Council Post: Fintech Views: Bubbles Are Not The Problem—It’s What Side You’re On That Matters

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Karim Nurani is an entrepreneur, investor, CSO of Linqtoco-founder of the Global Investor Conference & host of the Global Investor Podcast

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The early-stage investing world loves buzzwords. One of the most popular today—perhaps the most popular—is fintech. The fact that fintech has grown in popularity while taking on behemoth institutions with deep pockets—many actually influence the money supply—has some wondering whether it’s in a bubble. There’s little evidence to justify the proposition, and it’s not the question you should be asking anyway. What matters is which side of the bubble you’re on.

Across the world, fintech firms are blooming. Based on a 2021 report out of Capgemini Financial Services, there are 12 high-yield companies worth $154 billion, a beautiful sum for a sector that is taking on companies with lots of their own money—traditional banks and financial institutions. These include companies like WeBank out of China, KakaoBank out of Japan, Revolut out of the UK and more.

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Justification for the bubble proposition hinges on current and future profitability, And on this point, the picture is quite bright. Of these 12, how many are profitable? Fascinatingly, half—of the other six, five are unprofitable and one is close to profitable. The profitable companies (with the year they reached profitability in parentheses) include WeBank (2016), KakaoBank (2019), Judo Bank (2020), Tinkoff (2008), Starling Bank (2020) and Chime (2020).

Given that most early-stage—and established businesses—struggle to be profitable, a 50% profitability rate is quite good. But profitability really shouldn’t be the measuring stick on bubble status.

Some Bubble Thinking

In the economic world, bubbles are like the sugar on top. They rouse up the crowd more than the actual meal. It’s important to note that what actually causes bubbles has no clear consensus nor do people ever know in real time whether they are in a bubble. For some observers, it’s the Federal Reserve and their friend central bankers who keep interest rates too low for too long, print way too much money and whose manipulations create winners and losers in a financialized world. Cases in point—at least to adherents—are the current stock, bond and housing bubbles. These standing bubbles are about to pop because too much money has been chasing too little supply over the past 14 years—with central banks as the chief instigators. To others, confident men are responsible for the swings in momentum. Others blame government policy, business managers or simply human nature.

The popping of bubbles has been historically expensive. The bursting of the savings and loan bubble in the 1980s cost the American public $124 billion (4% of GDP), while the Asian financial crisis of 1994 to 1996 caused international banks to pour $264 billion into 25 emerging market economies, The bursting of the American housing market in 2008 cost the US economy approximately $22 trillionand trillions more around the world, while the coronavirus pandemic has cost governments and central banks (so far) more than $60 trillion. Bubbles can be expensive, especially for those that are on the wrong side.

But with all the demonizing of bubbles, you forget one thing: They’re essential. Just close your eyes and think for a moment about what the world would be like if there were no exhilarating bursts of speed brought on by bubbles. The world would be a dimmer place. Innovation would slow. The human condition would be set back years from where it could be.

Being On The Right Side Of Bubble History

Think for a moment about Sir Isaac Newton, the father of classical mechanics. As an investor, Newton was an early participant in the South Sea Bubble, Initially, he made a healthy profit—but had only invested a bit and sold shortly after his initial investment. Then he saw his friends get rich. So, Newton reentered at close to the peak. Around a year and a half later, Newton exited the South Sea Company broke. He had succumbed to the wrong side of the bubble.

On his experience, Newton is often credited as remarking: “I can calculate the movement of the stars, but not the madness of men.” Newton wasn’t the only one to lose large sums of money. High-ranking government officials, everyday craftsmen and other scientists lost enormous wealth. But the story shouldn’t end there. Some investors made handsome sums, such as Hoare, who came out of the ordeal with a profit of around 26,000 pounds—about $14 million today. And think for a moment about what the world learned from the South Sea Bubble.

At Linqto, the team and I are well aware that bubbles burst. But we don’t view that as a dreadful thing as death is where much opportunity lies. According to Barron, private markets over the past two years have produced 83 cents more in return for every dollar of investment compared to public markets. Investment firm Hamilton Lane predicts that private markets will best public markets by 300 to 500 basis points every year for the next five years. Linqto and other companies have the potential to grow and learn with each burst.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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