June 23, 2022
3 min read
May 31, 2022
5 min read
I am 58. I have lived through the plastics hype, the AI hype, the dot com boom hype, and I will live through the fintech hype.
Let’s face it, technological innovations are often over-hyped. With financial technology — fintech — the argument was that fintech would lower costs and eliminate barriers and thus democratize investing. After more than a decade it is clear that, for once, the technology has more than lived up to the hype and fintech has delivered on its promises. Unfortunately, most of the media coverage focuses on the technology — algorithms, blockchain, cryptocurrencies, proof-of-work, decentralization, peer-to-peer transactions — and less on the actual finance. Most people don’t care about the technology, they are interested in the opportunities to invest in and explore this new financial landscape.
To get a sense of how monumental the change has been, let’s briefly consider where we were and then see what we can do today with as little as $100. Indeed, there is such a diversity of opportunities that, to help clarify, we’ll break them down into three categories: Buying Assets, Making Assets, and Yield Farming Assets.
The Recent Past
Compiled in 2013, this chart shows where we were eight years ago. While $5 to $10 trading commission may not sound that expensive, what they mean in practice is that only high-dollar, low-frequency trading made any sense. For instance, if you bought a stock with our $100 you would actually receive $90 in stock. If the stock increased in value by 20% you would have $108 worth of stock. If you then sold it, paying the fee again, you would end up with $99 — you would have lost $1 — on a stock that increased in value by 20%. This structure meant actively trading in amounts of less than $10,000 was almost certainly a losing proposition. Not surprisingly, even the discount brokerage Schwab and Co. had an average account value of over $100,000 in 2001 — a radical departure from the traditional balances in the millions. The fees simply precluded a person with even a few thousand dollars, much less $100, from participating. This is the world fintech promised to change, and it has delivered on that promise.
Part I: Buying Assets
The simplest way to acquire an asset is to buy it. Each day, trillions of dollars are poured into stock, bond, currency and commodity markets. Traditionally, as we’ve seen, there have been huge barriers to participation in these markets. But those barriers are beginning to fall as low-cost trading becomes available around the world.. Both stock and cryptocurrency markets are booming and they have increasingly low barriers to entry.
Fintech has lived up to the promise of opening the stock market to everyone. While something like 50% of Americans own some stock, the vast majority of stock value is owned by only 10% of the population. Further, homes with below median income own virtually no financial assets. Platforms like WeBull and Robinhood brought tens of millions of people into the stock market by introducing: no fee trading; no minimum trades; no cap on the number of trades; fractional ownership that allows investors to buy part of a stock; and friendly apps. With $100 you can invest in over 5,000 stocks, ETFs and more. If fintech had accomplished nothing else, this would still be a remarkable feat.
Similar to stock trading, these exchanges are instead geared towards investing in the new world of cryptocurrencies. Much of the media has focused on the technological innovations to make cryptocurrencies possible. However, for the investor the technology is less important than the opening of an entirely new world of assets. Cryptocurrencies have proven to be highly volatile and have generated staggering returns. Exchanges like Coinbase, Binance, FTX, and Kraken provide much lower fees for trading, functional apps, and fractional ownership. These platforms feature hundreds of different currencies to invest in. With the possibility of margin investing, your $100 investment can be leveraged, with some derivatives exchanges offering up to 150X. Again, $100 can open up a world of investing possibilities because of very low fees. For instance, Coinbase charges 1.49% to transfer money from a US Bank account. So, our $100 would become $98.50. From there, each trade is around .5% — though there is some variation. After the initial transfer, it would cost about 25 cents to buy $50 worth of Bitcoin or other listed cryptocurrency. Binance and Kraken are popular exchanges that have even lower fees and offer more opportunities for futures and margin trading. They both have low to no minimum balances, which makes a wide variety of platforms available to our $100 investor. Popular stock trading platforms also include some options for trading crypto currencies though they are much less robust than dedicated crypto platforms.
To add to the stocks and cryptocurrencies, new platforms are launching that tokenize commodities. While some limited commodities trading is available now, it is quite likely that within a year commodities trading will also be open for the small investor. Another active area of investment is NFTs. The digital equivalent of the art market, NFTs allow people to invest in unique digital items including art, music and other collectibles. Currently, the most popular NFT exchanges are hosted on the Ethereum network and the associated high fees mean that $100 is insufficient to participate (more on NFTs in Part II of this essay). However, an increasing number of NFT markets are appearing on other networks like Binance Smart Chain and Solana that are rapidly lowering the cost of market entry. Finally, it is likely that we will soon see trading apps that tokenize stocks and other financial instruments from around the world — the holy grail of bringing the world’s securities to small investors.
Conclusion To Buying Assets
In less than a decade, the price and ease of investing has dropped to the point where $100 allows anyone to buy 1,000s of stocks, cryptocurrencies, future contracts, derivatives and, if they are so inclined, trade on margin. That’s why today more than 30 million people use Robinhood and Webull and more than 100 million people use the most popular crypto exchanges. If this were all fintech had achieved, then it would have lived up to the hype. However, and perhaps even more impressive, fintech has added a whole new genre of possibilities for small investors. Learn more in Part II, coming soon…
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