The world of finance is rapidly changing. New digital financial technologies are disrupting established industries and reshaping how people save, invest, and receive financing. Digital currency, or digital tokens with monetary value, has been one of the most talked-about innovations in the financial sector in recent years.
While cryptocurrencies like Bitcoin have drawn a lot of attention from media and investors, there are many other new and exciting developments occurring in the financial technology space. Cryptofinance is an umbrella term describing emerging trends in peer-to-peer lending, equity financing, virtual currencies (e.g., Bitcoin), and alternative asset classes such as government bonds or venture capital.
These new ways to invest money are generally cheaper, faster, more transparent and trustworthy than traditional methods. What follows is a brief overview of the key concepts that make up this emerging space of financial innovation commonly known as "crypto finance." Read on to learn more about each topic...
What is crypto finance?
Cryptofinance is any kind of financial activity that relies on open-source technology like blockchain and is outside of the traditional banking or securities industry. Cryptofinance has the potential to transform how people invest and pay for services, exchange assets, and store money.
Cryptofinance businesses often focus on serving two types of customers: people who are underserved by traditional financial services (e.g., people in developing countries who don’t have bank accounts) and people who want to put their money to work in new and innovative ways that may not be accessible through traditional financial services.
Peer-to-peer lending platforms
Also known as “P2P lending,” this type of investment platform connects individual investors with borrowers. The P2P lending model enables people to earn interest on their savings by lending directly to others (e.g., small businesses or homeowners who need a loan).
One of the most popular P2P lending platforms is Lending Club, which has issued more than $79 billion in loans since its inception in 2006. Investors can earn high returns by lending to a diverse group of borrowers on the platform. Individuals on Lending Club can borrow money from investors at lower rates than they could get from a bank.
Lending Club and other P2P lending platforms operate as online marketplaces that connect borrowers and lenders. These platforms use blockchain-based technology to manage and store information about borrowers.
Equity financing platforms
Equity financing platforms enable companies to raise capital by selling stock or shares on a digital platform. Companies can sell shares to investors at the start-up stage or during the later stages of growth. One of the most popular equity financing platforms is called AngelList.
AngelList acts as a marketplace where entrepreneurs can find investors to fund their ventures and can also be hired as a co-founder by another entrepreneur. Investors can earn returns by investing in early-stage companies on this platform.
AngelList operates as a digital marketplace where entrepreneurs can post information about their companies, including a description for the business model, management team, financial information, and other data.
Virtual currencies (cryptocurrency)
Virtual currencies, sometimes referred to as cryptocurrency, are digital tokens that have monetary value. Some virtual currencies are created and maintained by a central authority, such as the Federal Reserve, but many are decentralized and exist outside of a central authority.
Virtual currencies may be used as a medium of exchange, store of value, or a unit of account. Some virtual currencies, including Bitcoin, are mostly used as a store of value or a speculative investment akin to investing in gold or silver. Others, called “utility tokens,” function like coupons or tokens that can be exchanged for goods or services.
Cryptofinance has the potential to transform how people save, invest, and receive financing. Cryptofinance businesses are using new digital technologies, including blockchain, to lower costs and increase accessibility.
In many parts of the world, people are increasingly using online investment platforms and cryptocurrencies to invest their money, which has the potential to increase financial inclusion. Access to information on investment opportunities, such as new types of virtual currencies, is also improving.
However, as is true with any new type of investment, it’s important for investors to do their research and understand the risks associated with these investments before putting their money into them.