SA-based crypto exchange VALR reports a five-fold increase in crypto volumes this year as nervous investors seek safety from more conventional assets such as shares and bonds.
Just two years old, VALR is now the largest crypto exchange in the country by trading volume over the last six months, trading nearly 17 000 bitcoin in September. Co-founder Farzam Ehsani, formerly part of the Rand Merchant Bank blockchain team, says growth was explosive from day one: “We entered the market offering lower fees than anyone else and signed up about 1 000 customers on our first day of trading in June 2019.”
It has since signed up more than 80 000 customers. What accounts for such explosive growth?
Reckless financial governance around the world and fears that traditional currencies will lose value, says Ehsani.
“Crypto is as promising as our legacy financial system is defective. The fact that it still takes our current financial system days to send money from one person to another, even within the same country, is absurd. Some 95% of money is now digital and digital transfers shouldn’t take this long.
“Imagine if emails took a few days to arrive at their destination – this shows the absurdity and archaic nature of our current financial system.”
The US Federal Reserve is digitally ‘printing’ more than $1 million per second, and went into overdrive as a result of the Covid-19 economic crash.
They did this to prop up financial markets which have decoupled from the real economy, and this is something of grave concern. Our current financial system is defined by divisions in humanity, predominantly along the lines of the nation state. Cryptocurrency offers an alternative that transcends the nation state and sees humanity for what it truly is: one. To be sure, cryptocurrencies are still nascent and there is room for improvement, but brilliant minds the world over are dedicating their lives to this today.
VALR’s other co-founders are Theo Bohnen, Badi Sudhakaran and Chris Tsimogiannis – all of whom were originally part of Rand Merchant Bank’s blockchain team. They left the bank in May 2018 to set up VALR, and started trading a year later.
VALR is backed by former FNB CEO Michael Jordaan and US-based Bittrex, one of the largest crypto exchanges in the world, who invested $1.5 million in seed capital in July 2018. It recently raised an additional $3.4 million from 100x Ventures and 4Di Capital, bringing the total raised to date to R79 million.
It offers customers the ability to buy and sell more than 50 cryptocurrencies, the largest selection of any South African platform.
Ehsani was born in Kenya to Iranian parents and spent most of his life on the African continent before moving to study in the US at the University of Berkeley. He was the inaugural chair of the SA Financial Blockchain Consortium, and previously worked at Deloitte Consulting in San Francisco and then consulting firm McKinsey, A committed member of the Baha’i faith (he worked at the Baha’i World Centre in Haifa, Israel for some time), he sees cryptos as a way to overcome national and sectarian divisions.
From shells and beads to bits and bytes
“In my humble opinion, cryptocurrencies represent the next stage in humanity’s monetary evolution – an evolution that has taken humanity from cows to shells to beads to salt to animal hides to metals to paper and now to bits and bytes.”
The exchange initially offered South Africans the ability to purchase bitcoin in rands (BTCZAR), then expanded to other cryptos such as Ethereum-Rand (ETHZAR) and XRP-Rand (XRPZAR).
One reason for the rapid growth at VALR is a referral system where existing customers get 15% off trading fees for referring another person. It paid out more than R5 million in September is referral discounts. Its pricing model also broke with convention by charging 0.2% to market takers (those who purchase cryptos at the prevailing market price) and -0.1% for market makers (those who place buy or sell orders away from the current market price).
“This means we actually pay our customers to provide liquidity on the VALR platform. What we aim to do with this system is make it free to sign up as a customer, charge no monthly fees and then pay customers if they provide liquidity on our exchange.
“There isn’t any financial institution that has anything like this out there,” says Ehsani.
Why cryptos will swamp out traditional financial institutions
Ehsani has little doubt that legacy banks will have to either embrace this new world or get dragged off to the knackers yard.
The market cap of bitcoin is currently about $255 billion, and all cryptos $402 billion. “Since the beginning of 2020, bitcoin’s price has gone up by 90%, yet cryptocurrencies in total still have a very low valuation compared to other asset classes. All cryptocurrencies are currently valued at $402 billion, which is only about 3% of the total value of gold, never mind other asset classes.”
One of the big trends to watch in the coming years is decentralised finance, or DeFi, which offers an alternative universe of financial applications, such as peer-to-peer lending and borrowing and the ability to earn returns on cryptos. “DeFi has taken off this year with a host of applications that facilitate the exchange of tokens and the ability to access collateralised funding, and in some cases uncollateralised funding, without the need for a trusted intermediary,” says Ehsani.
DeFi operators, in addition to offering a return for lending you crypto, also offer a token as something else of value which can be traded. Banks have never offered their client anything other than loans at interest.
“I think we are still very early in the development of the crypto asset class. At just over $255 billion the value of all bitcoin is still only a dot on the financial landscape of the world. To put this in context, if all the bitcoin had the same value of all the gold in the world, then each bitcoin would have to be valued at $575 000, a 50-fold increase from its current level.
“No South African with investments should be without some exposure to cryptos such as bitcoin.”