Evangelizing to different investor profiles
This is part of our December 2020 report into:
Millennials and Gen Z
Millennials have earned the reputation of disrupting or killing traditional industries, and the financial sector is no exception.
The disconnect between millennials and traditional investments is the result of various factors, such as their firsthand experience with the long-term effects of the 2008 global recession on assets and investments, as well as the complexities and inefficiencies in the procedures for and the maintenance of traditional investments like stocks.
Crypto and digital assets, however, appear to have more appeal for millennials. The lack of a middleman and offices, both of which add to overhead costs, and ease of access makes it convenient for the millennial to open and maintain an account.
Furthermore, the system that processes and maintains these digital assets is perceived by millennials to be more trustworthy, unbiased and transparent. The possibility of fractional ownership of these digital assets also coincides with millennials’ values and beliefs around the shared economy.
To further growth in the market, tools are continuously being developed to attract more millennials and younger investors, making it easier for them to understand the dynamic digital exchange market.
While crypto and digital exchanges appear to be aimed more at millennials and younger investors, sophisticated and experienced investors in traditional markets have already joined or have shown great potential for conversion. Traditional investors who are continuously looking for new opportunities cannot help but notice, despite the volatility, the resiliency of cryptocurrencies like Bitcoin, which was able to bounce back and surge to US$12,000 in June 2020 faster than any other financial investments, despite the ongoing pandemic. Some have speculated that the Bitcoin surge can be attributed to a large transfer of the stablecoin Tether (USDT) to the Bitcoin and cryptocurrency exchange Binance. Nonetheless, while these traditional investors may not resort to putting their investment directly in Bitcoin, some of them have already invested or have demonstrated an interest in investing in stablecoins’ low volatility.
Marketing a crypto exchange to traditional investors isn’t always a surefire thing. Bakkt, which raised nearly US$500 million, promised a physical settlement of Bitcoin futures contracts. In theory, this would be a godsend to institutional investors, as a cash settlement is the norm at institutional-grade exchanges like CME. So, why didn’t they take the physical settlement?
Data from the first few weeks shows that demand simply wasn’t there. On the first day of trading, 72 bitcoins were traded on the platform. As Federman Capital’s Tom Federman points out, institutional investors simply weren’t interested in the product. They already had institutional-grade exposure. Millennials, the growth story for the industry, weren’t targeted.
According to a study released by the Frankfurt School Blockchain Center and BlockState AG in 2019, 71% of investors in digital securities
are traditional and not blockchain-specific investors. In a more recent study in June 2020 by Fidelity Digital Assets, it was also found that institutional investors—like financial advisors, high net-worth individuals and pension and hedge fund managers—have also been actively investing in digital assets and tokenization.
These findings may mean that a simulated and targeted approach to attracting traditional investors may no longer be necessary. But there are still traditional investors who may not be too keen on entering the digital exchange market due to lack of accurate information.
Capturing new investors
Digital exchanges use different tools to attract new investors, ranging from apps that emulate traditional investment tools and terms used in stocks to simple tools that cater to younger investors. Still, barriers to entry in the market remain due to the overwhelming number of options, the number of tokens in the market and the rapidly changing technology, which can be both intimidating and confusing for new entrants. Furthermore, the digital exchange market is still new and there is no widely accepted or consensual agreement in the industry on the correct way to start investing.
These barriers to entry can be simplified into:
- finding and applying the correct information to start investing; and
- the type of digital assets in which to start investing.
While digital exchanges evolve their processes and tools to make signing up to a crypto exchange and the process of trading easier and less tedious, accessible and transparent educational tools, including white papers, blogs, explainers, market updates and so forth, that relate to cryptocurrencies can be used to support lead management in order to attract investors.