As they say on Wall Street… money never sleeps and it's true. The investment landscape is constantly changing and global markets are permanently reacting to political and economic changes occurring throughout the world. Nowadays we are used to and expect everything to happen at lightning speed and most everything we need is never more than a click or tap away on a screen.
Admittedly the professional side of the financial world has always been fast and has used whatever was the cutting edge technology of the day to trade and gather market intelligence. The difference was that everyday life wasn't quite as fast as the speed at which the money markets and those that worked in it were.
With this in mind the consumer facing side of the investment world has been forced to adapt. Today's consumers demand everything now along with ease of use and good value. It therefore stands to reason that the consumer side of investing has had to catch up fast and this is where robo-advisors have come to the rescue.
Robo advisors in traditional markets
If you are not familiar with the term robo-advisors, they are algorithm-driven software bots that perform portfolio management 24 hours a day, 7 days a week, 365 days a year. They don't need food or sleep and that's a very good thing when it comes to taking care of your hard earned money.
The first robo-advisors arrived on the scene way back in 2008 during the financial crisis and were initially used by financial managers as an online interface and to balance their clients assets. A couple of prominent robo-advisor examples are Betterment and ETFmatic. Betterment, one of the largest independent robo-advisors based in the United States was launched in 2010 by Jon Stein. Betterment is primarily focused on the US market and as of April 2021 had over $29 billion of assets under management and over 600,000 customer accounts. Brussels based ETFmatic is a major player in the European robo-advisor space specialising in exchange traded funds (ETF) and was recently acquired by Aion bank.
Since then robo-advisors have grown both in popularity and in terms of the sheer number entering the market.
The math behind robo-advisors has been around since the middle of the past century and the underlying technology behind robo advisors has been available since the early 2000s but it is only the arrival of cloud-computing and the internet revolution that has made it cost-effective and available to the masses.
Robo advisors for crypto
Fast forward to today and say hello to crypto robo-advisors, the latest innovation in the world of robo-advisors. In traditional stock and commodity markets money does actually sleep whilst the markets are closed but in the hyper fast world of cryptocurrency money really never sleeps. The crypto market is running 24 hours a day, 7 days a week, 365 days a year. With this in mind it would literally be impossible for even the most talented and determined person to efficiently monitor the crypto markets around the clock every day of the year. Crypto robo-advisors however do exactly that. Crypto robo-advisors are built to automate and optimize the highly demanding task of monitoring and fine tuning crypto portfolios.
But there are different ways to build robo advisors and different ways of managing portfolios. From Indexing solutions to using highly sophisticated algorithms built on advanced award winning scientific and economic principles, let’s take a look at the options.
Robo Advisor Strategies : Modern Portfolio Theory (MPT) , Indexing, the Ulcer index and iVAR
Let's dive in a bit deeper and get a little more technical as to how robo-advisors and crypto robo-advisors actually work behind the scenes.
Modern Portfolio Theory (MPT)
Way back in 1952 Harry Markowitz introduced Modern Portfolio Theory as an approach to constructing investment portfolios and received a Nobel prize for his pioneering work. Modern Portfolio Theory essentially boils down to constructing an investment portfolio that has the task of maximising the expected return whilst assuming a certain well defined level of risk. Markowitz defined this amount or level of risk as volatility, which is also referred to as the standard deviation, a value that measures the dispersion relative to the mean. What this essentially means is that if a certain financial security has a larger price range variation where the data points are further removed from the average this indicates higher volatility and thus higher risk.
Most robo advisors in traditional finance still rely on those basic principles of Modern Portfolio Theory to construct their portfolios.
However it should be noted that investors generally do not perceive this standard deviation only as risk but also an indication of potential opportunity (i.e. when the price "deviates" upwards). If a financial security hardly moves up or down, whilst it may be stable or safe it generally does not present much money making opportunity either. What investors are interested in is a measure of the downward risk or drawdown as it's known in investment talk in order to make safer investments with a lower downside risk.
Strategies based on Indexing
Today most robo-advisors in traditional finance work with exchange traded funds built on market indices and they use Modern portfolio theory to decide what index fund to buy and in what proportion.
That’s certainly true for betterment and for ETFMatic that we mentioned above. Index Funds are great in traditional finance since they allow you to buy a whole swath of the market at once, and very cheaply. So if you want to buy all the "financial" companies in the US, you can buy a share in an Index made up of all the "finance" companies listed on US Stock exchanges for about 100 dollars. Because shares in traditional markets are not fractionable, it’s the easiest way of building a very diversified portfolio with relatively little money.
Traditional market focused Robo advisors will therefore choose amongst a list of 10 to 50 exchange traded index funds to build your portfolio.
Indices (and so Index funds) are usually rebalanced on a monthly basis and work perfectly well for the somewhat slow moving traditional markets.
In crypto too, some have replicated those strategies. MakaraDigital offers "baskets" of tokens you can buy at once, and which are rebalanced periodically. TokenSets similarly offers a decentralized version of index investing with the DeFi Pulse Index and the Metaverse Index.
But applying the same principles used in traditional markets isn’t strictly necessary when it comes to crypto. One can buy fractional shares in the vast majority of crypto and build a pretty respectable and diversified portfolio starting from just 100€, whereas 100€ would not buy you a single Amazon share! Also, crypto moves fast. Really fast. At this point in time, it’s more like investing in startups and not like investing in 150 year old industrial behemoths, so rebalancing on a monthly basis is maybe not the best approach and perhaps also a little risky when it comes to crypto robo-advisors.
Introduction to The Ulcer index
The origins of the term Ulcer index you can probably guess. The term Ulcer index effectively derives from the level of volatility risk an investor can effectively stomach without getting an ulcer. To deviate briefly from this point it should be noted that since the advent of the term Ulcer index it is widely acknowledged that bacteria are the cause of gastric ulcers and not the stress from investments although the stress probably doesn't help! Be that as it may, the term Ulcer index has stuck and is an indicator of volatility that helps analysts and traders determine what are the optimal entry and exit points when trading.
The concept originates from 1989 when it was first introduced as a way to determine the downside risks of mutual funds. The Ulcer index is considered by many to be a superior way of calculating risk compared to say standard deviation. The Ulcer Index calculates the amount as well as the duration of a percentage drawdown in comparison to the previous highs. The worse the drawdown is, the more time it would take for a stock to recover and return to the original high point, therefore leading to a higher and less desirable Ulcer index value.
There are not many robo-advisors on the market that look at investment risk the way humans do.
iVAR - the answer to managing the risks you should actually care about.
Now that we understand a little about Modern Portfolio Theory and the Ulcer index we can begin to understand the concept and the origins of iVAR. iVAR is a human centered risk metric, based on Value at Risk (VAR) which addresses the key factors that investors perceive as risk; namely the frequency, magnitude and duration of losses. Here we should highlight that we are talking about the frequency, magnitude and duration of losses and not upward and downward fluctuations which is what is commonly measured using standard deviation. Because with standard deviation one perceives their portfolio increasing in value as an actual risk.
As you will see, not all robo advisors are created equal and regardless of the market you are investing in, traditional or crypto, it is crucially important that you understand and are fully on-board with your chosen roboadvisor's strategy.
To learn more about our portfolio construction methodology please take a look at the link below:
The pros and cons of crypto robo advisors
First the pros
Crypto robo-advisors are operating in a not yet mature market
Whilst traditional financial markets are quite mature, the crypto market in comparison is far from mature. It's still relatively new, has many hurdles to overcome and can be extremely volatile. This provides an even greater need for crypto robo-advisors that can mitigate and manage the downside risk using sophisticated algorithms for portfolio construction.
24 / 7 monitoring
One of the primary advantages of particularly crypto robo-advisors is the ability to continually monitor the crypto markets on a 24/7/365 basis and automatically adjust the portfolios they manage within very tight tolerances that have been set by the teams managing the crypto robo-advisors. We have to acknowledge that whilst the world of cryptocurrencies presents massive opportunities for gains due to high levels of volatility the risk needs to be managed very well and crypto robo-advisors are ideal for this kind of work. Now if you found a robo advisor that only rebalances monthly, it might have been more inspired by the traditional markets than what is actually most effective for crypto.
Non emotional decision making
Another key advantage is that crypto robo-advisors don't have emotions, they don't get tired and they don't have a bad day. They are there to do a fast paced and demanding job at the same level of quality, speed, pinpoint accuracy and endurance 24 hours a day, 7 days a week, 365 days a year. It would be practically impossible for a human being to perform this task with the same level of accuracy, precision or endurance that a crypto robo-advisor could provide day in day out, furthermore running the same equations every 15 minutes would also likely bore a human to death.
Robo advisors in general and crypto robo-advisors have democratized investing and lowered the barriers to entry for everyday investors. Serious investing was previously reserved for the wealthy who had the means to invest significant sums of money, think at least $50,000 and upwards and as a result were able to have a portfolio manager or financial advisor to manage their investment portfolios. This however left behind a massive swath of everyday people who had relatively smaller amounts available to invest and were left to their own devices to devise and monitor their own investment portfolios while likely not being aware of the latest developments in applied mathematics for portfolio management because, honestly, who has the time? Whilst this can work well for someone that has the available time, talent and interest, the majority of people simply don't have the available time or interest for that matter. They want to put their money into safe, knowledgeable hands and not have to think about it. Crypto robo-advisors fit in perfectly here, they are relatively inexpensive and require very low opening balances and generally have lower fees than human managers. The minimum investment levels are within the reach of most people and provide a very efficient and elegant solution for experienced investors as well as those that are maybe new to crypto investing.
Now the cons
It's inherently less personal
One of the strengths of crypto robo-advisors, the lack of a real person managing the portfolio could also be seen as somewhat of a downside. The fact is you cannot speak to your robo-advisor and discuss your very specific financial needs and goals. We should however put this into perspective. Those with considerable funds to invest and wanting the reassurance of a person to call can always opt for a more traditional financial advisor, however the sheer economical advantages of crypto robo advisors making it possible to have your portfolio managed 24 hours a day, 7 days a week using cutting edge technology and algorithms with low fees and low opening balance requirements must surely be seen as a positive overall. Crypto robo-advisors are by design built for the masses and have to fit the needs of a very wide cross section of investors. They are not bespoke like individual advisors and therefore are not tailored to the needs of an individual but rather to a large group of investors as a collective. This is however the only way such a technology can feasibly exist so perhaps it's more of a pro than a con!
Also, they’re not all that different from one another, and the 10 or 20 types of portfolio a robo advisor can offer you is often enough diversity to satisfy 99.9% of people's needs.
Robo advisor technology has not experienced a financial meltdown event
The first robo advisors arrived on the scene in 2008 around the time of the global financial crisis and have since then operated in a relatively stable financial environment. There is no proof yet as to how robo advisors would cope during another massive financial meltdown such as the global financial crisis of 2007 - 2008. The 2020 pandemic is certainly a major global event however it has not shaken the financial markets in quite the same shocking way as the 2007 - 2008 global financial crisis compared to industries such as aviation, tourism, oil and brick and mortar retail that have certainly suffered more. Fortunately the financial markets have been more resilient since the 2007 - 2008 crisis and hopefully this resilience could well spill over onto robo-advisory services whenever the next big one comes along!
Where to find crypto robo advisors
We mentioned some above, but also mentioned their shortcomings. And this is where our Crypto Autopilot comes in. The Crypto Autopilot algorithm builds Crypto Portfolios using iVAR - so effectively looking at the risks you should actually care about whilst also checking whether it is the optimal portfolio multiple times per day. This way you are not left holding a bag of worthless coins because one coin went belly up in the middle of the month, like an indexing strategy could.
If you would like to see the results of the Crypto Autopilot versus 5 other popular Crypto "indexing" strategies, you can take a look at this dashboard: http://bit.ly/OSOMPerfBenchmark
The Crypto Autopilot is a completely hands off solution for investors who do not want to manage their portfolio, make trades or stay up to date on daily finance and crypto news.
The experienced Crypto team at OSOM carefully chooses which assets are good and investable on a daily basis, and then the algorithm does its thing, running millions of calculations on cloud computers to find the optimal allocation 24/7/365.
OSOM is secure and regulated by the Estonian Financial Intelligence unit. There are no hidden fees,and you only pay for performance. For more information check out the homepage: https://osom.finance/
The arrival of crypto robo-advisors should be seen as a real step forward.
The efficiencies brought about by highly advanced software algorithms, high levels of computing power and access at everybody's fingertips means that investing is truly becoming democratized. You no longer need to have significant funds to invest or a deep knowledge of the crypto markets. As crypto robo-advisors grow in popularity and sophistication it is fair to say that we can expect a wider spreading of wealth across all levels of society, true accessibility at last! But beware, they aren't all created equal, so do make sure you really understand the pros and cons of the crypto robo-advisor you are considering very carefully!