All assets have a price, which is set at the margins. Beneath the market clearing price (where the bids and asks meet) is an orderbook. The orderbook represents the depth of market participants willing to take liquidity (sell) and provide liquidity (buy). Successful investing (ie. two-way risk management to both the upside and downside) requires a deep understanding of the “dominant rulesets’’ which govern the orderbook of a particular asset. Long gone are the days of “buy low / sell high” value investment frameworks as the dominant ruleset.
Evidenced by the violent Mar 2020 draw-down and subsequent melt-up in markets through the summer, the orderbooks of many assets are now more heterogeneous than ever. Value investors have been met at the margin with a formidable mix of: (i) price-insensitive passive strategies (401k flows, target date funds), (ii) implicit / explicit volatility-linked strategies (risk-parity, vol control funds), (iii) market-making activity-driven flows (eg delta/gamma hedging of options, ETF authorized participant actions), (iv) central bank programs like QE buying “collateral” (note: collateral which underpins an ever increasing amount of secured financing activity, OTC derivatives, etc), (v) to new regulations and geopolitics that drive changes in macro balance of payments (trade and capital account) flows. …
Well before COVID, there was an unspoken consensus that our global economy — powered by the US dollar — was likely not sustainable. It was never a question of if, but over what time period that the world would transition away from a USD-dominated system.
Coming out of the 2008 Great Financial Crisis (GFC), Central Banks were tasked with bringing the global economy back from the brink through unprecedented monetary policy. For a while this worked, but like all market cycles, people eventually adapt to the new rules of the game. Excesses develop and unintended consequences emerged. Leading up to this latest market crash — the fastest decline in history — was a decade long bubble brewing in short volatility (vol) strategies.
Short vol bubbles eventually pop when there are bouts of higher volatility. Like a ticking time bomb, any number of market catalysts would have eventually set off the short vol unwind. …
It is inevitable that those who become interested in crypto / digital assets, also become interested in the mechanics of the global modern monetary system. Just as there is a well-known “crypto rabbit hole”, there exists a parallel rabbit hole on discovering “what Modern Money is”.
Contrary to many people’s intuition, Modern Money is a more complex concept than most realize. Long gone are the days of money being backed by gold and a banking system that creates credit only through deposits and loans. Today, a global complex network of credit-based instruments function as Modern Money. …
Since its inception after the Great Financial Crisis of 2008, Bitcoin has captured the hearts and minds of many around the world. Yet, 10 years in, many people still don’t have a common agreement on what Bitcoin really is.
No matter how many times it has been pronounced dead, it continues to exist. And like clockwork, the network of loosely bound participants comes together, every ~10 minutes, to update a global ledger of transactions. All of this driven by a deceivingly simple incentive laid out on a ~10 page document published just over ~10 years ago.
One of the most common misconceptions about the Blockchain and Digital Assets space is that we’re witnessing “a technology-driven” revolution. While the technology paradigm of distributed ledgers (“DLTs”) certainly brings incremental innovations to the table — mainly increased standardization and electronification — arguably, the bigger transformational innovation comes from new forms of distributed governance and incentive mechanisms.
Technology disrupting finance is a narrative that’s existed for a long time. The dream has always been for tech to digitize financial services, increase competition/access, reduce concentration risks, and improve customer experience. Many sales-pitches have tried to achieve this: from FinTechs, TechFins, API / Open Banking, to Permissioned Blockchains.
At their core, investment managers perform the important function of matching savings with investment opportunities. They either employ strategies to invest client cash into market tracking products (passive, index/ETFs) or into products which try to outperform (active, alpha-generating).
For most managers, the past 10 years since the crisis have presented a conundrum. Increasing central bank liquidity (Quantitative Easing), coupled with an increasing shift into passive strategies that do not consider fundamentals in their valuation, has led to a regime change in the global financial market structure. …
Excitement around the potential of blockchains and digital assets, including cryptocurrencies, can be summed up by a deceptively simple idea:
“Blockchains allow us to create digital jurisdictions that are not defined by geographic borders.”
Blockchain-based digital jurisdictions are conceptually analogous to countries. Like countries that exist today, they have their own underlying markets, incentives, governing mechanisms and assets. Collectively, we refer to these ecosystems as “digital economies”.
Understanding how value is created and accrued within digital economies requires a different way of thinking. One that combines ideas across many disciplines: from computer science, behavioral economics, finance, psychology and political science.
This article presents a multidisciplinary set of 3 critical “macro narratives” for blockchain-based digital economies. …
Science, by all measures, is a public good or infrastructure that exists across borders. As a close friend recently noted: “cancer doesn’t care where you live”. Yet, the way that most science-focused funds are set up, implicitly evaluates investments in scientific technologies and marketplaces based on geographical (and sometimes political) boundaries. In fact, the scientific economy works best when there is frictionless collaboration across borders and fair attribution of contribution across the globe.
Historically, scientists have relied on a number of scientific platforms / intermediaries to facilitate collaboration and drive efficiencies. A number of venture investments were made to simplify various layers of the science stack — from the information layer (intellectual property management, scientific publishing), the operating layer (laboratory robotics and automation, outsourcing), to the funding layer (platforms to fund basic and commercializeable research). …