You’re hearing more and more news about bitcoin, the blockchain and cyrptocurrencies, but the big question floating around is whether bitcoin is the new gold, or just a fad. Richard Tall, Partner and Head of Financial Services at DWF, here provides Finance Monthly with an insight into the answers.

Economic history has delivered many assets, which, for seemingly little reason, deliver huge surges in value. Dutch tulips, the South Sea bubble, railway shares and the dot com boom are all examples of these surges, most of them driven by what the objective observer operating with 20/20 vision would categorise, using modern parlance, as "FOMO".

And with the advent of Bitcoin and other cryptocurrencies, many have claimed that the next "FOMO" driven asset surge is already taking place.

Cryptocurrencies arise from the solving of a complex series of arithmetical equations. Mankind has been solving arithmetical equations from the dawn of time, but with the exception of the development of an industrial or commercial purpose, has any intrinsic value been attributed to the simple solution of arithmetical problems? The value of any asset is a matter of perception of a variety of factors; why is gold any more valuable than iron, other than it looks nicer and there is less of it? While gold has been around longer, is it inherently more valuable than bitcoin simply on the basis that it has been around for longer and mined from the ground rather than a machine?

Had one been around for the first gold market, would market conditions have fluctuated more or less than the bitcoin market? In 2017 alone, Bitcoin has seen a rise in value of 700%. Its banning, along with other cryptocurrencies, by one of the world's most significant financial regulators, and a slamming by the CEO of one of the world's largest investment banks, have caused its price to swing significantly too, having touched both $5,000 and $3,000 in the three weeks prior to this article being written. Did gold do that?

Much news was generated by the entrepreneur and Baroness Michelle Mone being linked to a disposal of units in a residential development, where payment would be accepted in bitcoin. Cutting-edge, but had Mone accepted bitcoin at $5,000 per bitcoin two weeks ago, she would be sitting on a loss. As with all of these things, it is possible for parties to agree to trade any asset for any other asset, in ancient times this was simply a barter system, but it still exists in many forms today. The first gold market would have been a barter market, the premise being that gold looks nicer than a sheep, albeit you cannot eat gold. The market would have arisen because a hungry person met a person who fancied a nice necklace. By definition, a number of factors, such as the supply of sheep and the acceptability of bling in the ancient world would have affected the barter price. Gold too (and no doubt sheep) would have had its naysayers.

So what is the future for cryptocurrencies? Or, should the real question be, what is the future for distributable ledger technology? The latter has implications for trade and payment systems which humankind is only beginning to fathom. What we have to come to terms with, is whether the value lies in the instrument which is created when a cryptocurrency is born, or if it lies in the service which it facilitates or delivers. By definition, the value has to be in the service facilitated or delivered, as without those, as has been pointed out by Jamie Dimon, all there is is a currency invented "out of thin air."

So where now for cryptocurrencies? This depends on whether they remain as tools of speculation or the means of delivery for a service. The latter will flatten values, with the value being inherent in the service or the entity controlling the service. The former will maintain the status quo, but with huge volatility being driven by the most unpredictable variable of all; sentiment.

Immediate market reaction to the illegal separatist referendum in Catalonia is likely to be muted – but what happens on the aftermath will be crucial, affirms the boss of one of the world’s largest independent financial services organisations.

Nigel Green, the founder and CEO of deVere Group, comments as Spanish police in riot gear moved in to prevent the ballot called by Catalonia’s regional government, but which Spain’s Constitutional Court banned from taking place.

Mr Green observes: “What is striking is how this chaos in Catalonia has been largely ignored to date by global investors, who last week appeared more preoccupied with Trump's proposed tax cuts and Angela Merkel's reduced political strength in the Reichstag.

“When global markets open Monday immediate reaction is likely to be muted too.   The Spanish stock market is relatively small. The country represents just 5 per cent of the MSCI Europe index, compared to 28 per cent for the UK, 15 per cent for France and 14 per cent for Germany.

“Whilst it is a huge existential crisis for Spain and is a big geopolitical event, regional tensions such as these, rarely have the necessary might to considerably affect global trading.  International commerce is stronger than all the sabre-rattling.

“It is unlikely that there will be immediate major portfolio rebalancing as a direct response to the events in Catalonia.”

He continues: “However, what happens next will be crucial for global investors.  Neither Barcelona nor Madrid will back down on this issue.  And now the genie of illegality is out of the bottle, there is little incentive for those supporting independence to put it back. Particularly if they can claim a majority of voters back their cause.

“Should the Catalans take further illegal action after the vote, and perhaps encourage civil disobedience, the uncertainty would create significant volatility and the outlook for the EU region's economy would darken and for Spain also.  “The Catalan separatists’ ongoing campaign would also likely trigger a major destabilising effect as it would encourage other areas to vote for independence from the EU.  Of course, against this backdrop, we could then expect the Euro would come under considerable pressure.”

Mr Green concludes: “Despite global financial markets largely shrugging off the events in Catalonia so far, it is important that investors keep their eyes on all major political events, including this one as how it plays out in the aftermath will be what matters.

“Investors must remain fully diversified across asset classes, sectors and regions, in order to safeguard and maximise their portfolios and to ensure they remain on track to achieve their long-term financial objectives.”

(Source: deVere Group)

Bitcoin just hit the $5,000 mark, and the growth of blockchain is taking various sectors by storm, in particular that of currencies. In this article, Fraedom CIO Simon Raymer identifies five important points to consider when discussing the use of cryptocurrencies.

1 - Gaining a greater understanding

There remain many challenges ahead for the established financial services businesses before they can start to successfully embrace these new technologies, in general there remains today a low level of understanding of the impact, both perceived and real, of new cryptocurrencies.

Most discussions around cryptocurrencies are directed or based on the perception of bitcoin. There is generally a great deal of misunderstanding about bitcoin and blockchain, especially in the media where they are both hot topics.

However, many established financial services organisations have a mixed understanding of the impact both blockchain and cryptocurrencies can and will have on their businesses. The way decentralised transaction mediums and P2P are likely to reshape the way businesses interact with financial services (such as loans, or cross-border financial exchanges) is something of a grey area, as is how it will affect the way businesses pay or receive payment for their goods or services.

Other challenges businesses face in embracing cryptocurrencies include creating expensive innovation centres within existing teams. Moreover, gaining senior support to provide budgetary allowances to obtain subject experts who understand these technologies to educate and champion them within the organisation is a difficult task, as is supporting the technical entrepreneurs to use these technologies to find the right business opportunities to challenge the market with.

2 - The blockchain infrastructure

A Direct transactional P2P model does not typically use blockchain today, but with faster and more cost-effective processing as a by-product, it’s only a matter of time before its use becomes widespread.

That, in turn, will help drive further growth in already burgeoning cryptocurrencies, like bitcoin, ethereum and ripple. Almost every one of these new secure payment mechanisms uses blockchain as its underlying infrastructure, with its success in doing so raising prospects for the cryptocurrencies also.

3 - The chance to innovate

Established businesses who embrace blockchain and/or cryptocurrencies have great opportunities to drive innovation themselves in these areas. They have the chance not only to deliver both existing and new services to the market using new technology but also to bring their own established trusted brands to the table.

While a lot of consumers and businesses are willing to take a risk with a small start-up, many are hesitant to either try or commit at a large scale without the backing of a trusted established brand, and the sense of control, security and maturity that comes with that. This encapsulates the opportunity that established financial services businesses are likely to have by embracing these new technologies – but they must not delay too long. The success achieved already by P2P and cryptocurrencies, together with the growing number of start-ups using traditional financial services, acts as a warning shot to any established financial services business that they cannot ignore these new technologies and start-ups.

4 - The peer-to-peer boom

The use of peer-to-peer (P2P) transactions that bypass the banking channel is gathering pace. We see this especially in developing nations like India, where traditional banking and financial services are not as well established, and consumers and businesses are jumping directly to P2P transactions providers.

The saturation of smartphone devices has also driven growth and this usage is likely to grow further as apps become more widely accepted across the P2P delivery platform. Currently, the strongest growth of P2P is taking place in the B2C space but many new start-ups are embracing the P2P concept and trials are taking place using blockchain and P2P-based approaches

It’s true that the direct transactional P2P model does not typically use blockchain today, but with faster and more cost-effective processing as a by-product, it’s a matter of time before its use becomes widespread.

5 - Welcoming third party expertise

Third party technology providers with knowledge and understanding of how new technologies, not just limited to blockchain and cryptocurrencies, can best be taken advantage of to challenge and disrupt the market in the right way.

Traditional financial services providers need to tap into the experience and expertise of their peer group, the key providers in the marketplace. In addition, they need to tap into those in the industry who can help them to navigate these new technologies successfully, quickly and with less cost, than if they try to do it alone.

As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on UK and global markets touching on the Bank of England, Brexit and currencies.

The pound fell to an eight-year low against the euro over the past week, pushed by ongoing signs of momentum in the Eurozone and concerns over the outlook for the UK economy.

Sluggish wage growth has also fuelled concerns about the strength of the economy as a whole.

The Office for National Statistics reported that average weekly earnings grew by 2.1% year-on-year in the three months to June - equating to a 0.5% fall in real wages.

While there can be little doubt that the fortunes of the Eurozone have improved, despite Brexit uncertainty, the fall in the pound looks overdone and the UK’s position could now be shifting.

Signs of improvement

The jury remains out on the extent to which Brexit uncertainty is weighing on sentiment, but earlier indications of a sharp slowdown in economic growth have given way to signs of stability.

Undeniably, the economy slowed sharply in the first half of this year. Quarterly GDP growth averaged a below-trend 0.3% across the first six months of 2017, compared with 0.6% in the second half of 2016.

As the third round of Brexit discussions gets underway however, reports including CBI industrial trends, purchasing managers index (PMI), labour market and even retail sales are all showing signs of improvement.

While plenty of downside risks remain, for now, households and businesses are in the main managing to cope with the challenges.

Employment and exports climb

Take the latest employment report, for example.

According to the ONS, total employment rose by a further 125,000 in the three months to June, pulling the unemployment rate down to 4.3% - the joint lowest rate since 1975.

Separately, the CBI reported last week that industrial orders rose this month, approaching the 29-year high seen in June. The trade body stated that a rise in both domestic and export orders was behind this rise, with the latter fuelled by the drop in the pound and the turnaround in the Eurozone’s fortunes.

Improvements didn’t stop there. The latest UK public finances data were also better than expected. July’s public finances were back in the black for the first time since 2002, thanks to surging tax revenues.

The beleaguered retail industry also saw a return to stability. Sales rose by 0.3% in both June and July, though this could prove temporary, as the latest CBI retail trades survey suggests renewed weakness in August.

Brexit and the Bank of England

Despite these signs, Brexit uncertainty still looms large.

At its policy meeting earlier this month, the Bank of England remained studiously agnostic on the implications of Brexit. For forecasting purposes, it assumes a “smooth transition” post March 2019, but makes no judgement about what form the UK’s eventual relationship with the EU may take.

It’s clear, however, that uncertainty continued to weigh heavily on the minds of UK rate-setters when they left the bank base rate unchanged again this month by a margin of 6-2.

Alongside this decision, the bank published its inflation report, containing modest downward revisions to GDP predictions for this year and 2018. Inflation is expected to remain above its target of 2% over the next three years.

Judging by the reaction, these latest communications have been taken as evidence that UK interest rates will remain on hold for a long time.

The markets are not priced for a first quarter-point rise until mid-late 2019, and the rate is expected to be below 1.0% in five years’ time.

Potential rate rise earlier than expected

But this looks overdone.

Market participants seem to have focused on the most dovish aspects of the Inflation Report, ignoring the explicit warning the rate may rise more sharply than the market yield curve expects and forgetting the implications of the ending of the Term Funding Scheme (TFS).

The programme has been in place since last August to help provide cheap finance to the banking system.

It would be odd to increase rates while at the same time mitigating the impact through TFS, so when it ends next February an obstacle to an early rate rise will have been removed.

On balance, the recent scaling back in UK interest rate expectations, and the corresponding impact on the pound, may have gone too far. There remains a significant risk that the first rise comes earlier than the market expects – possibly by early next year.

Much will depend on how Brexit negotiations develop. One thing is certain, the markets will be watching closely for any signs of progress.

With the ups and downs of global uncertainty in today’s markets finding a buyer can prove difficult. Here Finance Monthly hears from Lord Leigh of Hurley of Cavendish Corporate Finance LLP on his five key tips to ensuring a business gives itself the best chance of attracting an overseas buyer.

The UK continues to be one of the most attractive markets for foreign direct investment (FDI) and inbound M&A activity. According to Ernst & Young’s 2017 ‘European Attractiveness Survey’, the UK was named the second most attractive market for FDI while Lloyds Banking Group’s June Investor Sentiment Index revealed that UK investor sentiment remains at near record levels, with overall sentiment up 3.87% compared to the same period last year.

Both these indicators are positive signals for potential overseas buyers of British companies and a fall in Sterling has also helped to make UK businesses more attractive, though the continued robustness of the UK economy and the performance of the corporate sector also underpin healthy M&A activity. Mergermarket reports that in H1 2017, the UK was responsible for 22% of all European M&A inbound activity, with UK activity totalling £46.6bn and Europe totalling $211.1bn.

Despite this encouraging backdrop, uncertainty, largely surrounding the outcome of Brexit, still persists, so it’s important for British businesses to take all the steps they can to ensure they are as attractive as possible to foreign buyers, who typically pay a premium compared to domestic buyers when acquiring a UK company.

1. Understand your buyer

The more aware you are of the foreign buyers’ motive for purchasing your business, the more value you will able to demonstrate to the prospect. There are typically four reasons an overseas buyer would be interested in a UK business: it provides access to the British market, or an entryway into European and international markets, it has attractive tech and intellectual property potential, or the business is able to merge with one of the foreign buyers’ existing businesses to generate cost savings and efficiencies. Identifying a buyers’ intention before engaging in the deal process will significantly increase your chances of selling and achieving maximum value for your company.

2. Develop a post-Brexit strategy

Although the UK is currently well positioned for FDI, the EY 2017 Attractiveness Survey reveals that a number of respondents think that, in the medium-term, the UK’s attractiveness as an FDI location will deteriorate, with 31% of respondent investor’s worldwide saying they expect this to be the case in the coming three years, although 32% say they expect it to improve. One can assume that this is potentially due to the uncertainty around Brexit and the UK’s access to the European single market.

To counter this scepticism, it is important for businesses to develop a post-Brexit strategy. For companies who do not export outside Britain, they will need to demonstrate that they have the capabilities to survive and grow solely in the UK market. Companies that do export outside of the UK will need to show that they can continue to easily sell their goods in the EU and have potential international markets they can access if selling in the EU becomes more problematic.  A good example is the recent sale of smoked salmon producer John Ross Junior, a company with a Royal Warrant, which we advised. The company proved its international capabilities by highlighting the 30 countries they supply and the opportunity for future growth in other regions, which were key factors in the decision of publicly listed Estonian company, PR Foods, to buy the business.

3. Foster key relationships

Foreign buyers want to see a highly connected UK business, and having strong networks is key for sealing contracts and fostering growth. Prospective buyers want to be reassured that the company does not have particular reliance on any one customer and should they purchase the business, there will be high retention rate among customers, employees and suppliers.

4. Update your books

The extent of the due diligence that the buyer will undertake depends on the sector, the buyer’s existing knowledge of the target company and the laws of that country. English law states ‘caveat emptor’ or ‘buyer beware’, meaning that the buyer alone is responsible for checking the quality and suitability of the company before a final sale is made. Having updated financial statements and a strong finance team to help respond to the likely multiple queries a potential buyer will have, should ensure a smooth and speedy process when engaging with a prospective buyer.

5. Appoint an advisor with specialist expertise

Selecting the right advisor for a sales process is key, especially when an overseas buyer is involved. Compared to domestic M&A, foreign deals demand an understanding of cultural differences, state versus domestic laws, and regulatory approval processes. Engaging an advisor with specialist expertise in your sector, the mid-size market and that has a global reach to find potential acquirers will optimise the sales process and ensure that the deal executed will be the best outcome for your business.

After Bitcoin fork, and a huge tech sell-off in July, Snap – the company behind Snapchat - has now joined the circus that is tech giant share prices. In one day in August, Snap Inc. dropped 4%, before bouncing back 6% 24 hours later. What is it about tech shares? Andrew Amy is Investment Manager at Cardiff-based digital wealth management service, Wealthify. Here he talks to Finance Monthly about this modern phenomenon.

One of the initial issues with Snap was, like many other tech companies, it was given a whopping price tag on the stock which, unluckily, was swiftly followed by two bad quarters of results. Despite currently sitting some 46% lower than at its peak in March, the company is still worth approximately $17 billion. That is a hefty price tag for a business that has yet to turn a profit.

Any company with an expensive valuation that fails to beat forecasts for two sets of results is going to struggle, especially as questions loom over the monetization of the business.

It’s not a whole world away from other tech companies. Facebook had a torrid time after its IPO, where its shares pretty much halved in value. Now, its shares are trading more than 300% higher than the IPO price, and its most recent financial updates were impressive. If Snap can replicate the same performance as Facebook, then shareholders may be able to breathe more easily.

So what is causing share volatility within the tech sector? It’s important to remember that, first off, there is volatility in every sector of every stock market, to varying degrees. For example, consumer staples are considered a low volatility sector, but that doesn’t mean there isn’t volatility there.

One way to analyse the tech sector is as two distinct sub-categories – the young guns and the old guard. Apple, Microsoft and Google have been around the block a few times, and so report fairly predictable earnings. They also have a proven track record of fending off competition and remaining at the top of their respective games.

The young guns, such as Netflix, Facebook and Snap, are equally recognisable brands, but are affected far more by volatility as a result of their valuations and competition.

Brand awareness is very powerful, and with some of these guys, especially Facebook, we’re seeing brand become monetised in the form of impressive earnings. However, these stocks don’t come cheap – you’re paying for exponential growth of future earnings.

When expensive stocks don’t deliver the returns that investors expect, the tendency can be to quickly dump them. Perhaps that’s what we’re seeing now, with Snap.

Competition in these fast-moving sectors is hard to predict. Many of the most innovative tech companies have little or zero competition at the outset, so their future earnings remain unchallenged. But, as with every type of business, where there is money to be made, eventually competitors will come.

Look at Netflix – it is currently under pressure from Amazon, but there are more challengers coming. The likes of Disney are set to go live with their own online TV offering, pulling content from Netflix in 2019, and traditional broadcasters are also not resting on their laurels.

Once these markets are more mature, perhaps we’ll see this area of tech become calmer.

While it’s easy to say there’s a tech bubble, it ignores that many stock prices and asset classes are following a similar suit at the moment. Global central banks have kept monetary policy ultra-loose with low interest rates and quantitative easing. This was seen as necessary to keep the economy afloat after the great recession of 07/08. However, when cash is earning you next to nothing, it pushes up the prices of other asset classes, as investors seek out higher returns.

Investment in tech companies such as Uber, AirBnB, or even Wealthify comes because of the innovation we bring to mature markets in terms of scalability, low cost to consumers, and easy access to services via apps and online. Not all startups will survive, but as we’ve experienced from our home in Cardiff, they can thrive, with the right investment and access to expertise and support.

The views above are personal opinions and not intended as financial advice or recommendations.