The Future of Financial Markets

Financial markets and their entire supply chain, both on the retail and institutional side, are about to undergo a total disruption on a massive scale by technologies such as blockchain engineering, algorithmic asset management or decentralized protocols.

What could financial markets look like in 10 years?

1. Financial markets will be fully tokenized, as will private markets. Synthetic tokens, perpetual futures and hybrid smart contracts could become the basis for financial derivatives. And, yes, almost everything will be based on blockchain derivatives.

2. Discretionary portfolio management could be completely replaced by algorithmic asset management (both by LFT -Low Frequency Trading- and HFT -High Frequency Trading-). Investing in a decorrelated portfolio of momentum trading models could be the future of retail trading.

3. Institutional returns in all asset classes -liquid assets, PE, VC, private debt, infrastructure, real estate, venture building...- could be decentralized with crowdinvesting. The masses will have access to investment vehicles today only available to accredited investors.

4. Financial advisors could be mostly replaced by robo-advisory solutions, especially at the retail level.

5. Deflationary CBDCs could replace the classic fiat monetary system. Physical cash will evidently disappear.

6. The highly leveraged commercial banking system running on fractional reserves could be replaced by DeFi and CeFi protocols, both competing with each other.

In this article I outline these trends that are transforming the investment industry.

Low-frequency algorithmic asset management

Although systematic asset management (both low-frequency trading -LFT- and high-frequency trading -HFT-) has been providing alpha for decades, it is striking how underdeveloped the algorithmic ecosystem is in the buy-side financial markets industry compared to classic discretionary portfolio management, which is not based at all on the scientific method, pure statistics or mathematics. If a human being makes entry, exit, and capital management decisions, it is not systematic.

Discretionary portfolio management means that a human team analyzes the market with a set of parameters and makes allocation and risk decisions. The interesting thing is that no human can beat algorithmic investment management, as well as HFT and its application of the scientific method to extract value from market inefficiencies. Humans may be better than algorithms in other areas, but not when it comes to following strict systems.

Some systematic CTAs have been outperforming so-called indexed products and the vast majority of mutual funds for no less than 50 years, and in the coming decades we will see algorithmic funds become available to the non-accredited investor, bypassing the classic fundamental fund manager who lives primarily on management fees and not performance fees -many systematic firms only charge management fees.

Thus, algorithmic fund management can still be considered an emerging and disruptive technology that, in combination with the tokenization of financial markets and machine learning, could create new categories of funds for the retail investment industry.

Some of the most famous HFT/LFT algorithmic firms are Mr. Simons' Renaissance, David Harding's Winton Capital, Two Stigma, AQR, De Shaw, Millenium, Point72, Man Group, or WorldQuant, among many others. Personally, one of my favourite CTAs is Dunn, which has been operating systematically for almost 50 years.

Crowdinvesting and robo advisoring

Crowdinvesting

The democratization of the investment industry is starting to become a reality with an emphasis on collective investment platforms, an investment instrument already highly supervised by different regulatory authorities internationally. With collective investment platforms, users can co-invest in an asset among many participants in a crowdfunding system.

Possibly the only way to achieve collective passive income is with shared income funds in sectors that can generate positive and steady cash flow, such as natural resources, infrastructure, real estate, debt, or private markets in general.

These investment vehicles take advantage of wealth creation opportunities in a collaborative way, so that the entire yield is paid out in dividends, i.e. the dividend is virtually 100%.

Random examples of regulated crowdinvestment platforms

• YieldStreet: YieldStreet is a US-based crowdinvestment platform that focuses on alternative investments such as real estate, private equity and litigation finance.

• Seedrs: Seedrs is a UK-based crowdinvesting platform that was founded in 2009. The platform has raised over £1 billion for more than 1,000 startups across Europe.

• Fundrise: Fundrise is a U.S.-based crowdinvestment platform that focuses on real estate investments, including commercial properties, residential properties and mixed-use developments.

• LendInvest: LendInvest is a UK-based peer-to-peer lending platform that enables investors to invest in short-term real estate loans.

• Abundance Investment: Abundance Investment is a UK-based crowdinvestment platform that focuses on renewable energy infrastructure projects, such as wind farms and solar energy projects.

• EstateGuru: EstateGuru is an Estonian-based crowdinvestment platform that focuses on real estate investments across Europe, including residential and commercial properties.

• Crowdcube: Crowdcube is another UK-based crowdinvesting platform that was founded in 2011. The platform has raised over £1 billion for more than 1,000 startups across Europe.

• StartEngine: StartEngine is a U.S.-based crowdinvesting platform founded in 2014. The platform has raised over $300 million for more than 500 startups across a variety of sectors.

• Republic: Republic is a U.S.-based crowdinvesting platform founded in 2016. The platform has raised more than $150 million for more than 300 startups in a variety of industries.

• Wefunder: Wefunder is another U.S.-based collective investment platform that was founded in 2012. The platform has raised more than $150 million for more than 300 startups in a variety of industries.

• Brickstarter: Brickstarter is a Spain-based crowdfunding platform that focuses on real estate investments, particularly in the renovation of historic buildings.

• London House Exchange: London House Exchange is a UK-based collective investment platform that allows investors to invest in residential properties throughout the UK.

• PeerStreet: PeerStreet is a U.S.-based collective investment platform that allows investors to invest in real estate debt, including short-term loans for fix-and-flip projects and long-term loans for rental properties.

• OurCrowd: OurCrowd is an Israel-based collective investment platform that focuses on early-stage startups in a variety of industries, including healthcare, cybersecurity and transportation.

• DAO Maker: DAO Maker is a platform that enables blockchain projects to raise funds and build communities through a process called "Social Mining". It also provides support for community governance and management.

• Republic: Republic is a platform that enables blockchain projects to raise funds through a variety of investment vehicles, including Regulation Crowdfunding, Regulation A+ and Regulation D offerings.

• Securitize: Securitize is a platform that enables blockchain projects to issue and manage digital securities on blockchain, including securities tokens and other asset-backed tokens.

• CoinList: CoinList is a platform that enables blockchain projects to raise funds through a variety of investment vehicles, including token sales, equity offerings and debt offerings.

• Vinovest: Vinovest is a collective investment platform that allows investors to invest in fine wines as an alternative asset class.

• Harvest Returns: Harvest Returns is a collective investment platform that allows investors to invest in agriculture, including farmland, livestock and crops.

• Livestock Wealth: Livestock Wealth is a collective investment platform that allows investors to invest in livestock, including cattle and sheep.

• EnergyFunders: EnergyFunders is a collective investment platform that allows investors to invest in oil and gas projects.

• Farmland LP: Farmland LP is a collective investment platform that allows investors to invest in farmland, with a focus on sustainable and organic agriculture.

• LendingRobot: LendingRobot is a collective investment platform that provides access to a variety of alternative investment options, including hedge funds that specialize in peer-to-peer and marketplace lending.

Robo-advisoring

Just as fund management in both liquid and private markets will be fully algorithmic, so will the mechanism that helps investors decide which investment vehicles to invest in.

Using simple big data, a robo-advisor can do the same job as a financial advisor or planner, directing you to the algorithmic and collective investment vehicles best suited to your risk profile.

Synthetic tokens and perpetual future contracts: the future of over-the-counter and exchange-traded derivatives

Synthetic tokens and perpetual future contracts are the representation of exchange-traded and over-the-counter derivatives but in the blockchain industry, with huge advances. A full article explaining synths and perps is here.

Synthetic tokens

A synthetic token is an on-chain financial derivative attached cryptographically in real time to an underlying database. The reason why synthetic tokens can revolutionise both exchange-traded and over-the-counter derivatives is due to the fact that their pricing engineering is quite simple: just a smart contract/cardinal/or similar protocols added to a database, without the complex financial engineering and dealing intermediaries that exist in today's fiat derivatives.

Synthetic tokens prices depends on the underlying database and not on institutional price influences or mass psychology. It can be understood as an "indexed token". Its indexation produces a sophocratic middle ground between the free market and price control that generates a more appropriate outcome for all parties.

The creation and distribution of synthetic tokens leads to a rational, responsible and logical investment given that a quantitative protocolization is performed to determine its real market price and so that it is neither overvalued nor undervalued.

Thanks to blockchain technology, we can build such financial products on blockchains such as Solana or many L2s, where the oracle of a token is permanently attached to a database, and therefore its price is entirely susceptible to follow that database based on pre-set parameters, and not due to volume.

With synthetic tokens the assets are always priced at their real value, there is no market manipulation and the returns are more rational and healthy.

Random examples of synthetic tokens

• Blockmas token: Invest in the full blockchain capitalization.

Invest in the entire blockchain market capitalization with a single token and leverage the liquidity penetration of central banks and CBDCs in the industry. The Blockmas token is a synthetic token that is cryptographically pegged to the total industry capitalization.

• Population tokens: Invest in population growth or declines.

Invest in real-time population growth or decline in nations such as India, Nigeria, Japan or China with both spot and leveraged tokens.

• Net worth tokens: Invest in the real-time net worth of billionaires

Invest in the net worth growth of the Bloomberg Billionaire List with a single token.

• X10 tokens

Invest in tokens with x10 leverage on major crypto assets with no margin risk.

• Government debt tokens: Invest in public debt growth

Invest in government debt growth in selected nations and take advantage of the automatic response of our current monetary system.

• GDP tokens: Invest in GDP growth

Invest in the GDP growth or decline of specific nations in both developed and undeveloped economies.

Perpetual future contracts

Perpetual futures are like over-the-counter swaps in traditional derivatives, but based on blockchains. In traditional finance, the most famous over-the-counter derivatives are spot FX, CFDs, exotic options, or interest rate swaps, most of which are banned in the US - with the exception of swaps on currencies, interest rates and other markets.

There is a huge industry outside the US based on selling ultra-leveraged OTCDs to non-professional retail traders with the aim of making them lose money as quickly as possible. While this is going on, their brokers control their liquidity pools and profit from their losses with B-book execution. A full article on hybrid execution models in OTC derivatives can be found here.

Deflationary CBDCs

Several years ago, saying that central banks were working on digital currencies was taken as a <conspiracy theory>. Today, there is virtually no major central bank that is not working and has not publicly announced its development of a centralized digital currency.

Digital Yuan (China): The Digital Yuan, also known as e-CNY, is currently being tested in several cities in China and has already been used in several pilot programs. China's central bank, the People's Bank of China, plans to eventually implement the digital currency nationwide.

e-Euro (European Union): The European Central Bank (ECB) is exploring the development of a digital euro, which would be a digital representation of the euro currency. The ECB has launched a two-year research phase to explore the potential benefits and risks of a digital euro.

e-Krona (Sweden): The Riksbank, Sweden's central bank, is exploring the development of an e-Krona, which would be a digital complement to Sweden's physical currency. The Riksbank has launched a pilot program to test the viability of the e-Krona.

Sand Dollar (The Bahamas): The Central Bank of The Bahamas has launched a digital currency called Sand Dollar, which is currently available to all residents of The Bahamas. The Sand Dollar aims to improve financial inclusion and reduce the cost of cash management in the country.

Inthanon Project (Thailand): The Inthanon Project is a joint project between the Bank of Thailand and several commercial banks to explore the feasibility of a CBDC in Thailand. The project has successfully completed several test phases and the Bank of Thailand plans to continue its development.

Jasper (Canada): Jasper is a project between the Bank of Canada and several Canadian banks to explore the feasibility of a CBDC in Canada. The project has successfully completed several phases of testing and the Bank of Canada is currently exploring the potential benefits and risks of a CBDC.

Digital Dollar Project (United States): The Digital Dollar Project is a collaboration between the Digital Dollar Foundation and several U.S. think tanks to explore the development of a digital dollar. The project is still in its early stages, but has gained the support of several members of Congress.

CBDCs have the major drawback of suppressing the libertarian values of society, giving the state massive control over individual, family and corporate economies.

DeFi protocols

DeFi represents a paradigm shift towards a more open, accessible, and transparent financial ecosystem based on financial services and applications built on L1 and L2 blockchains and challenging the status quo of centralized institutions

Unlike traditional finance, which relies on centralized intermediaries such as banks and exchanges, DeFi operates on a decentralized, peer-to-peer network, enabling users to engage in financial activities without the need for traditional intermediaries.

1. Traditional financial markets

DeFi opens up new possibilities for financial markets by democratizing access to various financial instruments. Traditional financial markets often exclude individuals with limited access to banking services, but DeFi allows anyone with an internet connection to participate in a wide range of financial activities. Decentralized exchanges (DEXs) facilitate the trading of assets without the need for a central authority, providing users with greater control over their funds and reducing counterparty risk.

Moreover, DeFi enables the creation and trading of tokenized assets, allowing users to represent real-world assets such as real estate, stocks, or commodities on the blockchain. This opens up new avenues for liquidity and investment opportunities, as users can trade these tokenized assets 24/7, regardless of traditional market hours.

1. Exchange-traded and over-the-counter financial derivatives

DeFi is disrupting the traditional derivatives market by offering decentralized alternatives that are more efficient, transparent, and accessible. Smart contracts, self-executing contracts with the terms directly written into code, enable the creation of decentralized derivatives without the need for intermediaries. This eliminates counterparty risk and ensures that the terms of the contract are automatically enforced.

Decentralized derivatives platforms allow users to engage in activities such as lending, borrowing, and trading synthetic assets. This creates a more inclusive financial environment where users can access sophisticated financial instruments without relying on traditional financial institutions.

1. Payments

DeFi is set to transform the way we make payments by providing fast, low-cost, and borderless transactions. Decentralized stablecoins, pegged to fiat currencies but operating on blockchain networks, offer a reliable medium of exchange within the DeFi ecosystem. Users can send and receive payments globally without the need for traditional banking infrastructure, reducing the dependency on intermediaries and enhancing financial inclusivity.

Additionally, decentralized lending platforms allow users to earn interest on their cryptocurrency holdings by providing liquidity to the system. This innovative approach to lending and borrowing provides an alternative to traditional banking services and offers users the opportunity to earn passive income on their assets.

Summary

While today the retail investor continues to be completely confused about where to invest, in the near future a robo-advisor would be able to direct him to the algorithmic funds and diversified collective investment platforms that best suit his profile. Global hyperinflation may be replaced by deflationary CBDCs in full-reserve deposits, and financial and private markets will be fully tokenized.

Of course, I do not want to claim that all these points will correspond exactly to the future of the investment industry and the financial sector, but it may give a generalist orientation to someone who is looking to invest or work in the investment industry of the future.