Market Thinking

making sense of the narrative

Market Thinker

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Think like a Zoomer. Internet 3.0 is going to be just as disruptive as the two versions that came before it.

When looking at Thematic funds for long term investing, the key thread that runs through most of  them is digitalisation and what some refer to as the fourth industrial revolution and the internet of things. There is, however, one aspect of digitalisation that has yet to be integrated into most thematic investing and that is the core of what we are now starting to refer to as Internet 3.0, the blockchain. At this point most people find that their eyes are glazing over and are struggling to stay awake in anticipation of yet another breathless discussion about how bitcoin is going to replace gold, or the dollar. Or anything and everything. Except that is not our point, in fact we think that the noise from the bitcoin traders is similar to that from the Gold bugs, largely a narrative aimed at driving speculative flows in one direction or the other (but usually up) and as such is something of a red herring to the real story, obscuring the important message, which is one of a new system architecture that will disrupt economies as much as Internet 1.0 or the mobile revolution did.

The Market Thinker: Devil is in digitalisation details and post-disruption plays

The reality is that Internet 3.0 is at a stage similar to the original internet in 1995, when most experts were doubting the business model of a young guy called Bezos who was trying to sell books and CDs online. The reason that he chose to start with books and CDs, rather than any other retail, is that, with such large back catalogues, an online ordering and centralised warehouse and distribution model was ideally suited to these two areas. There was a cost benefit and also often a tax arbitrage which helped him to gain enormous market share before moving into other products. For Internet 3.0, the equivalent of books and CDs looks, to us at least, rather like Financial services, because at the heart of it is the distributed ledger known as the blockchain and the one thing that the blockchain does really well is custody and transactions, both of which are almost free, whereas in traditional finance, like wealth and asset management, these are some of the biggest ongoing costs.

Thus, as with most thematics in early stages, it becomes easier to see who might be a loser than who are the obvious winners. The ability to take out some of your largest costs throws up opportunities for principals rather than agents – the middle men get squeezed – but not everyone takes the opportunity to adapt and, as we found with Apple versus Nokia, the eventual big winner has likely not emerged yet. More generally though, Internet 3.0 requires us to ‘Think like a Zoomer’ – not someone who has spent the last 18 months on Zoom calls, but to think of the behaviour of people in Generation Z. These people have grown up with all the tools of Internet 1.0 and the mobile data evolution and the future growth opportunity lies in what they will be doing with the new tools, not what the millennials will do. For the Zoomers are the children of generation X, who are now assuming economic and social power as the baby boomers are retiring. It is no coincidence that the millennial tech companies are now facing increased pushback from Gen X, leaving the Zoomers to pick up the innovation baton.

Like the original internet, or the telecom. Motor car or railway booms before that, this new set of systems is being built whether we like it or not and it will affect all existing systems as it does so. As such the original focus is likely to be on the engineers and equipment suppliers, but there will also be moves by existing dominant corporations to stake a claim in the new world. This week, for example, FaceBook are rebranding themselves to better reflect their commitment to Internet 3.0, with an emphasis on what they refer to as ‘The MetaVerse’, an online series of ‘worlds’ in which people will act and react with one another in a manner similar to the Spielberg movie ‘Ready Player One’. We can choose to ignore the components, much as we have largely ignored video games even though they generate more sales than Hollywood, but we should not ignore the system. The coming ability to not only both earn and spend money within the virtual world of the MetaVerse, but to seamlessly translate it Into Real Life  (IRL) via stable coin – crypto money that doesn’t change in value – will be as disruptive to transactional and custodial services and the middlemen who run them as Amazon was to the staid world of books a generation ago. Some of the smartest people out there are watching this all very closely, and we should too.

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One Reply to “Market Thinker”

  • Enjoy when your house or securities portfolio based upon a block chain ledger system gets hacked or you lose your password.
    There is no legal recourse then.
    The blockchain replaces the legal distinction between property/ownership and possession (remember the “possession is 90% of the law” quip) , upon which our whole societies are based, with possession equaling ownership (“possession is 100% of the law).
    This will be a completely different system and society, count me out.

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