New Era – Revisiting “Investment Decisions Framework”

In 2016, I wrote an article about why to invest in bitcoin. I explained why that would be the best alternative compared to other asset classes. Keep in mind that at the time bitcoin was not even thought to be an asset, let alone something that most of the investing world or investment gurus would invest in. In fact, I also wrote that it was the least risky of all (inspired by the new kid in the block)! Looking back it has produced returns of more than 2000% in this period.

Now it is spring 2018, probably the last snowing day, and I am inspired to share my thoughts on decisioning and my investment decisions framework for the new era we live in.

Your investment decision should strengthen your portfolio in at least three ways:

  • Layer 1 – Expanded Selection of Assets
  • Layer 2 – Decision Analysis to Build Conviction
  • Layer 3 – Allocation Decisions Driven by Logic

Layer 1 – Expanded Selection of Assets: Today swathes of money are blindly chasing ETFs and passive allocations – the money is moving dangerously in one direction, and volatility in the market has become alarmingly low. So it is pretty nasty out there right now as investment has become very very unidirectional and can’t be sustained. Please become multi-dimensional. There are multiple assets and n number of options in each of those asset classes. Many new asset classes are emerging, and many old ones are moving off the radar. So we can’t keep checking the same periscope. I am not saying let’s move as the world is moving. No, not at all. In fact, I am a big fan of old asset classes, as they will soon become very very important. What I mean is, we should not think about selecting assets in the old-fashioned way. We need to expand our horizon and constantly seek new assets – things are changing rapidly with technology, and technology itself is the biggest investment you can make.  So don’t get stuck (in management, we would say don’t get into an anchoring problem) with existing assets that you hold. Seek new ones, learn, experiment and add to your arsenal. Don’t throw away old asset classes as they become unfashionable, either. Be very critical in your decisioning. If you are an investment house, have people, partners, tools and processes that help you grow your assets, in both number and quality. Don’t miss out on great investments!

Layer 2 – Decision Analysis to Build Conviction: Every asset has its own value drivers, things that make that particular asset grow or shrink. They can be radically different from one another even in the same asset class. For example, the pre-dominant (but by no means the sole) value driver for Ethereum is the developer community, whereas for Bitcoin it is the network transactions and wallet counts. For Apple, it is product & service purchases. You need to look at assets together with their value drivers. Industry people will know the value drivers, so you need to learn something about them. Focus on understanding the predominant value driver and base the asset’s growth on that – irrespective of the price movements. It’s best to collaborate with experts who can do that for you.

Layer 3 – Allocation Decisions Driven by Logic: Even once you have selected multiple assets and analyzed which ones are good investments, never jump to investing immediately. Never have FOMO – fear of missing out. You need to look at how the decision to include the new asset changes the total risk of existing portfolio. Is it rightly correlated and does it reduce the overall risk? What % you should allocate? Is it a good time to invest in this asset class? If not, wait for the right time. One of the best ways to invest in any asset class is with dollar-cost-averaging – in layman’s terms, if you plan to invest x$, start by investing a small proportion of that x$ and keep adding to your initial investment as your conviction grows. Another most important criterion is liquidity.  Never ever put all your allocation into illiquid assets. For example, many families ruin their entire productive life by buying a house (an illiquid asset) and then working just to pay the loan for that house. Keep your emotions out of your allocations: have a proper model and system for that, too. If you are an investment house, definitely have proper tools for allocation methods, maintain a healthy watchlist and have governance implemented on top of all your investments.

Above all investment decisions, the best investment is always investing in yourself and the people around you. Over time, there is nothing that beats that. If you ever have a choice between asset classes and people, go for people without a question. If after that you have another important decision to make – then it is to invest in technology.

Have a great day!

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Quick review note to myself – 4 – Oct 2019

  1. Market is losing momentum (S&P and Dow). May be time to reduce in West-stocks and wait in sidelines. May be good time to reduce unwanted risky positions. Curve has inverted too. Yield-spread has increased. In a few months, we will be entering rough patches
  2. Gold and silver are gaining momentum. May be good to increase position given interest rates and crisis times.
  3. Stay put on crypto space – watch out for large changes around stable currencies, cryptography, decentralized Identity and Access, cross-border investing, asset tokenization, next generation internet etc. Look out for the stars and gems. Buy some cryptocurrencies with your existing money.
  4. Keep It Simple – buy 50% gold, 50% crypto at throwaway prices.

2019: looking forward

There is so much uncertainty in the market – some say we are close to recession, others say it’s a golden period for everything. In spite of such polar opinions, there is still a lot of clarity on how the world and markets are fundamentally moving forward. For example, in 2016 Are we in deflation? & 2017 Deflation Export: New Trend, I wrote on how nationalism will be the main underlying force in economics for the next decade. You can see that the trend continues to take more shape and speed with trade tariff wars and geo-political uncertainties and how military spending is going through the roof everywhere. If globalization was the force for the last 40 years, nationalism could be the force for at least the next 20 years if unchecked.

Imagine what it would mean if China forked out or disconnected from the main global or western supply-chain. That would completely alter the supply-demand curve and could lead to extreme uncertainty and highly imbalanced price movements in different asset classes. The policies of governments are going to play a much larger role. So one thing we can expect for sure is volatility. I will be publishing the right market instruments to capture that – based on the tech research I run – in the next days.

When hedge fund manager Ray Dalio raises comparisons to the 1937 scenario of recession coupled with world politics and war, he is more than right. A wealth gap, low-interest rates and nationalism are all in force. The right question is how people should understand that scenario if it plays out and how we can protect our assets and invest (or divest). Every asset class has to be looked at again – cash, gold stocks, bonds and commodities. All these base instruments are in a totally different context today. I am studying this very carefully based on my research and AI-based data analytics. Commodity prices are especially likely to go for a toss and that is one area where you could see the maximum price movements.

Many of us who have a technology background and use technology to solve many problems in the world wish it could play a role in solving many of the issues that would arise during such periods. Unfortunately, current technologies including artificial intelligence have not really helped with the wealth gap or worldly problems, but at least AI has helped us to understand the issues. Technology can also help us to build social infrastructures in a participatory manner. 

These are times for everybody in the world to protect their assets. Cash does not have the same meaning as it used to, and assets are not correlated to their fundamental values as they used to be. It is more than ever the time for being discretionary & selective. I aim to help in those tough decisions!

#4 Blockchain & Fund Mgmt., KW 15/10/18

Investments Impacting  and Insightful Events

Big names like Apple cofounder Steve Wozniac, hedge-fund billionaire Steven Cohen and  plastic surgeon/startup investor Kim Byung-gun are all investing and going big in this space! Is the underlying value being felt by the most knowledgeable people?  Interesting times of change.

Traditional players like fidelity are getting in, and coinbase is focussing more on retail. The positioning in this space is starting…

Steve Wozniak Apple cofounder gets into blockchain based VC service

 Steven Cohen goes blockchain

Plastic Surgeon Buys $352 Million Stake in Korean Crypto Exchange

Investment Giant Fidelity Launches Assets Targeting Institutional Investors

Coinbase shutdown large investors index fund

TRON marching into 10s of billions!

Blockchain Security: Bank Perspective

This is the abstract my Deutsche Bank colleagues Riccardo Riccobene and Prof. Wolfgang Hoehnel and I submitted for Industrial Track WI2019.

The threat surface of blockchains can be divided into two parts. Inside the Blockchain and Peripheries of blockchain.

Peripheries are systems that connect to blockchain network from outside. For example, an exchange where different currencies get traded or wallets where users store their own keys. The most of the hacks for example on bitcoin happened on the peripheries of bitcoin network. Especially, the Exchanges and not inside the blockchain. For example, the famous Mt.Gox which was an exchange where in June 2011, 750 thousand bitcoins( More than a 5 Billion USD value today)  were reported to be missing from the exchange to the latest Zaif exchange hack in Sep 2018 where 60 million dollar was stolen. Bitfinex, Bitfloor, Poloniex and Bitstamp all were surrounding system where security breaches happened and not in the blockchain itself.

The Second type of threat surface is inside the blockchain itself.  Smart contracts are code by which blockchain platforms are programmed to execute the needed logic. Example of a simple smart contract would be transfer money X from address A to address B.  If there is a cryptographic error or simple programmable errors, that can be used to abuse the blockchain network.  Here the new networks where the code is still not used for long time, and all bugs are not yet corrected are susceptible. For example, famous DAO project would be a good case. Smart contract Split-Return was used to hack the blockchain network to pay-out large sum of 52 Million dollar.  Weak consensus algorithm and methods of consensus are as well big issues. Many of the smaller projects and non-proof of work suffer from this issue. There are multiple threat vectors but the most important ones to be smart contracts quality and proof of consensus algorithms. To avoid inside chain attacks, it is important to write very clear code and tested from multiple angles and audited by third-parties before live deployment.

Most of the threat you see would be variants of the above two.  Cyber Security teams need to handle both of these threat surfaces.  Most of the work being discussed is in-blockchain security and smart contracts but blockchain becomes more usable by enterprises when end-2-end security including the peripheral systems and applications using them are also taken care from security perspective.

There are multiple methods used to secure end-2-end. But core of all this and fundamental one to all this is cryptography. So End-2-end key and certificate management plays the most important role.  Identity to key mapping and vice versa is also big part of the solution.  It is important to use the typical defence-in-depth security from hardening to penetration testing must be done on the oracles.  Oracles are the gateways through which data is transmitted in and out of the smart contracts in the blockchain. Normally a typical IT system would be GIGO: Garbage In and Garbage out.  In blockchain world, it is GIGS: garbage in garbage Stays.

Last but not the least, we as users are the biggest threats be it outside or inside.  This is the area, where we believe, most of the future research will go into in addition to the privacy and custodianship which are as well very important pillars in Cyber Security for Blockchain.

Take on emerging markets – deciders perspective

As there have been some strong movements in global markets in the last few days, here are my thoughts

For emerging markets: The strengthening of USD and increasing interest rates mean:

  • -> weakening of emerging markets currencies
  • -> so commodity prices in the emerging world shoot up
  • -> so cost to companies increases (for example, the price of oil)
  • -> so lower profits are anticipated
  • -> so Sensex drops.

Some additional observations:

  • Defensive sectors are picking up – healthcare, energy, industrials, utilities: people are moving to safe assets.
  • The American dollar is going up!
  • The gold price has done well in emerging markets.

Mainly notes for myself on investing in emerging markets (these are just thoughts, not advice; take this rants at your own risk):

  • Safe investors: This is the time to be in cash or money markets (it was not sexy, now it is – 2%)
  • Risky investors: If you have the ability to short without a lot of leverage, it might be worth trying small caps that ran too far.
  • Market neutral long large cap, short small caps.
  • Gold is only advisable in emerging markets with conviction.
  • If you want to stay in stocks, rotate to safer sectors like healthcare, utilities.

Preserving your capital is more important than anything else in such times.

#3 Blockchain – Asset mgmt, KW 01/10/18

Most Notable News

There is a forward-forward Indicator for crypto now. Crypto market is highly driven by sentiments and market-noise. It is well-known that growth in google trends is a good forward indicator for crypto world. Google is again going to allow crypto ads, which means that more people going to look into this space and thus more interest over time. Metamask among hot wallet/web wallets has the highest appeal among the Ethereum developers and now with support of Ledger hardware wallet, they have taken the game of wallet/custody to the next level. Stellar Dex is going to definitely induce large scale liquidity to the market as many of their different BAAS project will start using this over time.

  1. Google to allow crypto ads again
  2. Metamask support for Ledger wallet
  3. Stellar launches decentralized exchange: zero fees
  4. Swiss-Based Asset Management Firm to Introduce Metals-Backed Cryptocurrency
  5. Extremely Difficult’ Conditions: India’s Zebpay Shutters Crypto Exchange
  6. Opera Partners With Ledger Capital to Explore Blockchain Applications
  7. Jobs in Blockchain is growing big way: believers time to jump in
  8. enterprise security with AI and blockchain

Most Investment-Related Notables

Custodianship is one of the biggest challenges in market, so here’s a refreshing and bold take by bitgo on custody. The MKR 16z debate was most scintillating this week, and here’s the a16 take on that.

  1. Bitgo: 1 trillion dollar Wallet
  2. Purchase of MKR by a16

Most Interesting Insightful Reads

  1. Mass onboarding on Ethereum: a nice model
  2. Stablecoins discussion
  3. Blockchain Privacy

#2 Blockchain & Asset Mgmt. KW 24/09/18

In my opinion, these are the major impactful and interesting news and articles this week, which are shaping the fusion of blockchain and asset management. Purpose will prevail: we can look forward to an Ethereum & ASIC tug of war. The HSEX strategic imperatives on data and market tech products are interesting. We see an interesting trend in origin tracing for food products, with multiple real cases coming from retailers. It’s very interesting to note that not only typical tech-cloud providers like MS Azure and Amazon Web Services and typical blockchain platform providers like Ethereum or EoS but also verticals like Ant Financial are entering the BaaS (blockchain backend as a service) space. It’s worth noting how a strong crypto-mining country like Iceland talks about blockchain, especially the reuse of the infrastructure.  Things can happen in the market, and smart contracts have to be defined in even stronger terms: now imagine this case of a Norwegian black swan!

Most Notable News

  1. Ethereum at gunpoint with ASIC miners: Purpose will prevail
  2. Brazilian Brokerage Behemoth Launches Bitcoin Exchange
  3. Report: Hong Kong Stock Exchange Eyeing Blockchain Firm Acquisitions
  4. Swiss Bankers Ease Access for Crypto Startups to Prevent Mass Exodus
  5. Dutch Supermarket Giant Adopts Blockchain to Make Orange Juice Production Transparent
  6. Alibaba’s Ant Financial to Launch Blockchain Backend-as-a-Service Platform
  7. Icedland aiming to be a pure blockchain business country
  8. South Korean Gov’t Pledges Support for BlockChain Startups to Facilitate Industry Growth
  9. Norwegian Power Trader Facing Bankruptcy After Massive “Black Swan” Loss

Most Investment-Related Notables

Non-fungible tokens are getting very interesting from an investment angle. Cryptokitties and decentraland are two of the first, but there are many coming in arts, music, and other creative industries. Here’s something like coinmarkercap for NFT market caps. Secondly, ERC 1404 is very interesting for banks, with multiple regulations, compliance and controls – could be powerful.

  1. NFT marketcaps
  2. Restrictive token standard for Banking ERC 1404

Most Interesting Insightful Reads

There are a lot of lessons to be drawn from winding down – the state of the ICO market, what utility vs shareholder rights means in a real context, how such a winding down could be put in the governance model and in smart contracts themselves. Read on. – winding down

Blockchain & Asset Mgmt. Week 17/9/2018

In our opinion, the major impactful and interesting news and articles this week that is shaping the fusion of blockchain and asset management.

Most Notable News

  1. 65 projects related to Environment listed by WEF
  2. Coinbase marching into Wall Street
  3. ECB take on digital Euro
  4. Korea partnering with Samsung on blockchain
  5. France preparation for ICO framework

Most Investment related Notables

  1.  Wave of crypto-institutionalization
  2. Crypto market 80 Trillion USD in 15 years

Most Interesting Insightful Reads

Practical review into first stable coin DAI

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