The Digitization Of Finance Unlocks New Investment Opportunities

It’s no secret that institutional investors realize average rates of return far better than individual investors. One of the biggest reasons why is that they enjoy opportunities most investors do not.

Yet technology is unlocking doors to wealth generation that most investors have been barred from and, in fact, were totally unaware of. These include having the opportunity to invest in early-stage companies and other alternative assets, the opportunity for fractional ownership of otherwise out-of-reach investments and increasing access to yield-bearing funds.

How is it possible that the Yale University Endowment has seen an average annual return over the past 20 years of nearly 10%, and a more than 40% return on investment this year alone? And is it possible to see such strong returns and do so as a hedge against public market volatility?

From my perspective, the answer is that Yale and other savvy institutional and accredited investors seek (and have had access to) alternative investments, including early-stage, privately-held companies, high-return funds, real estate, energy and, increasingly, cryptocurrency. In fact, Yale was an early investor in many early-stage companies, including Amazon, Facebook, Google, LinkedIn and Airbnb.

As I mentioned, you can see that institutional and wealthy investors have portfolios that look very different from most investors because they have had awareness of, access to and the means to participate in the higher-risk, higher potential-return alternative investment opportunities that, in general, individual investors have not had access to.

This is why the private capital markets (everything invested in and traded outside the traditional NYSE, NASDAQ or other public exchanges) are growing at twice the rate of the public markets. Indeed, by the end of 2020, research by my company, Securitize Markets, showed that $2.9 trillion in new capital had entered private markets during the year, as opposed to just $1.4 trillion into public markets. At the same time, total investments in the private markets reached nearly $11 trillion, a figure expected to continue to increase, according to Preqin. 

This growth is being driven by increasing awareness and comfort with investing in the private markets as well as — critically — increased access. The digitization of traditional finance, powered by blockchain, in particular, is knocking down some of the walls that previously blocked ordinary investors from accessing the most potentially lucrative opportunities.

What is blockchain? In the simplest sense: a digitized, decentralized ledger of transactions. Rather than relying on paper records and centralized exchanges, blockchains create a decentralized way of securing and trading assets, enabling instantaneous trading and record-keeping. Rather than asset ownership being stored in paper files or servers under one institution’s control, it is recorded across a constellation of computers all around the world, each maintaining identical copies of the same chain. Transactions are permanent, ownership is indisputable and trades can clear in seconds rather than days.

Here are four ways blockchain has helped democratize finance, along with a few considerations I recommend keeping in mind.

1. Investments Beyond Stocks And Bonds

It’s well known that investing in real estate can be one of the best ways to generate wealth as well as cash flow. But real estate is expensive, complicated and often carries with it real expenses such as upkeep. Commercial real estate, in particular, can provide investors exposure to a wide variety of property and business types, including multifamily housing, office and industrial space, retail, strip malls, self-storage and more. In cases where the investment process, securing financing and managing properties are time-intensive or cost-prohibitive, or if someone finds directly investing in real estate is too daunting or out of reach, there are various new blockchain technologies that can help.

2. Fractional Ownership

Blockchain enables participation in large investments through fractional ownership. By digitizing the previously paper-based process of creating, issuing and trading securities, it’s easy for large investments to be divided into tiny pieces, allowing more investors access through a lower price point. The recently announced T27 high-rise project in San Jose, California, is one example of this, as is AcreTrader, which enables fractional ownership and the trading of farmland.

Fractional ownership is also how individual investors are able to participate in the growth of cryptocurrencies such as Bitcoin, which, despite being valued at more than $63,000 as of this writing, can be purchased fractionally for as low as a penny.

3. Exposure To High-Growth Or Yield-Bearing Funds

No asset class has generated returns as impressively of late as cryptocurrency. Many options, use cases, high volatility and fractional ownership, have combined to create a sector that, barely a decade old, now has a market cap of $2.5 trillion.  In addition to purchasing cryptocurrency through platforms like Robinhood or Coinbase, investors can also consider funds to gain exposure to growth, yield or a blend of opportunities in one investment. 

4. Greater Liquidity

One of the historic downsides of investing in alternative assets is illiquidity. Because there are so many kinds of alternative assets — from real estate to crypto to commodities and more — and a multitude of websites, auction houses and apps on which to research, I encourage you to expose yourself to opportunities that you might not have considered previously. The emergence of marketplaces bringing the diversity of assets under one roof has also created opportunities for wealth generation and liquidity that have not existed until now.

Originally published in Forbes Council.