least Canadian $1 billion. We believe AuBit fits that criteria very well indeed,” said Lonsdale in a statement.

Read: Michael Jordaan’s crypto venture ties the knot with EasyEquities

According to AuBit’s website, the plan is to roll this network out to 180 countries and bring financial services to the mass market, while continuing to grab the interest of institutions and traditional investors.