Category: Think Pieces

One of the wake-up calls during the still on-going Russia’s invasion of Ukraine is how the market witnessed the US and EU utilising the powerful tool of economic warfare by barring Russia from accessing its billions of foreign reserves (except using the reserves for energy payments.) As a result of this sanction imposed against Russia, calls have been raised for the need for alternative holdings.

Being the top holder of foreign currency reserves with $3.22 trillion as of January 2022, with over two and a half times more than the second-largest reserve holder, as well as a friend of Russia, it will come as no surprise if China decides to unshackle itself from the dollar-dominated system in order to reduce their reliance on US dollar.

De-dollarisation is not only limited to China, it is reported by The Wall Street Journal that “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan,” a move that could further erode US dollar reserve currency’s status. And one should also notice that the Middle East, led by Bahrain and the UAE, is setting up some of the world’s largest crypto exchanges spearheaded by FTX (who have decided to leave HK) and Binance.

No matter how the war of tragedy unfolds, it has signalled to some countries the need to reduce their reliance on SWIFT – the global messaging system between banks to ensure financial security. In fact, Russia’s central bank has developed its own alternative to Swift called the System for Transfer of Financial Messages since 2014, when the US government threatened to disconnect Russia from SWIFT. But it is nowhere near as big as the former.

Having said that, with cryptocurrencies becoming more mainstream, the long race to catch up may not be necessarily if blockchain technology is here to provide a powerful alternative to the legacy global messaging system in the coming years.

Blockchain as a backbone for global finance may still be remote, but we have witnessed how crypto has marked its place in the war.

With Ukraine’s central bank limiting its citizens from withdrawing foreign currency, some Ukrainians have turned to crypto as an alternative. Crypto trading volume on Ukraine’s Kuna Exchange had surged 200% in the last week of February, reaching its highest level since May 2021. The country has also raised over $50 million in crypto donation, as indicated on its official donation website.

Source: CoinGecko

On the other hand, crypto could also be used as an escape route for Russia.

The fact that cryptocurrencies cannot be frozen (let’s rule out centralised crypto wallets for now), has made these tokens an extremely important tool. The Bank of Russia has been developing the digital rubles and has already started the pilot stage of its CBDC before the war began. The call to ban selective Russian banks from the international payment system may have motivated the Russian government to speed up the progress.

Despite no clear evidence of Russians rushing to crypto for a safe haven as information is limited about the country lately, we are witnessing regulators around the world ramping up their efforts in the cryptocurrencies space. Perhaps one of the motives behind this could also be the attempt to close any potential loopholes in the sanctions. While we hope that the conflict can be quickly resolved, if sanctions have become a norm rather than exception, we should all think about what self-sovereignty means to our wealth.

The global CBDC race

On 9^th March 2022, US President Joe Biden signed an executive order on digital assets, including cryptocurrencies. While the order did not specifically launch any new policies, but only guidelines for the upcoming steps, it marked the first official strategy on digital assets set forth by the US government and has given the crypto industry the regulatory clarity that has been long sought after.

The executive order outlined a number of policy priorities and risks related to the implications brought by digital assets, first and foremost is customer and investor protection, followed by financial stability and systematic risk, national security, energy demand and climate change, etc. The executive order contains a well balance of discussion on both the opportunities and risks.

No commitments were made to a US Central Bank Digital Currency (CBDC), but the executive order specifically called for the “urgency” for the Fed to double down their research on CBDC. We see this as a pursuit to put the US on a level playing field with China who has launched its CBDC pilot last month.

Just days after the executive order was signed, the European Parliament voted to advance a draft of the Markets in Crypto Assets bill, or MiCA, which is a regulatory framework for crypto assets that has been in development since 2018. A lot of similarities could be found between the executive order and the MiCA.

The uniform framework for the EU’s 27 member states also covers rules on supervision, consumer protection and environmental sustainability of crypto assets. An earlier addition to the bill that aimed to limit the use of cryptocurrencies powered by the energy-intensive consensus mechanism known as proof-of-work, which essentially means banning crypto such as Bitcoin and Ethereum in the EU, was voted down by the committee.

Alternatively, the committee voted in favour of a proposal to include crypto-assets mining in EU taxonomy for sustainable activities by 2025 to reduce carbon footprint. The EU has begun its digital euro project since July 2021 and the current investigation phase is expected to take two years. One thing to note is that the MiCA will not be applied to CBDCs.

While the US and the EU have just started with the entrée, China is enjoying the dessert. After eight years in development, China has debuted the digital yuan, its version of CBDC, during the Beijing Winter Olympic Games last month, subsequent to its trial launched in late 2019. According to the data released by the Chinese government, the digital yuan was accepted by more than 8 million merchants and over RMB 87 billion in transaction value was reached as of the end of last year. The next step for China would be to follow its plan outlined in the 14^th Five-Year Plan, further expanding the development of the digital currency alongside its digital economy.

Image Source: Kyodo

Last but not least, the Hong Kong Secretary for Financial Services and the Treasury released a letter through his blog yesterday, announcing the government’s latest development in regulating the virtual asset industry. Although there is no explicit timeline for the next steps, the letter highlighted the government’s consideration to introduce a new licensing regime for virtual assets service providers in accordance with the requirement imposed by the Financial Action Task Force which requires all virtual assets exchanges to apply for a license from the Securities and Futures Commission.

If 2021 was marked as the year that made crypto and NFT broke out of their niche, 2022 would be the year of crypto regulation. And with over 80 countries currently exploring a CBDC, we think digital currencies are here to stay and disrupt the traditional financial system. These are still early days for CBDCs and we do not know how fast and far they will go.

But we are excited.

 

Reference:

https://data.imf.org/regular.aspx?key=61280813

https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541

https://donate.thedigital.gov.ua/

http://www.gov.cn/xinwen/2022-02/23/content_5675094.htm

https://www.atlanticcouncil.org/cbdctracker/

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Who would’ve thought that someone is willing to pay a hefty price for turds? Although some might find this to be stomach-churning, it is a reality. According to Bloomberg, manure is selling for USD 40 to 70 per ton, an all-time high level since 2012.

Major reasoning behind this phenomenon could be traced from the ongoing fertiliser crisis, especially from one of its key ingredients: ammonia.

Ammonia is a compound of nitrogen and hydrogen (NH3). The high nitrogen component, a key macronutrient for plants, makes ammonia an essential feedstock for all nitrogen-based fertilisers. Alternatively, it can be applied directly to the soil as well.

Based on our study, the dynamic of ammonia market is reflecting today’s problems on multiple fronts, namely: supply chain, agricultural, energy, and geopolitical tension. Its price performance is a perfect example of what could happen when an inelastic demand faces a serious setback in supply.

Perhaps, ammonia could be good long exposure for the ongoing problems in the world. Below is our learning on this matter:

The now deep-pocketed farmers could afford the unprecedented upswings of ammonia price

The soaring price of ammonia has a profound impact on the agriculture market as fertilisers typically contribute up to 20% of in-farm cash costs. The ammonia market, however, is also affected by the agriculture market as the chemical is their essential derivative demand – 80% of ammonia use case comes from fertiliser.

Given such a relationship, ammonia price can only elevate that much for a considerable time because there are people who are willing to pay for it. In this case, it is the farmers who account for most of the demand.

As of 23 February 2022, the Bloomberg agriculture commodity price index was indicated 67% higher than on the end of 2019 level. The favorable agricultural prices certainly have buoyed the fertiliser market as it deepens farmers’ pockets. Nutrien, the world’s largest plant nutrition producer, sees crops producers’ margin to expand by more than two hundred percent for 2021 and 2022 compared to the 2019 level.

We see the outlook for agricultural commodities to remain bright as the tight market is yet to see relief. Global grains stocks-to-use ratio that indicate the carryover availability to fulfill the full-year demand has been in a free-fall in the last couple of years. The weak prices of 2012-2020 might had disincentivized investments in this space and resulted in a weak production capacity to timely respond to demand.

The combination of economic reopening and stimulus packages during the pandemic is also providing strong support for the demand for agricultural commodities.

Provided by these circumstances, farmers should be well-incentivised to continue applying fertilizers for maintaining or boosting their production. Especially, when they know that in some parts of the world crop yield might be adversely impacted by La Nina.

It is amazing to see this rock-solid demand could afford multiple setbacks on the supply side.

The supply-side problems have dislocated ammonia market by at least 48%

Normally, ammonia plants are built altogether with the downstream fertiliser plants. The statistics of the International Fertilizers Associations (IFA) indicated only 18.4 mn tons of 185.3 mn tons global capacity production in ammonia was traded globally in 2020. Only 10% of global production was intended for trade, causing the merchant ammonia market prone to disruptions.

Based on our estimate, the current ammonia market’s equilibrium faced a dislocation of at least 48% from the 2020 locus due to the following supply-side issues:

• Energy-crisis sent one-third of European ammonia plants to shutdown

Ammonia production process requires hydrogen and involved an energy-intense process. Most of the ammonia plants today are using natural gas as their feedstock for their hydrogen rather than coal or water due to environmental and economical considerations. Natural gas as a feedstock could govern 70-90% of the cash production cost of ammonia, excluding energy cost.

According to Bloomberg Intelligence, currently, about one-third of Europe’s ammonia production plants are being shut down due to the pricey natural gas cost. Such supply gap translates into additional demand to the merchant ammonia market and pinched 30% of the merchant ammonia balance.

The reasoning behind the energy crisis was a combination between structural changes and geopolitical tension:

In Q4 2021, we saw the tight energy market take the spotlight and send costs sky-high. The sector underinvestment over the last five years driven by lackluster prices, ESG scrutiny, and global-wide consolidation jolted fossil fuel prices up when it faces a robust demand from economic reopening. We had written some of these matters in our previous blog post in June 2021 (link).

In the case of natural gas, we saw its energy cost per unit has exceeded brent oil in both Europe (Dutch TTF) and Asia (JKM). Indicating the two regions’ competition to secure supply. This was primarily due to the region’s structural shift of adopting natural gas in their path of decarbonization. This structural shift is expected to result in a shortage of LNG in the future according to McKinsey.

With over 20% gas share in their energy mix, gas demand was amplified because intermittent renewable energy did not work during winter. About 10% to 20% of energy sources had to be switched to ‘dirtier’ hydrocarbon and gas has been the top preference.

This condition is worsened as Russia’s gas flows which account for 40% of Europe’s gas supply are reduced significantly. Russia’s gas flow in December 2021 was 10.3 bcm, about 26% lower than the same period last year.

The recently escalated tension of Russia-Ukraine has resulted in the postponement of the Nordstream II pipeline operation, carving out a significant potential gas supply for the region.

The Dutch TTF’s futures are now trading above USD 20 per MMBTU until mid-2023. This price has priced in the delay of the potential gas supply and implies LNG in Europe won’t be adequate to fill in the gas stock-up in the region for the whole year which starts at a very low base as inventory level is lower than five-year lows.

Warmer winter from La Nina for Europe could help to ease the replenishment of gas production but at this rate, this effect would be rather blunt. With natural gas availability remaining uncertain, we believe that the shutdown of European ammonia producers would take some time and the country will be a dominant buyer in the market.

• Missing fertiliser exports from Russia and China

In attempts to control food prices and security domestically, Russia and China have imposed restrictions on fertilisers export to ensure the availability and affordability for local farmers until 1H22. We estimated this resulted in 18% of missing supply from the merchant ammonia market.

The uncertainty looms whether as the policy would be carried as the initial plan since the tight market in agriculture, potash, nitrogen (ammonia), and phosphate market persist. Not to mention the escalating tension between Ukraine and Russia lingering the uncertainty in the already tight agricultural and energy market.

• Supply chain constraints kept prices high

The supply chain problems constraint that was initiated from the COVID-19 pandemic still haunt the economy. The steep freight cost has reportedly caused some producers to switch their inventory policy from just-in-time to just-in-case, stretching up the freight capacity even more.

For Europe and Asia, the steep freight market capped the potential cost savings from importing through LNG freight. Based on the normal calculation, we estimated about half the price of the current LNG price in Europe and Asia is going to the freight.

In addition to supply chain issues, health protocols also delayed the recovery and development of plants. Those factors combined slows down the plant turnaround process from 20 days to 60 days, according to one of our sources in the industry. Another case in point is the development of the Ma’Aden Ammonia-3 plant’s commercialization has been stalled from December 2021 and is expected to be delayed until Q3 2022, a nine-month delay.

Ammonia could be a good long-exposures on today’s world problem

In short, tight agricultural market, energy crisis, geopolitical tension, and supply chain issues are factors that keep ammonia prices high. At the current goldilocks situation, we see European fertiliser companies purchase to set the support price for ammonia as they become the dominant buyer in the market. It still unclear on how long this confluence of problems could be untangled.

So far, the pockets of farmers have been deep enough to pay the high price of ammonia from the tailwind of their commodities. Given the tight relationship of ammonia in the multiple problematic verticals of today’s economy, perhaps ammonia exposure could be a prospective long-exposure towards todays’ world problems?

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As the saying goes, time is money, inventors of play-to-earn games and esports have certainly taken note of it. One may consider that these two sectors in the gaming industry are the same in the way which both provide an opportunity for gamers to monetize their time spent on playing video games. This has led our analyst to study how the rise of play-to-earn games may potentially change the esports scene. And how may their convergence fit into the gaming industry?

Pro Earners – P2E phenomenon

Play-to-earn – GameFi – is the combination of video games and blockchain where players can earn cryptocurrencies and NFT by spending time in the games. The additional feature of being able to transfer values created from online games to the real-world is the key component that makes play-to-earn games differ from conventional games.

Play-to-earn has come exploded in 2021 with the growth of Axie Infinity, a metaverse game developed by Vietnam-based Sky Mavis that, that comes with its in-game token called Smooth Love Potion (SLP). And the play-to-earn phenomenon took off in the Philippines when Covid-19 destroyed jobs and forced many to stay at home. According to several news platform, Axie infinity gamers in the Philippines could earn USD 5 to 20 on daily basis during summer 2021 – comparable or even better than the country’s minimum wage of USD 10.5 per day. Not only does the play-to-earn model presents a new and flexible income stream, it also represents the beginning of shift in the socioeconomic paradigm.

 

Source: Axie Infinity

Pro Gamers – E-Sports ecosystem

Esports, rose in popularity in the 21^st century, has turned games from a casual hobby to a professional sport. And it has been taking the world by storm in recent years with impressive audience numbers. Insider Intelligence forecasts that there will be 29.6 million monthly esports views in 2022. The 2021 League of Legends World Championship grand final accrued an audience of over 73 million peak viewers, an increase of 60 percent compared to the previous year’s tournament. So what exactly is esports?

According to NewZoo, a market intelligence specializing in esports industry, esports is defined as:

“Competitive gaming at a professional level and in an organized format (a tournament or league) with a specific goal (i.e., winning a champion title or prize money) and a clear distinction between players and teams that are competing against each other.”

One of its sound merits is no doubt the loyalty of its fanbase. Despite not necessarily for all esports games, but most games have their own audience, best esports players even amass their own legions of fanbase. The network effect of such a community is the winning formula in esports market. According to an analysis done by Newzoo in 2019, between League of Legends, CS:GO, and Overwatch, only 6% of consumers watched esports content from all three games within the previous 12 months. Overall, 71% of viewers watch only one of these franchises. League of Legends and CS:GO have the most loyal audiences, with 29% and 25% watching only that title, respectively.

Source: Newzoo

The loyalty of the hyper-social, millennial fanbase of the esports industry has attracted not only an explosion of investments from venture capitalists and private equity firms, global brands such as Mercedes-Benz, Coca-Cola and Intel also saw this powerful branding medium and have all poured funding into this market by carving out sponsorship and partnership deals as an attempt to reach this largely millennial fanbase. These investments are being woven into the fabric of the entire ecosystem, such a multiplier effect has led the esports scene to grow and mature.

Both esports and play-to-earn games have set the foundation of their positions in the playfield. Let us now explore how a convergence of the two may change the scene.

What can happen when they are combined

For play-to-earn games, attracting true gamers has always been the top challenge. There are two reasons to why true gamers are deterred from participating in these games. Firstly, the play-to-earn feature has become a double-edged sword as it allures players who are fundamentally drawn purely by the potential value of the tokens, as opposed to the game itself. This creates an unhealthy player-base where these players will switch as soon as other games offer higher rewards. And when a large portion of players decide to leave and exchange the tokens for other digital currencies, the value of the token collapses. The second reason being that the play-to-earn games lack the most fundamental aspect of game itself – fun. Reviewers say that the missions are repetitive as if doing chores to grind 100 SLP a day. And one may notice that most noises or articles surrounding these play-to-earn games are how one can make a living, rather than how one can have fun, through playing these games.

It is clear that play-to-earn games need to be more entertaining to sustain, the gameplay and graphics of play-to-earn games are still very basic. A merge of play-to-earn games and esports will imply an increasing adoption of token mechanics by AAA gaming studios, leading to a big leap up to the quality of play-to-earn gameplay. What esports can also bring to the play-to-earn game model is the huge social component inclusive of media, pop culture, and commerce. One of the reasons that contributed to Fortnite’s popularity is that: Fortnite is built to be social. Esports and gaming are a highly social activity which people share opinions, talk and engage. So essentially, the problem here is to make “play-to-earn” to become “play-and-earn”.

As for esports, not only very few become good enough to play professionally, a career of a pro gamer is usually rather short-lived compared to a conventional career. Esports is also a “game developers say it all” model, all the in-game skins, characters and items bought are maintained by these corporates. Once a career ends or once you stop playing, gamers walk away with nothing. Play-to-earn model provides an extra level of protection to the gamers, who will be rewarded based on their skills. Having said that, a robust economic model is required to ensure the value of their time spent it not wiped out due to token volatility driven by external manipulation. In addition, with the introduction of game assets and NFT into esports, these game publishers could expand their reach into a whole new market – the cryptocurrency investors. The tokens also provide an easier channel for investors who may have previously found it difficult to navigate within the esports industry.

The unique features of play-to-earn and esports model complement each other. Despite still a long way to go, the start is promising. There are around 3 billion gamers worldwide, and only a small fraction of them is playing blockchain games. With more people getting involved in play-to earn games, it is only a matter of time when play-to-earn becomes too big that gaming studios cannot afford to ignore. Ultimately, as development continues to grow, more investment will be attracted. So we say there is a big opportunity still untapped.

 

Reference:

The Esports Observer, https://archive.esportsobserver.com/newzoo-report-august/

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While having a getaway from a tumultuous year of a volatile market, one of our team members decided to share his bitter and sweet experience while enjoying delicacies in two different restaurants. The story reminds us of maintaining an underdog spirit to avoid being complacent and getting spoiled. The story in his own words is as follows:

The tale

I recently visited a gorgeous restaurant in Jakarta. The place was busy again after the Covid hiatus. I was so delighted to see the restaurant making a strong comeback, and I was also elated to recognize that we are supporting a local business that had fought Covid and won.

Almost everything about the place has gone back to normal. However, that, unfortunately, includes the poor-mannered and unhelpful staff. How did I forget about that?

Despite my colleague’s warmhearted gestures like making jokes and chatting friendly with the restaurant staff, they gave us a stiff face. We certainly felt that the staff acted like they were doing us a big favour by interacting with us. Others sought ways not to have to do much while pretending to be hardworking. When the wrong food was delivered to us, no apologies were offered, not even in the most basic form.

How could this happen? Is the restaurant staff not grateful for our support?

Maybe they are not aware of it because the restaurant is busy once again. Maybe because the restaurant staff did not have to do the heavy lifting to make their business successful. The location is superb and the design is first class. The hardware is great.

The problem is with the software. We understand that the restaurants under the same group are not nearly as bad. If anything, the service is known to be outstanding. In other places, however, the hardware, the place, and the design were not nearly as good as for this particular restaurant.

Sometimes the gorgeous hardware, or the ecosystem, works against you. Perhaps it’s too easy for complacency to set in when people would come anyway, thanks to the restaurant’s unique setup.

A few days later, during a holiday in Bali, my family went to dinner in the quiet Sanur area. The restaurant we picked looked gorgeous (now a negative word in my mind) from the outside. But this time around, I did not expect much after the previous experience described earlier. Maybe my defense mechanism kicked in, attempting to manage my expectations after a massive disappointment just days earlier.

To my pleasant surprise, the staff working there were adept, fully engaged, and movingly knowledgeable. No one was glued to their phone. Instead, they were super disciplined, yet very friendly. Their smiles were genuine, even when we did not attempt to make jokes.

The food was no disappointment either. The duck was juicy, and the sauce complemented it very well. It was not too fatty but it did not lack fat. The eggplants were also outstanding. It was soft, tender, and packed with amazing flavours. Even the dessert, cheesecake with mango toppings, did not fail to bring out joy to my table.

Later on, I learned that the restaurant was initially part of a big-name hotel. It is now completely separated and they needed to survive on their own with no more ecosystem support from the big-name hotel. The food was great and tasted even better with such a good service.

The name of this splendid place is Naga Eight. Considering that they just re-started, maybe it’s still too early to tell what will happen in the future. If they can maintain the “day-one” spirit, I think it could one day be a dining institution in Bali.

With the “day-one” mindset and full acceptance that one has no support from any big ecosystem, suddenly Team Naga Eight stops rehearsing their limitations: they have been granted the chance of a lifetime.

Companies’ value creation starts from the people

In Indonesia, many investors are eyeing technology companies as they started to populate the public equity market. We find it quite often that investors overweight their tech stocks investment consideration for the ecosystem and may slightly overlook other aspects of the business as a result.

While the tech ecosystem may provide a better chance of winning as it provides a captive market that may translate into faster and cheaper user acquisition, it is not a necessary nor a sufficient condition for success. As in the tale of the two restaurants, the ecosystem may provide a comfort zone that could be counterproductive for the company’s growth like a spoiled child knowing there will be a divine hand to lift them.

The only way to reduce such risk is by paying more attention to the management team’s execution capability and their attitude towards the game. Like a horse race, it takes both a good horse and jockey to win the race.

If we recall the blitzscaling stories of new-economy companies that are worth hundreds of billions or even trillions of dollars today, a major part of their success can be attributed to the management’s attitude and character instead of just where the company come from. After all, a company is run by the people.

In the industry where there are numerous cases of David and Goliath, the threat of the underdogs should not be taken lightly. Their hunger for victory is what we are looking for. Underdog companies are more likely to question the way they conduct business and more willing to reinvent themselves while ecosystem players tend to be more constrained by their patron.

In start-up companies whose profits are often still imaginary, management team spirit is indeed a reality.

Last words…

The story of Naga Eight reminds us of a scene from Dark Knight Rises (2012). The hero of the story Bruce Wayne (the Batman) successfully made an impossible jump to escape the Lazarus Pit Prison after numerous failed attempts only when he did it without the rope that keeps death away.

Only when he knows that failure is not an option, he can exceed his limitations and achieve the impossible.

Doctor                  : “You do not fear death. You think this makes you strong. It makes you weak.”
Bruce Wayne      : “Why?”
Doctor                  : “How can you move faster than possible, fight longer than possible,

                                without the most powerful impulse of the spirit? The fear of death.”

Bruce Wayne      :”I do fear death. I fear dying in here while my city burns.

                                And there’s no one there to save it.”

Doctor                  : “Then make the climb.”

Bruce Wayne      : “How?”

Doctor                  : “As the child did – without the rope. Then fear will find you again.”

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Resolutions are firm decisions to do or not to do something. While such determinations can be reached anytime, it is a common practice to say out loud in the beginning of each year what those things may be, followed by a reflection at the end of the year on how much have been accomplished during the year. Three topics we believe that may stimulate you to decide some resolutions for 2022 are about health, habit and mindset. More specifically:

Healthcare today is really sickcare, how can we change that? Tiny changes may have remarkable results, how do atomic habits work? Unlearning is a big part of learning itself, how a growth mindset can embrace the metaverse? We gather our thoughts and previous research on these subjects to remind ourselves as well as our readers the importance of staying healthy, nurturing good habits and having a growth mindset.

A siren call to the healthcare (or sickcare) system?

Starting an exercise routine, cutting back on alcohol, eating more nutritious food…

Which ones of these appear on your new year resolutions? As we kickstart another year with the pandemic around, staying healthy is one of our top priorities. The soaring covid cases in the Omicron wave got us to pay attention to the healthcare systems around the globe.

And we noticed a few issues with healthcare systems around the world:

1. Healthcare systems focus on treating illnesses than preventing disease and maintaining wellness.

2. Economic incentives for the industry participants have made treatment and medication extremely costly as well as discouraging better health education in communities.

3. Mental health has been one of the most neglected area of public health. According to the National Institute of Mental Health, nearly one in five U.S. adults had a mental illness in 2019 (51.5 million people).

The U.S. healthcare system over the past decades has been shaped to address the needs of patients instead of maintaining the wellness of the healthy population. Technology has been the greatest driver of improvement in many industries, but healthcare remains the exception. Dr Rafael Grossman, who is the first surgeon in the world to use Google Glass during an operation, believes that the advanced technology has become a tool to improve access to health. He thinks that the collection of data and analysis by AI have become more important in the field in healthcare. These tools enable better diagnosis and prediction of diseases, as well as the likely outcome of a specific intervention through treatment and medication.

However, for participants in the healthcare system, it is not lucrative to help healthcare consumers to prevent health problems. Economic incentives for patenting medical devices and drugs have remained strong barriers to effective disease prevention. More advanced technology may provide a cost-effective solution to correcting this systematic issue. This strategy is unfortunately undesirable to the system participants. The lack of potential for patenting advanced technology impedes one’s incentive to address the problem.

There is no simple solution in transforming the U.S. healthcare system. The best advice to each individual would be to take control and be in charge of maintaining his/her own health.

How do atomic habits work?

Often, we find it challenging to build a good habit or break a bad one. One week, two weeks, then we will likely revert to the old routine.

To be persistent is difficult. This time around, we have turned to the book “Atomic Habits” by James Clear for some guidance.

As stated in the book, atomic habits are defined as:

Atomic:
– An extremely small amount of a thing; the single irreducible unit of a larger system.
– The source of immense energy or power.

Habit:
– A routine or practice performed regularly; an automatic response to a specific situation

Clear introduces the importance of small changes. Little things add up to big things and time can create a multiplier effect. A small change may seem insignificant at first, but over time, the impact can be greater than you would have imagined. Sometimes we find it difficult to form good habits while bad habits linger. Clear explains that this is not uncommon. He elaborates using two reasons for why changing habits can be challenging, first is that we try to change the wrong thing, and second one being that we try to change our habits in the wrong way.

He further explains by using the three levels of change:

1. Outcome change
This level is concerned with changing your results.

2. Process change
This level is concerned with changing your habits and system.

3. Identity change
This level is concerned with changing your beliefs.

Most people managed to get to level 1 or 2 but failed to change their identity / beliefs. The true behavioural change is identity change, once a behaviour becomes part of your identity, you will become more motivated to maintain the habits associated with it.

“Progress requires unlearning. Becoming the best version of yourself requires you to continuously edit your beliefs, and to upgrade and expand your identity. ” – Atomic Habits by James Clear

The above is one of our favourite quotes from the book, it perfectly resonates with our strong belief of the importance of the ability to unlearn.

This also paths a great lead-in for us to introduce the next topic – a growth mindset to embrace the metaverse.

Entering the future with a growth mindset

Our readers would be familiar with the idea of the growth mindset that we introduced in one of our blog posts last year. For those who are new to our blog, you may read the post here.

As we all know, the future is uncertain. But one thing that we can be certain about is that technology will continue and play an even bigger role in driving our future. And metaverse will be one of the important representations of this technology driven future.

The word metaverse was the tech buzzword of 2021. With metaverse becoming a reality and hybrid culture are here to stay, how should individuals seek to familiarize themselves with it?

Having a growth mindset can create a significant impact. People with a fixed mindset may find it difficult to embrace the new concept of metaverse as it blurs the line between the physical world and virtual world. It is against the beliefs of “reality” fixated in our mind. Is the metaverse real? How do we define what is real? In the metaverse, we are represented by our avatars, we see and communicate with other avatars. Are they real? This all comes down to our beliefs. No difference to being in the physical world, we can experience feelings such as happiness, sadness and anger in the metaverse. Such sensations and emotions created by our brain influence how our brain construct reality.

A growth mindset encourages development. People with a growth mindset are not fixated on existing, stereotypical concepts, they are always seeking to find new ways to learn. In the era of digital disruption, this concept is more important than ever. Sometimes, people may struggle to make progress. The problem is that they have been focusing on the wrong thing. Learning is not the spigot to embrace new ideas, it is the unlearning. Unlearning is the ability to adapt and perceive differently. We cannot learn a new skill or concept without unlearning an older one.

Embracing the metaverse means unlearning what we understand today as the internet, what’s real and what’s virtual. Embracing the metaverse means embracing a future of unknown, unknowable and unique.

 

Reference:

Is Mental Illness on The Rise?, https://www.banyanmentalhealth.com/2021/07/01/rise-in-mental-illness/

Going from ‘Sickcare’ to ‘Healthcare’, https://healthmanagement.org/c/healthmanagement/issuearticle/going-from-sickcare-to-healthcare

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In our quarterly report of Q2 2020, we wrote about our thoughts on the inflation outlook. More than a year has gone by, with the global pandemic situation and subsequent responses from central banks, it seems that our thesis has become more mainstream.

In fact, a survey by the Fed suggests an increasing fear that inflation may not be transitionary. More respondents, who came from respective fields in the market such as broker-dealers, and investment funds, acknowledged the risk of persistent inflation as compared to 6 months ago.

Readers who have been following us are familiar with our discussions about MMT and the increasing prospect of high rates of broad money growth. Conventional economic theory would tell us that the resulting outcome of all the money printing and extreme reactions from central banks would most likely be inflation.

As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.”

When Milton Friedman meets Blockchain

An emerging new world that is unfolding is the Web 3.0, a decentralised internet based on blockchain technology – the same technology where cryptocurrencies are built upon.

In the past year…

1. Bitcoin grew by 240%, outpacing gold substantially.

2. The total value locked in DeFi platforms grew more than 19 times.

Source: defillama.com

3. And the overall cryptocurrency market was up by 5 times, from slightly over $0.5 trillion to $2.7 trillion.

Source: CoinGecko.com

With all these numbers above, the cryptocurrency’s rise seems to be a phenomenon that is too big to ignore. We may be one of the first few to question how these events may have changed the inflation outlook.

With the abundance of money supply, it is natural that risky assets (such as real estate, equities, and high yield bonds) attract speculations. This time around, virtual assets such as bitcoin, NFT’s and other cryptocurrencies are also highly sought after.

While fiat will be losing its purchasing power due to uncontrolled supply, arguably bitcoin’s is preserved as its supply is capped at 21 million coins with the additional annual supply automatically reduces by half roughly every four years until all coins are in circulation. Its scarcity has been the main driver of its value. Some may even consider bitcoin as the new gold. More investors have dipped their toes into the cryptocurrency space not only out of a vehicle for speculation, but also a necessity as a hedging tool. At the moment, cryptocurrencies are worth around $2.7 trillion, which may seem to only represent a small portion of the global financial system. However, whether its net impact will be inflationary or not is yet to be seen. One can argue that a wealth effect is being created, no smaller than the last tech boom more than 20 years ago. Therefore, its potential inflationary impact cannot be ignored.

Blockchain offers the “trustless” environment for peer-to-peer transactions, this functionality is central to the growth of the DeFi market. The distributed ledger technology eliminates the need for trusted third parties, or intermediaries such as banks. For instance, securities transaction settlement which currently takes “T+2” to complete can be shortened to split seconds once the intermediaries are replaced by a smart contract. Not only does this reduces the costs of transacting, but it also speeds up transactions, driving the velocity of money.

Photo Credit: Beeple
The most expensive NFT art – “Everydays: The First 5,000 Days” by Beeple was sold for $69.3 million in March 2021.

NFTs have become a hot space for speculators, unlocking the rarity value of some assets. In 2021, the sales volume of NFTs surged to $10.7 billion in the third quarter alone, up more than eightfold from the previous quarter. The NFT market gained traction quickly, while most of the NFT hype has been around art and music, physical assets such as wine and spirits have also entered the NFT marketplace.  For example, a 1991 The Macallan cask which was appraised by Bonhams between $1.1 and $1.2 million earlier this year, were sold together with a digital asset from artist Trevor Jones called “The Angel’s Share” for a record-breaking $2.3 million in October. The NFT marketplace is essentially creating a more accessible platform to inject liquidity into the perceived illiquid assets such as collectables, driving up their demand. Physical assets are stored away once they have been sold as NFTs, lowering their supply in circulation. The NFT market may potentially bring an upward pressure to the prices of physical assets.

Photo credit: Trevor Jones
“The Angel’s Share” by Trevor Jones

The emergence of cryptocurrencies, DeFi and NFTs undoubtedly raised the curtain on the world of Web 3.0. The Web 3.0 architecture, however, is still in construction before it can infiltrate the mainstream. Such building of infrastructure will require more resources and technological innovations.

In general, technology is seen as a key tool to boost productivity and reduce costs. Therefore, some may see it as deflationary. However, in the context of Web 3.0, technology plays a much bigger role. Rather than just being a tool in production, it is also the key enabler of such an evolution. IoT, cloud computing, AI, machine learning, these are just some examples of the value chains of technologies required for the Web 3.0 expansion.  Waves of capital may swarm into these investment opportunities to accompany the development of these exciting innovations. This would no doubt result in a rising unprecedented demand of energy and raw materials for the development of this infrastructure.

Of course, it is difficult to reach an unambiguous conclusion on how inflation will take shape. From an investor point of view, we are of the camp that 1) the accelerating supply of virtual assets, 2) growth of DeFi and 3) technological innovation may serve as a contributing factor to inflation. As such, we believe that real assets and commodities would remain as the top picks for inflation hedging, while Web 3.0 strategy may present profitable opportunities in times of uncertainty.

Reference:

Dapp Industry Report: Q3 2021 Overview, https://dappradar.com/blog/dapp-industry-report-q3-2021-overview

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In the 1Q21, we published a quarterly report titled “Into the Rabbit Hole”. We provided our view on the investment landscape in the next wave of technology revolution, Web 3.0. Many investors seek guidance as the next landscape will be unknown, unknowable, and unique. Due to these traits, investing in the Web 3.0 today possesses a high risk and a potentially life-changing return condition.  

In web 3.0, blockchain, peer-to-peer network, and the spatial web becomes the key characteristic with other technology revolving around the 3Ds (digitalisation, decentralisation, and democratisation) of the internet. This force of changes is reversing what the web 2.0 and the 3Cs (connectivity, content, and commerce) has brought, inequality and abusive monopolistic power. 

The rising blockchain adoption, NFTs valuation, and the attention from regulators on the previous two subjects might be a signal of how disruptive they could be.  

This time, we feature our team member’s blog, Simon Chan, who is not only an expert in tech but also very passionate about blockchain.  Here is his take on the Web 3.0 and the 3D Economy: 

Some people see that Web 3.0 is still far away and virtual. This is particularly the case in topics about blockchain and crypto. This impression comes from the fact that the focus has so far been more on the technology rather than its economic constructs.  

In other words, most people don’t care about which technology is being adopted as long as they are dealing with a counterparty or a middleman that they trust.  So, it is now time to redefine the counterparties that did not exist with new definitions.  

In this issue, I will discuss such possibility, knowing that there may be inconsistencies or conflicts with what we know and believe today.

Wallet to replace banks 

Under Web 3.0, the basic unit of all transactions will be a token. It is an indisputable record (or rather the state of a record) enabled by a distributed ledger technology (such as blockchain). Ultimately, the central place of all record keeping will be a personalised wallet. All really means ‘all’. For now, you can think about it as ID, Money, and Trust (Credentials).  

As transactions are made on a: (1) permissionless (to participate in a blockchain); (2) trusted (with all records showing consistent states such as ownership), and (3) peer-to-peer (including robots) basis; banking and finance will carry new meaning. 

Basically, what it means is that financial transactions can be carried out between two wallets. Financial needs remain as they are (i.e. borrow and lend money, borrow and lend time, borrow and lend trust, etc.) and may continue to exist in various disguised forms (e.g. saving plans, investment funds) currently offered by hundreds of thousands of financial institutions or intermediaries.  

Going forward, all such needs will be fulfilled by two smart wallets negotiating with each other and complete a transaction in no time. Wallets are smart because they can be instructed and trained but yet they shall verify automatically before asking you to proceed and such verification is genuine and indisputable.  

You can already see that such a possibility shall mean that the financial economy is powered by wallets rather than banks. In other words, what you need are wallets, not banks. And wallets are not owned by anyone, with no single point of failure.  

People may be confused by the digital wallets that many banks are offering as part of the digital banking business. They are still owned by the banks and are limited to their services. Those are NOT the universal wallet I am discussing here.  

Crypto likes to talk about DeFi, meaning finance being decentralised, and this has a similar meaning of wallets replacing banks as real economic constructs. Finance is just one of the applications of tokens in Web 3.0 and the 3D (digitalisation, decentralisation, and democratisation) economy. It may also be referred as the token economy.   

NFT to redefine MMO games 

MMO stands for massive multiplayer online. It is usually used to describe internet games such as MMORPG (RPG stands for role-playing game). They got so popular that professional teams are sponsored by nations and corporates to compete in international tournaments.  

NFT (non-fungible token) is a new breed in crypto that can be referred to as private tokens which can only be transacted through auctions. Internet games, be they RPG or Fantasy Sports (players play as a manager managing virtual sports team composed of real players such as EPL, NBA, etc.) which involves MMO are most suited to be redefined using NFT. 

To excel in any game, players have to either spend time, money, or cheat. There are professional gamers who earn their living by playing other players’ games (power level up and can be considered a form of cheating). Game companies are very good at selling to players gears, skins, or even landscapes so that they feel more powerful and satisfied within their gaming community (that also mingled with the real-life community sometimes).  

Stealing, cheating, and starting over are among some of the biggest pain points for gamers.  

NFT, which sits on a blockchain, has the same security as other tokens. And when applied to games, it brings with it portability (of accumulated property of time and money spent genuinely) even though a game company may no longer operate the game. It is a perfect solution to gamers’ pain points. 

3D perfectly applies to NFT games. The best way to answers gamers’ feedback is to democratise the application of rules setting without cheating. NFT gives players another layer of commitment and addition to the games. This should be big, really big. 

On-Chain infrastructure to redefine businesses 

Web 2.0 gave us on-line business as opposed to off-line business. E-commerce was born. The technology angle is electronic, and in order to be electronically (and electromagnetically) transmitted, things have to be digitised, securely stored, and seamlessly transmitted on the Internet (and many technologies and standards that enable it).  

Now that almost anything can have a digital twin on the Internet, it has created the problem of digital abundance that make the internet not trustworthy and the heavy reliance on trusted parties, regulators as well as brands (those which you feel comfortable to trust their single sign-on solutions to replace hundreds of login’s). Convenience still trumps security, a trade-off that most people make under digital abundance.  

Social media may make the situation even worse as it adds to the problem with an identity crisis. Web 3.0 may give us an alternative to live in digital abundance by introducing mathematical trust (for ID and Money) layered with human trust (provider of some Credentials) that will provide us with a business model that has a very high standard of security (no single point of failure), privacy (ID reveals no unnecessary information about the owner), as well as default opt-out ability (permissionless to join and leave the chain) and full transaction record in a personal smart wallet. 

All of these require a web of ‘chains’ that can ‘talk’ to each other. This is perhaps the biggest infrastructure to be built.  

Each token represents a real-life function and only those that are in demand will continue to exist. But the ledgers should always exist and the web of ledgers is the infrastructure that must be built to enable on-chain business. It requires further built out of the internet, massive digital twins adoption using IoT, globally acceptable governance protocols (chains) to reduce (legal) cross border fictions, and lots of education such as this series of Web 3.0 and 3D Economy. On-Chain business will be huge. 

I believe that smart wallet, NFT games, and On-Chain infrastructure will be the three key areas where investment opportunities are attractive, IMHO.  

Link to the original Simon Chan’s blog: https://www.cnomis.org/post/web-3-0-and-the-3d-economy-7

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On the previous blog (link), we mentioned that some discouraged investors from China tech stocks might shift their portfolio allocation into Southeast Asia tech names who have similar high-growth profile yet lesser regulatory risk.

Below is our reflection on the Southeast Asia tech investment opportunity:

The Southeast Asian market has been unloved due to post-commodity supercycle currency depreciation and low-tech exposure

Southeast Asian equities were the investor’s darling because of the region’s high economic growth and exposure to commodities during the 2000-2012s commodity supercycle. However, the last decade has been rough. The ASEAN market simply lost its charm as it has been underperforming relative to the S&P500 for almost a decade.

From our understanding, elevated currency risk and non-existent tech exposure are the major reasons for ASEAN’s relative underperformance to the U.S market.

Currency pressure – ASEAN currencies had suffered from three things between 2010 to 2020: (i) the Fed Taper Tantrum to prevent inflation post-GFC due to the massive quantitative easing, (ii) Donald Trump’s economic policies that caused capital flows to the U.S. denominated assets, and (iii) post-commodity-boom-triggered current account deficits in the commodity-exporting countries. As a result, the currency risk in the ASEAN rises, enter the super dollar era.

Furthermore, the ASEAN market also lacks the 2010-2020 bull’s DNA. The region has low-to-none tech exposure as suggested by the figure above. Hence, it missed the huge tech bull market between 2010 to 2020. This factor, however, is finally set to reverse as many South East Asian technology firms will be entering the stock market within the coming year.

The mounting interest in the Southeast Asian technology companies

Southeast Asia is an inherently lucrative playground for tech companies to grow. The region’s fast-growing economy could enhance the high-growth trait of tech companies. Furthermore, given that most Southeast Asian countries are in the emerging market category, it offers even more problems that could be addressed. It is all the right business at the right place. There you go, a triple leverage for a growth stock in Southeast Asia.

Investors’ interest in the region’s tech firms could be gauged well from Sea Limited’s (SE.US) stock price, which increased by 7.35 times since the COVID-19 low in March 2020 and shows no sign of slowing down. The company owns Garena gaming company and Shopee e-commerce. Each subsidiary is one of the biggest players in their respective fields in the Southeast Asian region. Sea Limited is now worth about US$ 168.8 Bn in enterprise value in August 2021, up from just US$ 15.9 Bn last year.

Moreover, some unicorns / decacorns in Southeast Asia are going to be listed in the stock market either through SPACs or direct listing. We are going to see a wave of structural changes in the Southeast Asian equity market. Technology companies will take over the region’s stock market for the next decade.

Indonesia has kickstarted its technology season

As the biggest and one of the highest growing economies in Southeast Asia, many venture capitalists have invested in Indonesia’s tech companies and eyed the debut of its first technology company on the stock market.

In early August 2021, Indonesia had its first unicorn tech listing, Bukalapak. This e-commerce company was valued at US$ 7.5 Bn and raised US$ 1.5 Bn, setting a new record as the biggest IPO on the Indonesian stock exchange. With that valuation, the company ranked among the top 25 biggest companies by market capitalisation. As a side note, the previous listing record was held by Adaro Energy, one of the world’s biggest coal companies who listed in 2008 with US$ 3.8 Bn valuation.

The listing of Bukalapak, however, had sparked some controversies between investors as they were divided into two camps: tech vs. value investors. The value investors argued that the company has not yet recorded any profits but already offered at an extremely high valuation and some see it as a way for VC’s to exit their investment by selling to public investors as the “greater fool”. On the contrary, those who belong in the tech camp welcomed this IPO as the first pureplay tech company listing. Nevertheless, the stock was oversubscribed by 4 times, reflecting investors’ enthusiasm in the company.

We estimated that the Indonesian stock market exposure to pureplay technology (excluding telco) is only 5.08% of the total market capitalisation in August 2021. Even more extreme, there is no tech stocks included in LQ45 index that represent the most liquid stocks in the country.

This is very low compared to the weightings of MSCI APAC and S&P 500 who had 38.4% and 26.8% contribution to the index, respectively.

Considering the high allocation of venture capital investments in Indonesia startups and the currently low weighting of tech stocks in the JCI Index, the arrival of an Indonesian technology stocks era is inevitable.

The nascent stage of Southeast Asia technology investment can provide numerous opportunities for investors

With many Southeast Asian technology companies planning to be listed soon and its underweighting of the sector in their regional stock markets, investors who understand how the game will be unfold can enjoy a significant advantage.

Those who are interested could learn from the development of the more mature technology companies that got listed in the USA, China, and India.

Could the shift of Chinese tech investors’ portfolios be a life-changing opportunity? Only time will tell.

“We can be knowledgeable with other men’s knowledge,

but we cannot be wise with other men’s wisdom.”- Michel de Montaigne

Reference:

https://www.cento.vc/wp-content/uploads/2021/04/Cento-Ventures-SE-Asia-tech-investment-FY2020.pdf

https://heyokha-brothers.com/web-3-0-investment-series-another-gale-of-creative-destruction/

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The Chinese word for Crisis (危机, read: Wéi Jī) is the combination of the words “Danger” (危险, read: Wéi Xiǎn) and “Opportunity” (机会,read: Jī Huì) philosophically suggesting that there is always opportunity in every crisis.

 

The clampdown by the Chinese government and stricter compliance requirements by the US SEC has created a perfect storm for Chinese tech companies.

Hundreds of billions in market value vanished within months as a result. Kraneshares China CSI Internet ETF (KWEB.US) has fallen by 56% from its peak in February to 19 August 2021. Stock prices of big names like Alibaba (BABA.US), Tencent (700.HK), JD (JD.US), Pinduoduo (PDD.US), and the recently publicly listed Didi Chuxing (DIDI.US) have fallen by 40% to 50%. Even more extreme, names like Joyy Inc. (YY.US) and New Oriental Education (9901.HK) saw their stock prices fall by more than 70% from their highs.

Is this big sale justified or does it represent a bargain-hunting opportunity instead?

The Chinese government is exerting its role as a great equalizer

It is clear that the Chinese government possesses the ability to put their local tech companies on their knees. Their clampdown targeted companies in various tech-sectors, such as e-commerce, fintech, gaming, delivery platforms, and edutech. Given the massive consequences, we asked ourselves why this action is necessary in the first place.

The rise of today’s tech titans begun in the US in the 1980s. It was kickstarted by the development of personal computers and the internet. At first, the vision of tech companies was simple. They were addressing the pain points of society. Fast forward several decades later, digital businesses such as e-commerce, social media, digital media, ride-hailing, and XaaS businesses have reduced many frictions in our daily life.

Despite the benefits, tech entrepreneurship has reduced equality. As more capital became available to finance innovative ideas, competition got fiercer. Most tech entrepreneurs must play in a winner-takes-it-all game. The winner will obtain most of the market share with competitors lagging far behind. Winning in the game also means better access to resources like user data and capital that arrives in form of exceptional free cash flows or a generous valuation. Data and capital become the seeds and fruits for venturing into tech businesses.

It is important to note, these tech titans remained agile despite their size. Small businesses only have a slim chance to compete with them.

Considering the improvements that technology companies have brought to the economy, we think it is unlikely that the Chinese government aims to shut down its internet sector. Reflecting on the worsening inequality in the US that is partly driven by tech companies, it is sound for any government try to avoid that trajectory. History has shown that extreme inequality will hinder economic growth and develop social unrest.

From the perspective of building an ideal nation, these clampdowns actually serve a greater good by promoting equitable economic growth, preventing abusive monopolistic power, protecting consumers rights, providing data protection, and enhancing national security. We see these objectives to be similar with what the United States and European Union trying to achieve. However, the Chinese government acted faster because of their single-party system while other legislative institutions in the West were still debating on how they could regulate the tech sector for the last decade.

We should note that the lack of regulation had been facilitating the extraordinary growth of most tech companies. Exploiting user data, avoiding taxation (to some extent), and leveraging ecosystem exclusivity are some of the examples. These advantages will be taken away for Chinese tech stocks and their valuation has adjusted accordingly.

The new regulations on user data security and enforcement of fair trade (i.e- the crackdown) eliminates some of China tech companies’ growth hack tricks. As such, investor’s may justifiably reduce their expectations on the China technology companies’ growth prospects because of the new rule of the game. However, we are of the view that this crackdown is not the end of China tech stocks.

The new regulation could translate into a lower top-line growth rate but a healthier bottom-line and more productive economy. Case in point, imagine if the culture of attracting customers by ‘burning money’ ends. Without excessive marketing and subsidy, China tech companies will have to rely heavily on their product quality and efficiency as the source of customer acquisition. Should this circumstance occur, the incumbent players will now have a better chance to compete as they face the tech companies’ true pricing instead of a subsidised one. Thus, tech companies’ profit margin could be healthier and national productivity also could benefit from efficiency-and-innovation-driven competition.

Furthermore, completely shutting down technology companies is inherently counter-productive to what the Chinese government has tried to build. After achieving monumental poverty eradication and industrial revolution since the 1960s, this might be just the right time for the Chinese government to start closing the wealth gap. The Covid-19 pandemic recovery has been K-shaped. A huge chunk of brick-and-mortar and mom-and-pop businesses have been absorbed by e-commerce firms.

On the other hand, the government is promoting ‘new infrastructure’ sectors including semiconductors, renewable energy, and AI as indicated in the 100th anniversary of the Chinese Communist Party. It also has promoted health-tech companies in one of the government policies to improve healthcare quality in the country. This fact shows that the government is not anti-tech but intends to curb the side effects of the inequality it produces.

Investors can benefit from the repositioning of China tech investors’ portfolio instead of a mean reversion

We do not see the current big sale will turn into a classic mean reversion play because the rule of the game for China tech companies has changed. Instead, the Chinese crackdown has caused investors to reconsider their portfolio allocation. Some will remain invested, and some will leave the market entirely.

We believe that those who remain invested might shift their capital into technology names that truly improve the nation’s productivity such as technological infrastructure and deep technology names or the ones with regulatory-compliant business model. Through this rebalancing, they can reduce the regulatory risk in the future while leveraging the growth of China’s economy in the tech space.

Meanwhile, discouraged China tech investors might shift their portfolio allocation towards US tech companies or Southeast Asia tech companies that have a similar high-growth profile and less regulatory risk as they are still in the early days.

 

How lucrative Southeast Asian tech companies could be?

That will be our discussion for next week. Stay tuned!

 

“There is a bit of conspiracy, and of authoritarianism, in every democracy; and a bit of democracy in every dictatorship.” – George F. Kennan

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Web3 economy replaces the old and the new

Creative destruction is an inevitable process. Web1 made browsing data available to the average person. Web2 turned interaction of people, transactions, and contents into businesses (social media, e-commerce, video streaming). Web3 adds the internet of money and the internet of identity.

The economy, old and new today, will see unprecedented disruptions, and morph into an open and token economy under Web3. Blockchain revolutionalises the backend of the internet in the most important aspect – from centralisation to de-centralisation of data storage.

Organisations that stand in the middle of the peer to peer sharing of data can be removed. This goes all the way to trusted agents, platform service providers, security and governance providers, and even governments. The economy can be truly open.

How do we get here?

The second industrial revolution in the 19^th century brought us electricity and mass production through assembly lines. It gave birth to well-established companies like Coca-Cola, Du Pont, and General Motors. Some investors call them old economy companies.

The distinction between the old and new economy firms primarily lies in their business model and mindset of operation.

Old economy firms are usually asset-heavy because their activities typically revolve around producing goods. By design, production capacity becomes the bottleneck to the company’s growth and utilisation becomes a priority. With high upfront capex established in the high-interest rate era (compared to today), their investors put cash flow generation as a top priority since day one.

On the contrary, the new economy firms are usually asset-light because of their open business model. New economy firms collaborate to create an ecosystem as the central source of value creation. As such, they do not invest heavily intangible assets like property, plants, and equipment. They share it with their partners through sharing arrangements or an as-a-service model.

The business model of new economy firms also operates on a per unit basis instead of capacity utilisation. This design enables them to scale up exponentially by developing higher adoption and stickiness of their ecosystem.

In terms of mindset, new economy firms are usually backed by investors who are capable to endure years of losses to catch a huge prize down the road. Instead of focusing on profitability since day one, cornering their market is their number one priority. Positive cash flows are expected to come after obtaining market dominance.

New economy firms are a combo of novel technologies that meet venture capital financing

New economy firms harness novel technologies from the 3^rd industrial revolution, i.e- personal computing and the internet, and apply them to an ecosystem-based business model.

Such novelty would not receive substantial financing from a traditional financial institution because of the high risk. This is when venture capital firms, high-risk appetite financiers specialised in funding early-stage companies, step in to support the innovation. There would be no new economy firms without these kinds of investors.

The development of the web and new economy firms

The development of the PC and the internet enables people to connect regardless of time and space. In the first generation of the web (Web 1.0) between 1983 to 1990, computers in the world were able to connect. The main purpose of the internet in Web 1.0 was to solely exchange information, scaling up the initial design of its founder Tim Berners-Lee.

Then, in the 1990s, some young entrepreneurs figured out that the internet could be used for more than just sharing information. Enter Web 2.0 era, the social web. These entrepreneurs created websites that became platforms for participants to share content and do commerce on the internet. The 3Cs namely: connectivity, content, and commerce would be the best way to describe it.

In the 1990s, Larry Page & Sergey Brin (Google), Jeff Bezos (Amazon), and Jack Ma (Alibaba) were all just young people with a vision back then. Due to their dedication and financial support from venture capitalists, we now have tech titans that shape our daily lives.

Digitalisation, decentralisation, and democratisation to be the next tech forefront

During the current web 2.0 era, we see that business competition has developed into a winner-takes-it-all game. In our 3Q19 report, we described how these business dynamics have increased inequality.

Wealth and power have never been this centralised. Tech companies to some extent could be more powerful than a government because of their extensive data ownership and strong access to capital, thanks to the generous market valuation and exceptional free cash flows. It leaves no room for the small guys.

Facing such issues, attempts to revert the centralisation of wealth and power have started both from regulators and the tech scene. We have seen numerous attempts by several governments from developed countries to curbs tech power through legislation. Closing taxation loopholes, data governance, and anti-trust regulation are some of the addressed issues.

In the tech space, we see the advent of decentralised network technology as an attempt to reverse the centralised structure. Peer-to-peer connections, distributed ledger technology (i.e- blockchain) and edge computing are examples of decentralised network technology.

We are of the view that digitalisation, decentralisation, and democratisation are the next tech trends driven by decentralised technologies. Below is our short introduction to the theme:

Digitalisation of contracts and transactions

Digital refers to the electronic storage and transmission of data. In the field of finance, data often means value. Digitisation (i.e. transforming non-digital data and records into digital format) has been going on for years and is still happening.

Digitalisation is not a product. It is a network of processes in which only digital data is created, processed, and stored. In theory, there is no need to regularly keep records and take snapshots (accounting) as unique full history can either be reproduced easily or in the case of blockchain, a full chain of historic records is a default output. When the digital data created represents a contractual relationship between two parties, it represents a value transfer.

Digitalisation suggests that contractual relationships can be created digitally. And if blockchain is used, it will also be secured and trusted, without the need of third parties to verify, approve and register them. The execution of digital contracts will be enforced by the whole network (checking and verifying) and not subject to manipulations. Therefore, it is trustworthy and secured. With such value proposition, on-chain contracts could be a norm in the future.

Decentralisation of network and governance

In the field of finance, centralisation is the norm rather than the exception. Cases in point: central bank, central registry, central depository, central clearing bank, central regulators, etc

During the Financial Crisis of 2008, insane risks taken by big financial institutions were blowing up in their faces and the US government came to their rescue to the order of many billions of US dollars. At the same time, average US citizens were losing their jobs and being evicted from their homes, while the large institutions that created this crisis were being backstopped by government money.

The initial creators of Bitcoin did so explicitly with the intention to offer an alternative financial system that would be more democratic and governed by the truly immutable laws of cryptography and computing power, rather than the oft-bending laws of man.

The need for a fairer and more trusted system has never been clearer. Fast forward 10 years, in 2020, when the pandemic hit the globe, causing the loss of millions of jobs once again, the risks of the existing financial systems were exposed to every corner of the world and every walk of life. Bitcoin has entered the main street as an alternative financial system that cannot be manipulated by central agents. This is a strong anchor of decentralisation, a process that can only be delayed but not reversed.

Democratisation in finance

Democratisation is the process of introducing the democratic system and principles to the financial infrastructure. This is in stark contrast to a centralized financial infrastructure. The creation of blockchain has not only made decentralised finance possible, but also has a wider implication of making decentralized property, arts, music, and lots of tangibles and intangibles possible.

Under this system, there is no dispute over fractional ownership, property rights, and legitimacy of creations and transactions. This is significant, as it greatly levels the playing field with extremely trustworthy and transparent value and allows peer-to-peer to directly engage in such transactions without huge costs of discovery, verification, and transactions.

The ability to own a fraction of something that is not represented by securities but the asset itself is something that will change the world under this democratisation process. When governance is truly decentralised and cannot be manipulated or faked, it represents the real value of trust.

Today’s Google and Facebook who monetise user data will also be challenged. Decentralised systems will not provide any data of great value to you unless with self-consent, on an active basis. Without the ability to unknowingly collect your metadata, Big Data will not be as valuable as claimed, and accordingly, AI will have much less applicable value. Limited data feed handicaps the machine’s learning ability.

Democratisation is in a sense returning financial power to the commons but not needing to use the centralised financial systems.

After all, another gale of creative destruction has arrived

With innovation continuing to spur, no one is safe from disruption. We are of the view that the next gale of creative destruction would come from decentralised technologies that would disrupt today’s new economy firms and enable Web 3.0. As such, the 3Ds will replace the 3Cs in the upcoming future.

Curious about what to expect in web 3.0? Stay tuned to our web 3.0 blog series.

“Every act of creation is first an act of destruction” – Pablo Picasso

Admin heyokha

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