The Sovereign Investor
Thank you for joining us for this edition of the NovaBlock newsletter. Here, we explore the intersection of technology, finance, politics, and of course, the crypto asset space.
The Sovereign Investor is a new class of investor leveraging transformational technologies to access the best deals and optimally customize her portfolio according to her preferences. She will have access to a new suite of financial products and investment opportunities, such as early stage ventures, real estate, fixed income instruments, and other novel financial instruments.
An investor may choose to invest in a basket of luxury rental properties in Seoul, short a basket of overvalued commercial properties in midtown Manhattan, and gain exposure to upside in the career of an up-and-coming NBA star, all with the click of a few buttons. Crypto and blockchain will act as the payment and settlement rails by which these global markets function, reducing trade frictions and opening up markets that were previously locked by the distribution channels of the incumbent financial system.
This phenomenon has been decades in the making, and the emergence of new global capital markets evolves from the connectivity enabled by the internet. The advent of the internet continues to be so transformational because it empowers individuals to have a voice and be content creators. In 2019, every 60 seconds, Facebook users post 510,000 comments, update 293,000 statuses, and upload 136,000 photos. Additionally, users upload 500 hours of original content to YouTube every minute. As the graph depicts below, this trend is only increasing.
Source: https://zephoria.com/top-15-valuable-facebook-statistics/
Source: https://www.statista.com/statistics/259477/hours-of-video-uploaded-to-youtube-every-minute/
The largest technology companies today are collaborative platforms, using digital communication protocols (i.e. TCP/IP) to enable users to engage in discussion, media, and commerce without the need for physical engagement.
However, whereas the internet age revolutionized access to information and personal publication, finance, banking, and wealth management were largely untouched. These sectors are geographically locked in by outdated regulations and incompatible jurisdictional laws. Using open finance protocols like bitcoin and ethereum, value can be transmitted in new ways not constrained by physical borders, while still remaining in compliance with the local laws of corresponding counterparties.
The asset digitization movement is all about investor choice. Asset managers can fractionalize units of real assets, making them more accessible to retail investors. Furthermore, by automating back office operations and compliance, and leveraging blockchain’s capabilities for near instant settlement, frictions to trade are reduced and more liquid exchange markets emerge. This does not remove the need for due diligence and investor protections, and the onus is on the investor to evaluate the merits and risks of any particular deal.
In 2015, the Blackstone Group, a private equity real estate investor with $81 billion under management, bought Chicago’s iconic Willis Tower for $1.3 billion. The vast majority of capital comprising Blackstone’s AUM come from large institutional investors. In the future, instead of the largest and most profitable real estate deals exchanging hands of multi-billion-dollar private equity funds and their wealthy clients, access to similar deals will be democratized.
The disruption of banking and finance applies to rich and developing nations alike; however, adoption may happen quicker in nations with populations cut out of the existing banking system. Today, 4.3 billion people, or 57% of the world’s population, have access to the internet, and 42% have access to a smartphone. However, many users are excluded from the global economy and do not have access to basic financial services and products, such as saving and lending products.
In traditional finance, banks act as intermediaries capturing most of the value by taking large spreads from managing and redirecting capital: funneling investor funds into IPOs, lending out consumer deposits in the form of loans, account management fees, etc. It’s never been more lucrative to be a bank, and in just the last ten years, the global banking industry cashed in over $8.5 trillion in profit.
Source: CoinShares
One of the latest trends in the crypto space is the decentralized finance (“DeFi”) movement. This sector promises to disrupt the traditional financial system, leveraging open protocols to provide users access to basic financial services, compressing the fees of intermediaries. All that is required is a smartphone and access to internet service. Already, dozens of projects have launched providing high-yield savings accounts, lending services, and asset ownership and exchange products.
MakerDAO, the largest DeFi project in terms of activity and volume, allows users to access a dollar-pegged stablecoin (called “Dai”) collateralized with crypto assets. Compound created permission-less lending markets to borrow and lend assets such as Dai. Set protocol allows users to access automated trading strategies usually dominated by quantitative algorithm-driven hedge funds. Using reliable price feeds and data oracles, Synthetix enables users to gain synthetic exposure to assets such as gold, bitcoin, the USD, Tesla, and Apple on the ethereum mainnet. RealT is a real estate investment platform providing fractional ownership of high-yielding rental properties, offering an estimated annual return of 13.9% with an investment minimum of $63.75 per token on its first investment property in Detroit.
TokenSets provide access to automated trading strategies such as technical analysis and weighted index strategies
DeFi usage is only growing, and over $670 million in value is currently locked in these platforms. Since these platforms are over-collateralized and require digital assets as collateral, the industry has converged on Total Value Locked as a crude metric to demonstrate the growth of the space.
Source: DeFiPulse
Just as the internet allowed individuals to gain access to information and networks, capped only by their thirst for knowledge and willingness to connect, blockchain empowers investors to be self-sovereign wealth managers. As privacy technologies and private key management develop, investors will have more ways to keep their wealth safe from government overreach. Tools like Set, Maker, and Synthetix are early experiments in this movement, increasing investor choice and improving the ability to express investment theses with more granular detail. It will be exciting to see what innovative financial products and portfolio mixes users will construct using open source technologies in the coming years.
Quick Hits
Yesterday, MakerDAO officially launched Multi-Collateral Dai (MCD). Whereas previously only Ether could be used to collateralize the Dai stablecoin, the upgrade allows the use of other assets such as Basic Attention Token (BAT), Augur (REP), and 0x (ZRX). Additionally, MCD offers the Dai Savings Rate, an option to earn savings simply by holding Dai in a special smart contract. This is a landmark achievement for the DeFi space and moves the industry one step forward to bringing real-world assets to the blockchain. In line with the theme of asset digitization, users will be able to use their portfolios of digital and real-world assets as collateral to access loans in the crypto economy.
The CME Group announced it will launch options on bitcoin futures in January 2020, Intercontinental Exchange subsidiary BAKKT announced the launch of its enterprise-grade bitcoin custody built for institutions, and BAKKT also announced it will offer cash-settled bitcoin futures in Singapore and bitcoin options in the US before the end of this year. These are all positive developments demonstrating the increased institutionalization of the space. These products are vital to increase liquidity and enable institutional participation of the nascent crypto asset class.
As the Libra project continues to face a hostile audience of regulators, Facebook launched a new fiat payment system called Facebook Pay. The new application is a payment system that is designed to facilitate payments across Facebook, Messenger, Instagram, and WhatsApp. Facebook Pay is a completely separate project with different objectives and goals than Libra. It is possible Facebook is using Facebook Pay to demonstrate it can handle user payments and privacy before the launch of the Libra network.