Dr. Clemen Chiang is the CEO of Spiking.
getty
We are on the verge of a new era of investing that will leverage the strengths of traditional financial models and the advancements of blockchain technology. Blockchain is no longer a fringe technology in finance. Major financial institutions, including BlackRock and HSBC, are adopting blockchain-based funds and platforms, and a growing number of countries around the world are launching, developing or researching central bank digital currencies.
As a fintech entrepreneur with years of experience in both portfolio management and financial innovation, I am excited about the immense opportunities we can unlock by combining these two domains. But I have also observed an urgent need to bridge the gap between the models that have historically guided Wall Street's money managers’ investment decisions and the rapidly evolving blockchain currencies and applications that will shape future investments.
In 2022, BlackRock CEO Larry Fink predicted that "the next generation for markets, the next generation for securities, will be tokenization of securities,” meaning that stocks, bonds and other financial instruments will eventually be converted to digital assets on a blockchain. I share this vision that, in the future, every single asset class will be tokenized on an open, immutable ledger—from stocks and real estate to art and vintage whiskey.
The current landscape is fragmented and confusing. Traditional financial models rely on a vast array of metrics, such as price-to-earnings ratios and debt-to-equity ratios. Blockchain assets have their own set of metrics, such as on-chain analysis for cryptocurrencies. The sheer volume and diversity of these metrics can be overwhelming, especially for the average investor, and investors need to be able to compare apples to apples, not apples to oranges.
To navigate this new terrain effectively, we must develop integrated frameworks that enable investors to evaluate blockchain options and stocks through the same lens, with the same criteria. Comprehensive integration will help us get the best of both worlds: the wisdom of traditional financial analysis and the transparency and security of blockchain.
The Value Of Traditional Models
Fundamental financial models such as the capital asset pricing model (CAPM), efficient market hypothesis (EMH) and modern portfolio theory (MPT) continue to offer money managers valuable guidance in investment decisions in the following ways.
• Fundamental analysis: Evaluating a company's financial statements, management and competitive advantages, as well as market conditions to determine its intrinsic value.
• Technical analysis: Using historical price data and trading volumes to forecast future price movements.
• Quantitative analysis: Employing mathematical models and statistical techniques to determine risk and return.
• Sentiment analysis: Assessing market sentiment through news, social media and other sources to gauge investor behavior and potential market moves.
The Benefits Of Blockchain
Traditional models also have constraints and inefficiencies when trying to address modern financial challenges. When integrated with Wall Street data, blockchain tools can improve important metrics.
• Transparency: Blockchain’s transparent ledger system enables immediate verification of transactions, significantly reducing the risk of fraud and increasing investor trust in data.
• Real-time data: Blockchain continuously updates and validates transaction records on its
decentralized ledger, allowing money managers to monitor and analyze real-time data from traditional and digital currency transactions.
• Asset tokenization: When traditional assets, including stocks, bonds and real estate, are represented as digital tokens on a blockchain, it lowers high barriers to entry in markets that were previously inaccessible to many investors. Tokenization allows fractional ownership, making it easier for people to buy and sell portions of these assets.
An Integrated Model For The Future
I believe that a framework that successfully combines data and insights from both traditional and blockchain-based assets must focus on several key areas.
- Unified metrics: We need to create comprehensive metrics that can be applied across all assets. For example, in my company, we've developed a proprietary "universe net purchase" metric that tracks the net buying and selling activity of major money managers for stocks and digital currencies.
- Transparent data analysis: We can offer investors a more complete, timely picture of asset movements and market trends by highlighting financial data from traditional sources on a transparent blockchain ledger.
- Risk assessment: By integrating blockchain data with traditional risk models, we can provide investors with a more nuanced understanding of portfolio risk across diverse asset classes.
- A dedicated blockchain bridge: We need to develop a blockchain specifically designed to ensure interoperability between existing financial systems and various blockchains. This bridge should support real-time data synchronization, implement advanced cryptographic techniques for data security and privacy and include features such as smart contracts for automated compliance and trade execution.
- Unified regulatory alignment: As regulatory bodies such as the SEC begin to oversee both traditional and blockchain-based assets, we have an opportunity to create standardized reporting and compliance frameworks that span both worlds and encourage collaboration between regulators, financial institutions and blockchain experts.
- A common investing approach: We need to establish standardized valuation metrics, benchmarks and analytical tools that can be applied to stocks and digital currencies. By developing clear guidelines for future asset tokenization, we can also prioritize consistency and comparability as financial systems evolve.
In our efforts to move toward integrating and analyzing traditional and blockchain-based assets, my team and I are developing the FIAT methodology:
• Fundamental: Incorporating key financial metrics from all relevant sources.
• Insider: Tracking the transactions of major money managers across stocks and digital currencies.
• Alert: Monitoring news and social media sentiment from a wide range of sources.
• Technical: Applying advanced charting and trend analysis to all asset classes.
As we move toward a future where tokenization becomes increasingly prevalent and blockchain plays a greater role in financial portfolios, the tools and methodologies we develop today will be influential in shaping how and where we invest. We need holistic, multifaceted frameworks that can help us create more effective, transparent and accessible financial systems for all investors.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
