The inception of crypto created an exciting opportunity for every day individuals to access the huge returns associated with financial trading. The traditional financial market is typically only accessible through institutions, like hedge funds that require minimum investments of over US$100,000 to participate. But crypto has been allowing retail investors the opportunity to gain four- and even five-digit percentage returns with just access to the internet.
However, with high reward comes high risk. The volatility of the crypto market means that it’s prone to violent crashes. For example, in the first half of 2022, the market lost US$2 trillion in value.
Much of this can be linked to the collapse of TerraLuna, when the UST stablecoin crashed to almost nothing, as well as Celsius’ financial struggles and bankruptcy. These events, along with others, resulted in bleak market conditions that investors had to navigate.
However, with disproportionate access to trading tools across the market, retail investors have been disproportionately affected. Hedge funds have access to high-quality data, research and analysis, as well as sophisticated trading tools, like mathematical algorithms that assess factors and predict market movements, meaning they could identify market movements early and react accordingly to shield themselves from the crashes. But without access to any of that, retail investors were left defenseless. In fact, some even reported they didn’t know that stablecoins like Terra’s UST could crash. As such, they’ve shouldered the worst of these crashes, and many others.
If we limit retail investors’ access to returns, then we risk breaking crypto’s promise of democratizing finance and instead create a financial market 2.0 — where only the wealthy can participate. Additionally, if we continue to operate under a centralized model, we risk the possibility of having single points of failure, thus repeating the same market crashes we have just seen.
So, what can be done to ensure retail investors continue to have access to the high returns available from trading crypto?
To answer this question, we first need to ask: What challenges are retail investors facing?
Crypto is becoming even harder to understand
As crypto has grown, so has the amount of data available to investors. To trade effectively, investors need to analyze a lot of this data, like transaction volumes, order flow data, wallet-to-wallet transactions, transaction price, and volume of currency being traded at any one time. And while this data is easy to access, bringing it together to analyze effectively is not. This is why companies that analyze on-chain transaction data to support traders’ decision-making and blockchain forensics, such as Nansen.ai, are valued so highly — Nansen.ai itself being valued at US$750 million.
The need for all of this data makes it difficult for retail investors who don’t have access to professional tools or datasets to make reasonable investment decisions. Instead, they turn to blogs, news posts, other investors and influencers to make decisions. But doing so only allows them access to a small portion of the information required and in some cases, contradictory information.
Ordinary investors also face a second challenge: the market is open 24/7. The traditional financial market is generally open from 9:30 a.m. to 4 p.m. on weekdays only, allowing hedge funds and professional traders to live a normal working life. However, with cryptocurrency, investors are vulnerable to losing funds because of neverending market movements.
For the average investor who has responsibilities such as work and a family to look after, this means that trading without help is risky and unrealistic.
Sophisticated tools are out of reach
In response to the negatives of the crypto market, institutional-grade trading tools were created that aid investors, thus increasing profits and mitigating losses. Algorithmic trading is one of the tools commonly used by hedge funds. This is software that can analyze the market to identify the best time to trade for profit and to sell to minimize losses.
Unfortunately, building effective trading tools is extremely difficult and, as such, they are expensive, so they often aren’t available to retail investors. For example, building a low-end trading tool can cost over US$55,000. While this alone is a big investment, it doesn’t compare to the tools used by hedge funds. To have a tool that guarantees profits, a lot of time, money and developer expertise is required. The result is that institutional-grade tools are only available to hedge funds.
However, for ordinary investors, hedge funds aren’t a viable route either, as they require a high initial investment and are sometimes exclusively accessible to accredited investors. Look at VanEck. It’s one of the most reputable crypto asset managers, but it has a minimum participation fee of US$100,000. For the average person in China who has around 35,000 yuan —or around US$4,870 — in disposable income a year, this is completely unrealistic. This means that retail investors are being excluded from the crypto market.
Equalizing the crypto trading market
Crypto was designed to allow everyone financial freedom. However, we can’t achieve this without accessible trading tools. If we don’t make changes soon, crypto could repeat the mistakes of the traditional financial landscape, where profits are only accessible to the wealthy.
For crypto to live up to its promise of bringing financial freedom to the masses, we need to create an environment where everyone has access to the same tools to ensure equal financial opportunities. To do this, we need to create sophisticated trading tools that don’t require advanced market knowledge, huge time commitments or high ticket entry.
There’s a low chance that the crypto market will become easier to understand any time soon. As such, to ensure crypto continues to uphold its promise of creating equal access to financial opportunities, we need to prioritize the creation of accessible trading tools that let ordinary investors benefit from profit potential of the crypto market. At a time when the average inflation rate in Asia sits at 7.63%, sophisticated trading tools could allow investors to make meaningful returns from their disposable income, creating new passive income avenues and driving financial inclusion.