One day — in the not too distant future — crypto will completely displace equities as an asset class.
Yes, you read that correctly.
Our beloved equities will soon join the club of obsoletion where the phone booth, the Walkman, the floppy disk, the Fotomat, the VCR, the fax machine, and many others reminisce about their youth while watching their legacies unfold.
But, do not panic. $100 trillion in global equity markets is not going to evaporate.
Not all all.
For, equities are not vanishing. They are evolving.
They are morphing into a novel hybrid asset class that is much more fitting for modern economies. While these new investment products will retain some of the characteristics of their equity lineage, they will look and feel a lot more like crypto assets.
And they will forever alter every aspect of global finance.
Highlighted below are five reason why crypto will obsolete present-day equities.
1. Reason number 1: Because conventional equity markets are completely broken
This should come as no surprise. U.S. public stock markets have not functioned effectively for a very long time — at least not since the annihilation of the small cap IPO in the aftermath of the dot com bubble burst.
Sure, equity markets can surge without small caps. But, they can’t sufficiently diminish wealth gaps and foster innovation without them. The fact is, stock markets are most constructive when they are providing a viable path of capital formation that serve companies and investors of all sizes.
Because they wait until so late in their life cycle to finally go public, today’s most sought-after emerging growth companies end up appreciating in the hands of venture capitalists instead of in the retirement portfolios of ordinary Americans. With companies IPO-ing with billions in market capitalization, some might even go so far as to say that America’s retirement savers have become nothing more than an exit strategy for the financial elite. Is it any wonder that retail investors have fled equity markets in droves?
There simply isn’t enough liquidity or demand to support a vibrant public market for most small cap stocks — notwithstanding the recent well-intentioned legislative pushes that help small emerging growth companies access capital from the investing public. Even the promising Reg A+ exemption has, thus far, been unable to revive the small cap IPO. And, it never will for the simple reason that Reg A+ fails to address the crux of the problem. The fact is, going public is not the issue. Being pubic is.
It is the ICO, not the IPO, that has been capturing the attention of speculators. Already, during the second quarter of 2018, ICOs raised a staggering 45% of the amount raised by traditional IPOs and 31% of the amount of venture capital raised.
Without a thriving small cap equity exchange, risk capital will continue its migration to crypto.
2. Reason number 2: Because retail investors hate equities
Some might argue that “hate” is too strong a word. In that case, let’s just agree that retail investors are “just not into equities” any longer.
In fact, they have been gradually losing interest — and trust — in equities for quite some time. According to Goldman Sachs, U.S. households have $900 billion less invested in stocks today than they did in 2007 — despite a 9 year bull market where the DJIA saw gains in excess of 300% from its 2009 lows.
And millennials, in particular, have a strong disdain for equities. According to a recent survey by Blockchain Capital, more than 1 in 4 millennials prefer bitcoin to stocks, and 27% of millennials think that bitcoin is more trustworthy than big banks.
Let that sink in for a second. In spite of all the negative press about bitcoin, including the fake news reports of bitcoin being ridden with fraud, millennials still believe it to be more trustworthy than long established financial institutions!
This brings me to the next reason why crypto will displace equities: because millennials say so.
3. Reason number 3: Because millennials say so
Like it or not, the future of the capital markets lie with millennials and gen-zers, for they are on the cusp of inheriting an estimated $30 trillion — the current size of the entire U.S. equity market. It is impossible to accurately predict investing trends without firmly understanding how budding generations see the world.
And, trust me, their views are diametrically different from their predecessors.
Millennials are a generation that would prefer getting a root canal than visiting a bank. Does anyone realistically believe that this bank-averse generation is suddenly going to start welcoming the financial establishment into their lives? Sorry, but I do not foresee any “hug a financial advisor” campaigns winning the hearts and minds of millennials. Nor do I expect equities to be removed from “the millennial shit list” anytime soon.
In fact, there is only one thing that millennials despise even more than banks — and that is owning stuff.
4. Reason number 4: Because sharing is the new black
Millennials — who have been drivers of the “sharing economy” — have exhibited a growing distaste for ownership in general. Whether it is car-rides, living quarters, office space or even luxury watches, millennials simply prefer “access” or “sharing” to “ownership”.
Because of this fundamental move away from ownership, the sharing economy is estimated to grow from $15 billion to $335B by 2025.
Anyone who believes that “sharing societies” will not significantly impact equity markets would be amiss. As farfetched as it may sound to some, we are headed towards a future civilization where owing stock is deemed less favorable to trading tokens for goods and services.
Think about it. Investors do not buy stocks for the purpose of possessing them. People don’t wear stocks. They don’t hang them on their walls. They don’t live in their stocks. They certainly don’t drive around in them. People don’t even take hold of stock certificates anymore. People buy stocks with only one goal in mind: to eventually liquidate them at a higher value. That’s it. Crypto offers them the exact same ability and much, much more. With crypto providing the potential for appreciation as well as other perks, the allure of holding equities is diminished — if not eliminated altogether.
5. Reason number 5: Because the tokenization of everything
Everything is eventually going to be tokenized — our currency, our businesses, our homes, our cars, our art, our patents, our insurance policies and yes, even our equities. In fact, all securities will be tokenized. Hell, even our ideas, our decisions and the food we eat will soon be tokenized. Essentially, if it can be shipped, shared or tracked, it’ll be tokenized.
Why? Because tokenization fosters efficiency. In the same way that the assembly line transformed manufacturing, crypto will revolutionize global commerce. Once people sort through all the clutter and confusion and realize that tokenization is simply a highly advanced electronic record keeping system, attitudes about crypto quickly shift from apprehension to acceptance. Some even become inspired by it — imagining the many ways in which crypto could impact humanity. It’s amazing how just a small dose of understanding can turn fear into enthusiasm.
What I personally find most promising is the implementation of tokenization to democratize the financial system. Tokenization brings fractionalization and liquidity to alternative — often highly illiquid — asset classes. It enables small retail investors the ability to access assets that were previously unattainable. It also helps them monetize assets that were difficult to liquidate in the past such as real estate. But, most importantly, tokenization will ensure that America’s emerging businesses — the lifeblood of job creation and innovation — have greater access to capital, the people’s capital.
With the fate of the small IPO hanging in the balance, equity tokenization will accomplish more than revolutionize small business capital formation, it will save it.
This article was originally published on Medium.