I used to trade baseball, basketball, and all sorts of sports cards for hours a day as a kid. I had spreadsheets dedicated to inventory and price fluctuations broken down by cheap / rich based on the monthly Beckett pricing as well as offline activity. I even built my own showcases from wood (in woodshop class) so that I could go to the local trade shows and get my hands on the best deals while making a generous profit on riding the underlying currents of the next hottest rookie cards of the season or timing the shocks to the supply and demand on certain players and brands. I dabbled in other collectibles such as rare coins, comics and even the occasional beanie baby. If it had a perceived store of value I would try to trade it. These markets at the time were fairly illiquid, with bid / ask spreads that varied from quite wide to null, with no regulation.
Fast forward a few years and this passion for markets lured me into the options world as a market marker on the buy side and the OTR swap derivatives world on the sell side where the velocity and direction of the moves in underlying assets dictated the perceived value of the tradable instruments. Shifts in attributes or features such as volatility, delta, gamma, rho, theta, credit, and counterparty risk would dictate price based on the variety of models you could leverage in your toolbox. These markets were either exchange traded (liquid and regulated) or over the counter, less liquid and less regulated. Over the years the players in the space would shift from old school (discretionary) to new school (systematic). Post the Lehman crisis, the private markets would become much more regulated, spreads would diminish and edge disappear in many of the structured more exotic markets as technology continued to move the curve forward creating more liquidity and transparency which historically only benefited the insiders.
Where did the edge go? In search for edge and less regulation, I stumbled upon other fragmented, opaque markets that were traditional in nature, with an abundance of price discrimination and little to no technology leveraged or optimized. Where was value that needed to be unlocked? The popular Craiglist probe down each vertical led me to zoom into the jewelry category as one sleepy space yet to be disrupted. And so the question became, how do we democratize the jewelry space by making highly sought after product more accessible, become a liquidity provider and improve the transparency to deliver an optimal trusted customer experience as the global market maker for the luxury space?
Fast forward and we see this managed marketplace playbook modeled out across numerous verticals. Value needed to be unlocked where it was stuck in order to get the flywheel going and add liquidity to a marketplace of buyers and sellers. So where is all the value creation going to happen? Where’s the edge? Will you have access to that edge? And how do you value it?
If we break this down, edge historically is found in markets that are opaque or newly created, with few players. Markets that are private, illiquid with no regulation. Going back hundreds of years ago, human nature hasn’t changed, but value creation has, whether it was capital formation and innovation from the original barter system, to the gold or oil rush, through the great depression or the wild west bond markets of the 80s. Historically, as more volatility shocked these markets, more regulation and standardization crept in with liquidity following. These markets would shift from private to public, adding more regulation and liquidity as a result. On the flip side, you have venture capital which has driven much value creation on the private, illiquid side. Where the value of a company from its early inception can often times be derived from a derivative of its underlying assets and parameters that are illiquid and hard to value like founder / product / market fit, emotions, psychology, and the size of non-obvious markets yet to be created.
How do we find asset classes that have historically been invisible and make them accessible. Securitization has been around for decades so it’s nothing new, but only accessible to the minority, the institutions. Indexing and the creation of ETFs have democratized access and created bundles of wealth. Now we’re seeing the same transformation of risk across a diverse group of illiquid assets. Over time, we’re seeing more decentralization with regulations getting weaker and technology pushing the curve forward and driving more liquidity into the system. Technology will continue to unlock risk profiles that have been illiquid and less regulated with capital formation and value creation continuing to grow and live in these private markets.
It’s never been easier to access these private markets. Value has been spliced, diced and unlocked in unique ways. Trading different capital stacks of private equity along with the fractionalization of their public counterparts and a number of collectibles such as art, sneakers, collectible cars, fandom, and cultural assets has become ubiquitous. Access to these private companies have been disseminated across numerous platforms such as SeedInvest, Angellist, CircleUp, Republic, and Forge to name a few, with information spread across their own Bloomberg for privates such as CB Insights, Crunchbase, or Datafox and the ability to access liquidity when you need to via EquityZen, SharesPost, or EquityBee. Cost of entry and exit will continue to drop. Many of the public market incumbents have been scrambling to keep pace by dropping their fees and gobbling up more innovative fintechs. However, they have been slow to adapt, waiting for change to perhaps stop, but it hasn’t.
Today you can be your own mini fund, digital agency, or car rental service. There are dozens of platforms to access crypto via centralized exchanges like Coinbase, Robinhood, Kraken, and Gemini and on DEXs like Binance DEX, dy/dx, 0x, Uniswap, bisq, Curve.fi or their derivatives. You can trade precious metals like gold thru ETFs like GLD and on other digital platforms or even diamonds with less standardized attributes through marketplaces or coin. The transformation of risk has added liquidity across private market segments like credit, real estate, lending, prescriptions, receivables, dry bulk, music royalties, sports player contracts or entire sports teams. As technology opens up higher resolution across risk profiles, demand is created with liquidity added to these markets, and value also changes as more buyers enter the market. What other surplus exists where value can be captured? Homes, extra backyard space for camping, kitchens, influence, education, human capital, payroll? What about financing your recurring revenue? Could I trade my skill or time with yours? How would my time or influence be valued vs. yours? Your time, your things, your human capital, and influence are all stores of value whose surplus can be tapped into on a granular level, frictionlessly with technology. If there’s demand for it, there’s value for it and vice versa. If there’s value attached to it, you can trade it, buy it, swap it, you get the idea. Not only for products, but any kind of service you can think of in any format you can think of, e.g. B2C, B2B, B2B2C, and on and on.
As we get out of the present and move into the future, technology will continue to fuel speed and accuracy across many asset classes and verticals especially those that push massive amounts of paper, are inefficient, and inundated with manual touch points. Fintechs will continue to automate the financial infrastructure stack across data aggregation e.g. Plaid, data capture via folks like ABBYY or Instabase, RPA via UI Path or Kryon, and at their intersection like Ocrolus, by parsing and analyzing data and risk profiles faster than ever before, resulting in more opportunities to serve the end user with faster, better, and cheaper alternatives. With the growth of innovative financial structures like ISAs (Income shared agreements), we will continue to capture higher granularity of which we can price risk that becomes more personalized and tailored to a unique set of needs. Technology will change the traditional processes by unlocking different capital stacks and risk profiles allowing for more accessibility, faster and better pricing, a more refined customer experience and ultimately more value creation.
We see this across education, with the Lambda school, home buying with folks like Landed and Ribbon, and insurance companies like Health IQ. Old school credit scores will no longer be of value. Health and life insurance won’t be dictated based on your age, but rather your microbiome and daily activity. Whether you need to be accredited in order to invest in privates, really a test of wealth rather than sophistication, will be a time of the past, just like getting your payroll settled T+14 vs. T+0, or approved for credit because you consistently charge your iPhone overnight. With the ability to structure and unlock risk profiles and pools at this granular level, we open up access, liquidity, transparency and value across these historically illiquid, private or even non-existent asset classes. We need to ask, why have things been done this way, down to their root causes, and where do they sit within the spectrum of private vs. public, regulated vs. unregulated, and tangible vs. intangible? Then we must ask, how do we cut through and capture value / surplus at their most singular, intrinsic states across these spectrums. By leveraging technology to unlock value and add liquidity to these newly discoverable assets, we can then index them and make them more efficient, accessible, personalized, and beneficial for all those involved. The world is so bright.
