Robotization coupled with artificial intelligence (AI) are reshaping every aspect of our lives. When we hear the term “robo-advisor”, our imagination is filled with images from science-fiction movies. But when we refer to robo-advisors, we mean things like bots, virtual robots or algorithms that automate different tasks. Robo-advisors grew out of the ashes of the 2008 financial crisis. Robo-advisors gained traction when people lost faith in traditional financial advisors and were looking for alternatives with lower fees. Startups like Betterment and Wealthfront were among the first to fill this void over a decade ago. They offered algorithm-driven financial planning services with little to no human supervision. If fintech wasn’t already disrupting the financial services industry, adding AI to the equation is an even bigger game-changer for finance across the globe. The cryptocurrency market needs robo-advisors to simplify investing and achieve widespread adoption.
Ilias Louis Hatzis is the Founder at Mercato Blockchain AG and a weekly columnist at DailyFintech.com.
When you search on Google for “robo-advisor” , the search engine returns 4.3 million results. Today there are more than 300+ robo-advisors in 10 countries. While all of them make use of the term, their offerings vary significantly.
In 2017, the assets under management by robo-advisors were $240 billion and this is expected to quadruple by the end of the year, reaching $1.1 trillion.
In 2017, there were 13.1 million investors that used robo-advisors. Since, this number has jumped five times to 70.5 million. At this growth rate, 54% year-on-year, we can expect 147 million investors to be using robo-advisors by 2023.
The US was the first country to introduce the automated financial advisors, and leads the robo-advisory industry with $1 trillion this year. China is the second-largest robo-advisor market at $300 billion, followed by the UK, Germany and Canada at $24, $13 and $8 billion respectively.
A typical robo-advisor collects asks clients to complete an online survey and uses the data to offer advice and automatically invest. Robo-advisor selects funds and automatically builds a portfolio for each trader. Most robo-advisors charge based on a percentage of the assets they are managing. They usually charge low fees, around 0.25% a year, and require small initial deposits, as little as $10. Traditional human wealth advisors charge around 3% a year, take a further percentage off profitable investments, and require a deposit of hundreds of dollars.
Robo-advisors appear to be ready to disrupt the cryptocurrency market, the same way they disrupted the traditional market, when they appeared in 2008.
Late last year, Staked announced Robo-Advisor for Yield (RAY). RAY is a smart contract that automatically allocates a user’s ETH, DAI, or USDC assets as collateral for three different lending markets (Compound, dYdX, and Fulcrum).
When an investor puts funds into Staked, they might put any given number of units of a single cryptocurrency into a specific lending market, like Compound or dYdX. Before RAY, the investor could leave their assets in that market and hold onto it without paying much attention. This was a relatively stable and low-effort way to manage crypto but didn’t necessarily optimize for the most profitable yield. RAY runs a network of smart contracts that constantly polls various markets to see where assets might produce the most return. For example, if the investor puts $10,000 of ETH into a specific market, but later a different market provides a higher return, RAY uses smart contracts to identify that opportunity and move the assets to the most profitable place.
Robo-advisors are the future.
Their speed of adoption in traditional markets is a testament to that. This is especially true for millennials. Today’s Millennial and Gen-X traders are considerably more sophisticated and past generations. Edelman’s 2018 edition of “Millennials and the Future of Money” found that 25% of affluent millennials held or used cryptocurrency, another 31% were interested in using it and nearly a quarter (23%) were using a robo-advisor for financial advice. Research by Charles Schwab also found that the majority of robo-advice users were millennials and 90% of robo advice users are satisfied with their experience. Robo-advisors let millennials see their capital working hard for them, while pursuing other endeavors in their lives, whether it be study, work or family commitments.
More importantly, robo-advisors remove emotions from the formula. Investing is inherently emotional, and volatility can trigger rash reactions. Adopting a more passive strategy through indifferent mechanical mechanisms that stay focused on the long term picture, rather than short term price movements can mean the difference between underperforming the market or maintaining a comparable rate of return over time.
Whether you’re an evangelist or a skeptic, there is no denying that investing in cryptocurrencies will be significant in the future. Investment opportunities in cryptocurrencies can be better harnessed with robo-advisors, than by a trader trying to keep up with different trading venues and assets simultaneously.
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