Democratizing Wealth

How blockchain tech is making alternative investing more accessible

Ric Edelman: It's Tuesday, January 30th. Are you interested in alternatives? Alternatives to what? Well, there's the basic investment categories stocks and bonds. But lots of investors are interested in alternatives to those traditional asset classes. Alternatives are a big deal. Lots of asset management firms specialize in these investments. Commodities, energy, real estate, crypto. Globally, individuals have 5% of their wealth. In alternatives, 60% do it to improve their overall portfolio diversification. 25% think they're going to get higher returns.  

The problem is that alternatives are complicated products. They're typically limited security offerings that involve far more paperwork than just opening a brokerage account. They often incur high fees, limited liquidity, large minimum investment amounts. But fund managers say they have found a way to make all of this better: Tokenization.  

They say that blockchain technology can streamline the operational processes, and this will let them make investments available to a larger number of investors. Tokenization can also improve liquidity and collateralization and facilitate portfolio customization. The net result? It's projected that tokenization will generate $400 billion in additional annual revenue for the alternatives industry.  

So what exactly is tokenization? It simply refers to representing ownership of an asset as a programable piece of computer code. This is known as a smart contract on a blockchain ledger. Ethereum is the leader in this space. Using this technology, you can generate automated instantaneous settlement. That's a huge improvement over the current method that involves multi-party processes, with everybody having their own siloed data that's expensive to reconcile with tokenization. Data management is easy. Illiquid investments become liquid. Blockchain records can easily and reliably prove ownership of collateral.  

And you can create innovative new uses like limiting exposure to certain industries or automatically rebalancing or automating capital calls. Capital calls are a major issue for alternatives because, you know, when you buy an alternative investment, you don't typically invest all your money all at once. You invest it slowly over time as they identify investments for you to buy. Well, those capital calls are a nuisance. They send them to you without you knowing it's coming, and you have a limited amount of time to send them the money or you void much of your investment.  

But when you have cash kept in stablecoins, the tokenization can automate the capital calls, making life easier automated for everybody. All told, tokenization could increase revenues for the alternatives industry, like I said, by $400 billion a year, according to JP Morgan. And instead of people investing only 5% of assets in alternatives, this could rise to 20%. Yeah, it's amazing. With only half as many stocks available publicly as there were 15 years ago, investors are looking for private equity, something that you can obtain through alternative investing. This represents a new investment category that might well one day be coming to you via your financial advisor.  

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