How on-ramps to new asset classes can change the demographics of asset ownership
A tweet a few weeks ago by Patrick O’Shaughnessy about on-ramps got my mind turning.
A few companies in the financial services space have been in the limelight recently in large part because they are on-ramps, the most noteworthy being Coinbase.
Coinbase created the on-ramp for investors to access the cryptoeconomy as an investable asset class. Coinbase CEO Brian Armstrong references this concept directly in his letter in the Coinbase S-1. By creating this on-ramp, Coinbase built a $100 billion business (at time of IPO) with more retail brokerage account customers than Fidelity, Schwab, and TD Ameritrade.
Companies that create on-ramps to different asset classes embody mainstreaming in retail financial services.
There is something incredibly profound and underrated about creating an on-ramp to new asset classes. Even moreso in an era where younger investors - Millennials and Gen Zs - view financial assets and investing in a different light than prior generations, and in an era where fractionalization enables investors to access assets that may have previously been unavailable to the individual investor.
Younger investors view culture as an asset class. Whether it’s sneakers, sports cards, collectibles, NFTs and NBA Top Shot, and crypto, investors want to invest into things that they can identify with as their interests, something that Leore Avidar of Alt eloquently describes as “interest-based investing.”
As a result of “interest-based investing,” we may see entirely new consumer financial services firms emerge. For younger investors, the first relationship they may have with an investment or financial services firm could be with one of these newer culture assets - crypto, sports cards, sneakers, collectibles, NFTs.
That is why companies that create on-ramps to new asset classes may come to define the future of retail financial services.
On-ramps bring new investors to an asset class. In their S-1, Coinbase states that they are the “default starting place for new user journeys into the cryptoeconomy.” Coinbase “reduce[s] the complexity of crypto by infusing usability at the core of each of [their] products,” which enables the mainstreaming of the crypto space.
Participation in the stock market is still not a reality for all Americans. Just 55% of Americans own stocks directly or through a mutual fund or in an IRA account, according to a Gallup poll from April 2020. The latest available government data, via the Federal Reserve in 2016, illustrates that only a small percentage of American families - 14% - are directly invested in individual stocks. Moreover, just 10% of households controlled 84% of the total value of these stocks.
Can on-ramps to new asset classes change the demographics of asset ownership?
Coinbase created this on-ramp for crypto investors in 2012.
Some of those individual investors who were early crypto adopters may now have more money in their Coinbase brokerage account than they do in their bank accounts.
This creates a very powerful dynamic for Coinbase.
They have both the assets and the trust of investors who were early adopters, not to mention the recent wave of millions of people who created Coinbase accounts to participate in the current upswing in crypto markets.
Companies that build on-ramps in other asset classes have a similar opportunity to Coinbase. As early Coinbase investor and Boost VC founder Adam Draper has said many times before, “gateways are super valuable businesses.”
Who are the on-ramp companies across different asset classes and alt investment opportunities?
Equities - Incumbents like Schwab, Fidelity, TD and startups like Robinhood, Public, Stash, Trade Republic.
Brokerage firms, both incumbents and upstarts, have created the on-ramp to enable more Americans to access public equity markets. Irrespective of your views on payment for order flow (PFOF), zero-commission retail brokerage has brought significantly more individuals into the market as investors.
We are also starting to see innovations in financial education, with companies like Commonstock, that are trying to educate investors about how to invest. This is a welcome - and necessary - addition to retail financial services.
Companies like Stash are also enabling investors to invest long-term into the stock market rather than trade, leveraging innovations in fractionalization of equities to enable more market participants at lower investment minimums. This is a good thing as well.
Early-stage private companies - AngelList, Republic.
Until recently, many investors did not have access to investing in early-stage private companies. Investment platforms like AngelList changed that for accredited investors. They enabled accredited investors to access early-stage private company investments in their SPVs alongside top-tier venture capital funds. Republic has done the same for non-accredited investors, lowering the investment minimum and bringing in all investors irrespective of their accreditation status.
They have created an on-ramp to investing into early-stage private companies, where significant value creation can occur in the more successful private companies.
Late-stage private companies - Carta, Forge.
Carta and Forge have a huge opportunity in front of them. By creating mechanisms for employees to enjoy greater liquidity in their startup’s equity, they have a chance to capture those employees as customers. They can help those employees diversify their potentially valuable single-stock position across a number of valuable later-stage private companies. Like Coinbase, they may serve as the first place where employees have a meaningful financial relationship due to the liquidity provided by their single-stock position.
Forge, for example, has created hundreds of thousands of new accredited investors by virtue of enabling employees, who are sellers of private company stock, to generate liquidity on their platform. Those investors are then investing that capital into other assets on the Forge platform, creating a powerful closed loop economy that keeps assets in their ecosystem.
Alternative investment funds – iCapital.
Private equity funds and hedge funds have previously been the domain of the institutional investor or the ultra-wealthy family office. This is in large part due to regulatory constraints that make it possible for only qualified purchasers ($5 million net worth and above threshold) and institutions to allocate to private equity funds and hedge funds. There are a number of investment platforms, iCapital included, that are structuring products for the accredited investor to access private equity funds at lower minimums. Provided that these funds are of the same quality as those provided to an institutional investor, like a pension or endowment, this is a positive development for the retail investor.
Wouldn’t it be interesting if every American could have exposure to private equity via their 401k or IRA?
Infrastructure – AltoIRA, Rocket Dollar.
More Americans have retirement accounts than taxable investment accounts. IRAs represent $11 of the $20 trillion in total retirement assets in the US. Self-directed IRAs can be an excellent investment structure to invest into alts – they can hold illiquid assets with long-term return generating potential, enjoy meaningful tax benefits and early withdrawals are penalized.
Companies like AltoIRA and Rocket Dollar are creating the infrastructure layer to enable investors to invest into alts via their IRAs. They have partnered with platforms to unlock the ability for consumers to invest into alt assets in a tax-efficient way, creating another on-ramp for investors to put assets into alts.
Crypto – Coinbase, Bitso, Shakepay, Sorare, Dapper Labs / NBA Top Shot, CoinList.
Crypto has offered incredible wealth creation opportunities for many individual investors over the past decade. Companies like Coinbase and Shakepay have become the trusted intermediary for many individuals and institutional investors to access the cryptoeconomy — and in many respects become a neobank for consumers that is built on crypto rails. We will see this continue to happen globally with regional players, such as Bitso, providing local users a new avenue to address the realities of currency devaluation and hyperinflation. And we’ll also see this happen with early-stage token projects, where issuance platforms like CoinList are enabling investors to access promising early-stage, blue-chip token projects well before they are listed on major exchange venues like Coinbase.
The NFT (non-fungible token) space and digital collectibles space is also gaining in popularity. Investors are keen to buy and own scarce digital collectibles, whether it be art, sports cards, or digital moments (and even first tweets, like Jack Dorsey’s, which is now selling for $2.5M).
Companies like Sorare, which just raised $50M from Benchmark and Accel, are providing an on-ramp for football fans globally to invest into digital cards of their favorite players, combining their love of fantasy sports with the ability to buy and sell sports cards digitally. The Sorare marketplace is growing – they’ve grown volume over 52% month over month for the past three months and a Kylian Mbappe card sold for over $65,000 in December.
Soccer is the world’s game, so when an on-ramp is created for fans of a global sport with global interest to invest, there’s a chance to bring in many new investors. And, as Alexis Ohanian said a few days ago, just wait until women investors have access to female sports stars’ digital collectibles and cards at scale.
Dapper Labs / NBA Top Shot are experiencing a similar phenomenon. People are buying rare digital basketball highlights, or moments, of NBA players and then trading them on the Top Shot secondary market. As of March 2nd, there had been over $278 million in sales from 88,000 buyers.
Companies like Sorare and Dapper (along with many others – as well as the crypto wallet providers like MetaMask and Rainbow Wallet) are creating on-ramps for investors to own a piece of digital collectibles in the crypto economy.
If making the front cover of a Bloomberg Businessweek issue doesn’t illustrate that sneakers have been financialized and are now an asset class, then I don’t know what does. Sneakers are now being traded on platforms like StockX just as stocks are be traded on the Nasdaq. Making the comparison to a traditional stock market even more spot on, StockX recently brought in a CEO who was a senior executive and head of listings at NYSE.
Sneakers are now an asset class where sneaker flippers are making hundreds of thousands, if not millions, of dollars trading shoes. The sneaker resale market is estimated by Cowen to be over $2B in GMV in North America alone and with the ease of which someone can buy or sell shoes online now, companies like StockX have created the on-ramp to the financialization of sneakers globally.
Art / Collectibles – Rally Rd, Otis, Collectable, Mythic Markets, Masterworks.
Fractionalization has been a huge innovation in the alternative investments space – for a few reasons.
First, fractional platforms unlock access to alts to a much wider swath of the population.
Second, fractional platforms unlock liquidity for premium assets, like multi-million dollar sports cards. A LeBron James fan who can’t invest $230,000 to own a BGS 10 LeBron James rookie card outright can go on Rally Road and purchase a fraction of that card. This is a major development for the market structure of cultural assets as financial assets. Providing access to individual investors helps to meet retail demand and provides larger investors with a liquidity option, akin to a private company investors exiting a portion of their investment via the public markets.
Fractional platforms like Rally, Otis, and Collectable are like modern-day investment banks for the collectibles space. They IPO assets in registered securities offerings, fractionalize ownership amongst retail investors, and then allow for secondary trading. In many cases, these platforms are the on-ramp for many investors to access collectibles as a financial asset.
Sports cards – Alt.
Alt enables people to explore and track the value of cards, invest into cards, and store their cards, and may become the Coinbase of the card economy as the gateway for individuals and institutions to access the card space as an investable asset class.
A company like Alt can become a category defining financial services brand of the future.
An entire generation of investors may start their investing careers with sports cards – and they will have access to cards as a financial asset through their Alt brokerage account. It’s not a huge leap to think that these investors, who build up value in their accounts with cards, might want to diversify into other emerging or traditional financial assets over time, and the experience they have with their first financial relationship may determine where their trust lies when it comes to working with financial services providers.
On-ramp companies create the future
On-ramp companies don’t just change an asset class, they create the future.
Companies that provide on-ramps for investors to access new asset classes have the ability to change the landscape for investing.
And that is a very good thing for the future of alts.
You can subscribe below to get access to more written and audio content from Alt Goes Mainstream.