Time was, anyone who wanted to invest in the stock market used a broker. That broker provided investment advice and handled all trades. The reason, of course, was that brokers did the research and had access to information that the average individual investor did not have. All of this changed as technology provided individuals access to the same information that the “big boys” have always had. Now, individual investors go through discount brokerages for specific trades. They still engage in institutional investing, though, through their 401K’s and through investments in large funds and such products as annuities. Enter cryptocurrency and its backbone blockchain technology. At first, digital currencies were viewed by institutional investors as an “exotic fad” – one to be avoided. They have sat up and taken notice, however, as Bitcoin and Ethereum climbed in value and, during 2018, seemed to reach an equilibrium that is more stable. Now, institutional investors, such as Goldman Sachs, are developing cryptotrading / cryptocurrency investment products. This trend will infuse much more capital into the digital currency markets, as well as provide greater “legitimacy” and transparency.
It is not just the growth of digital currencies that is disrupting traditional financial and investment industries. The technology itself is changing the entire face of investing altogether. And here’s how:
Trading Cost Can Decrease
A recent report by Oliver Wyman, an international financial services consulting firm, has estimated that IT and operations costs in capital markets is close to $100-$150 billion a year, as well as an additional $100 billion in post-trade and securities servicing fees. These fees are passed on to customers in the form of such things as front-end loads and yearly administrative costs. Blockchain technology or cryptotrading, with its transparent and immutable recording and storage of investment transactions, holds the promise of greatly reducing these costs by capitalizing on public blockchains.
Reduction in Settlement Times
Traditional trading processes can take up to three days for settlement. Blockchain technology has a potential to speed thing up and reduce the processing times to one day, or even a few hours. Though, public blockchains can become congested as well due to certain technological limitations coded into this technology – and that’s an issue developers will need to solve before we’ll witness wider adoption.
24/7 Trading for Global Markets Can Be Made Possible
Currently, exchanges in every country have hours of operation. The U.S. Stock Exchange, for example, is open from 9AM to 4PM, Eastern time. Blockchain can “open” global markets to 24/7 trading, eliminating the need to wait until a market opens to consummate a trade.
The transparent ledger system, along with the immutability of any contract, document, trade that has been recorded in a block, drastically reduces fraud or other illegal activity in the investment sector. This is now being further reinforced by digital currency investment groups and exchanges getting on board with KYC (Know Your Customer) compliance. Compliance has long been a requirement for traditional investing, but the verification process in cryptotrading has lagged behind.
This is no longer the case. An advanced KYC verification service is offered by Cryptonomica – it’s already used by Stex.com for legal cryptocurrency trading in Estonia. Malta will also soon begin licensing crypto projects, and Cryptonomica is already partnering with exchanges that plan to launch on Malta. “Compliance that mirrors that of traditional investing will add far greater transparency and trust within the crypto trading markets,” said Vadym Kurylovych, founder of Stex.
Tokenization of Assets Can Enable New Types of Investments
Suppose an individual held a baseball card that had a value of $250,000 (yes, there are such cards). He could sell partial investments in that card through a blockchain tokenization process, all of which would be recorded and stored in an immutable blockchain environment. Basically, with the help of blockchain technology private equity trading can be “simplified” to P2P exchanges of respective coins that can be traded without any intermediary.
Private Equity and Real Estate Investment Will Change
Currently, private equity funds hold huge amounts of money from individual investors. These monies are invested in startups, small companies looking to scale, buyouts of struggling companies, and in real estate. Investors place their trust in fund managers and pay for that trust. Blockchain has the potential to eliminate these middlemen and provide for a trusted means to invest individually and directly.
These six disruptions are just the “tip of the iceberg” relative to how blockchain will be transforming the world of investing in the near future. Will it mean the eventual demise of institutional investing? Probably not. But the “big boys” will have to embrace blockchain and use it to provide products and services that will keep ever-more savvy investors happy.