Value Creation and Value Destruction - Winners and Losers
Value Creation and Value Destruction - Winners and Losers
Last time, we focused our newsletter on a "smorgasbord of important and value accelerating topics" reflecting the breadth and depth of innovation impacting the world of digital finance.
This week we will dig a little deeper into one of the areas we discussed - stablecoins - to emphasize how we are seeing value creation on a massive scale being captured by a new breed of disruptive companies that we have invested into, and conversely how those who are not moving fast are almost certainly about to see massive value destruction as they become the losers, not winners, of this time of unprecedented innovation.
To ease into this, let us begin by reminding ourselves how corporations lose value.
THE LESSONS OF LOST VALUE: STUDYING THE BIGGEST LOSERS
In our best selling book on Corporate Innovation we outlined the value creation of the last thirty years, and went into detail about the drivers of it, and conversely, the ways in which massive value destruction had occurred for those who sat on the sidelines and did not participate. The Biggest Losers of value if you will.
To summarize what we wrote then:
"While many benchmarks of corporate practice start by looking at successful companies...we decided to study the biggest losers: companies that, in one way or another, had seen their fortunes go south over a 10- year period.
We analyzed US public companies with at least US$1 billion in enterprise value on January 1, 2002 (1,053 companies met these criteria). We calculated each company’s change in enterprise value over the next 10 years and then indexed each company’s annualized return to that of its industry benchmark to control for industry-specific effects.
This allowed us to zero in on the biggest losers—the companies that experienced the most dramatic losses of enterprise value.
Only 103 companies had annualized returns relative to their respective industry benchmarks that were worse than negative 10 percent.
This group corresponded to the bottom 10 percent of performers in our overall sample.
The results are unambiguous: among the 103 companies studied, strategic blunders were the primary culprit a remarkable 81% of the time.
When we segmented the data by industry and geography, we found some variations; for example, strategic failures are particularly acute in the financial-services industry, and Europe has more operational problems than the US or Asia. Nevertheless, strategic failure remained the major cause in these cases as well.
About half the time, the loss of value occurred gradually: over many months, or even years if the company took too long to grasp a changed strategic environment or lacked the agility to react.
The other half of the time, the lost value occurred in a matter of months, weeks, or even days.
Sometimes these sharp shocks were caused by strategic failure (for example, being caught by surprise when a competitor introduced a superior product), and sometimes they resulted from an operational issue, compliance problem, or external event that overwhelmed the company."
At the time of writing, we did not have a rationale for why Financial Services companies are so much worse at managing strategic change.
However, it appears to be happening again right now.
Massive value creation is occurring as we transition into a new world of digital finance characterized by digital monies, commodities, and assets, but many of the largest legacy financial services players are systematically falling behind and are about to witness massive, and we expect, rapid loss of value.
WHO WINS AND WHO LOSES FROM STABLECOINS?
To illustrate how this is working in practice, let's look again at stablecoins which were one of the examples we focused on in the last newsletter. This time the three key questions we plan to answer are:
How do stablecoins unlock value?
Who is benefiting from this value creation?
Who is experiencing value destruction from this innovation?
Let's answer each in turn.
1. How do stablecoins unlock value?
This is an easy one:
Stablecoins unlock value because they enable digitally native movements of value over the Internet - usually dollar backed, although the innovation of tokenization can be applied to any money (or in fact any asset).
More specifically, the value creation derives from quicker, cheaper, easier movements of value.
As traditional payments systems are slow, expensive, and complex to use, they levy high costs, which reduce value (value equals benefits minus costs of course, but also discounted cash flows are larger if costs are lower, all else being equal).
There are other sources of value being unlocked by stablecoins including:
Democratized access including to the world's unbanked,
Reduced counterparty risk which is itself a function of settlement times, and
Far quicker and more effective compliance which raises the prospect of an end to the massive facilitation of global crime and fraud which the traditional banks and payment companies perpetuate and are frequently fined for facilitating - for example JPMorgan Chase has paid a total of $38.995 billion in fines since 2000 for various violations.
For now quicker, cheaper, easier are the bulk of the drivers of stablecoin value creation.
2. Who is benefiting from this value creation?
Simply put we all are capturing this value. However, to make this easy to understand, let's look first at consumer payments, and then turn to enterprise payments.
Consumer Payments and The Impact of Stablecoins
We all pay others and we rely upon banks and payment companies to facilitate our payment activity. However, like the proverbial frog in the pan of water, we just don't realize how bad our plight has become (the death of a thousand little cuts):
There are 8 billion individuals in the world, and about 2/3's of them are banked.
There is a very good reason why 400 million plus of them have already migrated across to stablecoin payments.
The reason is that today, our banks and payment companies charge us for their own inefficiency (incompetence).
This shows up in high fees, high spreads, high float during slow processes and so on.
Just as one example, JP Morgan Chase recently told all its customers that manual wire transfers would cost $500 each!!! (Exhibit 1).
Exhibit 1: JP Morgan Chase Manual Wire Fee is $500
Of course, JP Morgan does not usually charge $500 for a payment. It charges tens of dollars for more typical domestic electronic payments - and if you are a highly attractive customer you may have your fees 'waived' although you will pay multiples of the waived fees in other ways including through less easy to see spreads and floats.
Exhibit 2: Tether Stablecoin Network Fees
However, look forward and you will see a dramatically different future coming fast now.
As we write, a Tether stablecoin transaction costs you $1.48 and Exhibit 2 shows how that has varied by network over time.
That's a fee regardless of how much you send - from small to massive amounts of dollars.
That's so much lower as to be worthy of repeating. JP Morgan Chase is saying it is charging its customers 337 times (33,700%) more for a transfer that should be close to free in an efficient digital world.
It is not just about transaction costs.
Slow makes banks money too. Because JP Morgan Chase earns interest (float) on your money while it is in their hands.
So moving money slowly makes banks money too. As an example, JP Morgan Chase slows down payments, and makes it hard for you to pay down your borrowings with them - you can borrow electronically from them in minutes or hours, but you have to repay manually, through a process that takes days and maybe designed to maximize their float - or so it appears to us.
It is true that most individuals don't understand the consequences of the costs they bear from inefficient banks like JP Morgan Chase. They don't make a lot of payments, and most very rarely make international transfers where the costs and time become clearer relative to the new and emerging alternatives.
However, for decades large enterprises like retailers and other consumer facing businesses have been very aware of this issue.
So let's look at this next.
Enterprise Payments and The Impact of Stablecoins
While individuals may not see the impact of today's very expensive payment world, those who are engaged in millions or billions of transactions are painfully aware and have been for decades:
Most of the world's financial payments are not made by individuals.
Every company needs to make payments and right now they are ripped off by inefficient banks like JP Morgan Chase and their payment providers.
This is why the US Justice Department sued the legacy players in 2024. "Visa’s Exclusionary and Anticompetitive Conduct Undermines Choice and Innovation in Payments and Imposes Enormous Costs on Consumers, Merchants, and the American Economy".
As an example, a retailer like Gap designs clothing, sources it globally, ships it to the US, distributes it across all of its stores, hires hundreds of thousands of people to market, sell and serve the clothing up, and at the cash register Gap makes perhaps 7.4% return on sales. At the eleventh hour, a bank or payment company shows up and charges between 1.5 and 3.5% of sales to process the payment.
The bank or payment company takes perhaps one third of the total profitability of the retailers business for doing something that should be close to free if the payment company was technology enabled and efficient like Tether, Circle and other stablecoin players.
So it is no surprise to read in the past week that Amazon and WalMart are now exploring their own stablecoins.
Why would any larger consumer facing business not launch its own stablecoin and disintermediate payment companies like JP Morgan Chase who have been ripping them off for so long?
In summary, the value creation unlocked by Stablecoins will be captured directly by:
Individuals who will see direct consumer benefits.
Enterprises, who after decades of fighting, will disintermediate the rent takers and bring in house the massive value that has been leaking at point of sale.
The stablecoin innovators who are already seeing their combined transactions volumes blast past Visa and MasterCard.
Then who will lose out?
3. Who is experiencing value destruction from this innovation?
This is also simple to explain. Incumbents focus on maximizing their profit pools, and rarely deploy better solutions until it is too late. They strategically blunder because they can't see the future for the massive profits they enjoy today as they take advantage of their customers with inefficient and costly legacy offerings. The biggest losers of value are the incumbents:
The players who will experience value destruction are those who don't embrace lower cost, faster, better ways of doing things;
While they may be able to hide behind regulatory moats created by lawmakers who are being paid a lot by lobbyists to slow down innovation for a period...
...Ultimately, consumer benefits win out over time - you can't resist value being delivered to end users forever, and once the lawmakers come on board the old regulatory moats come tumbling down.
So the US stablecoin bill (Genius Act) really matters and it will probably have passed around the time you read this newsletter.
If it does pass, then legacy banks and payment companies will know their economic rents charged for simple money movements, maximised as in the JP Morgan Chase example above by anti user fees and spreads, are about to go the way of the dodo.
It's why the big banks appear to be exploring a stablecoin consortium (think VISA for stablecoins)...
...and it's why Circle's IPO took off like a rocket this week....
...And it is why Tether CEO Paolo Ardoino is not in favor of an IPO even at a $515,000,000,000 valuation.
We wish that incumbents were good at innovation and bringing end user benefits to their customers. Unfortunately, decades of work and research make us feel that it is just not the case.
Consumer benefits are unlocked by pro innovation players who are willing to disrupt to the benefit of all.
IMPLICATIONS FOR INVESTORS
The smart money is betting:
The future of domestic and international payments will be natively digital over the Internet through tokenization, most probably in the form of stablecoins.
The innovation will be embraced by the world's individuals and enterprises who are sick to death of the outrageous pillaging of their bottom lines by inefficient legacy banks and payment companies.
The value creation of stablecoins will be captured by the disruptive and native stablecoin players like Tether and Circle...
...and finally, the big banks and payment companies will be too slow and too anti consumer to be able to bring the new innovation to market in time.
Fortunately for us, we are investors in many of the companies that are trying to unlock benefits to consumers worldwide with digitally native payment technologies.
Please reach out to us to hear more about this new acceleration in Digital Finance and Blockchain. We are constantly working to provide early stage diversified access to Blockchain and Crypto ventures and into AI and the Future of Intelligence and Computing so please reach out at IR@BlockchainCoinvestors.com to discuss further.
Thank you for reading,
The Blockchain Coinvestors Partners
About Blockchain Coinvestors
Blockchain Coinvestors invests in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 12th year and to date we have invested in a combined portfolio of 1,250 blockchain companies and projects including more than 110 blockchain unicorns. Visit us at www.BlockchainCoinvestors.com to learn more.
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