How do robo-advisory platforms provide an edge over traditional trading strategies?

With robo-advisory platforms now managing over 10% of all assets under management (AUM) in traditional markets, the question of whether they can outperform traditional trading strategies is naturally in the forefront of leading tech minds. In addition to this, can robo-advisory technology be adapted to alternate markets? Can we use this revolutionary technology to democratise industries like digital currencies? The answer to all of these questions is simply yes.

Before I tell you why, let me lay out what a robo-advisor is, in essence and how it delivers optimised performance for its users. Simply put a modern robo-advisor is a two-tiered investment system that results in the user realising the capital gains they desire, but without the need for constant money management or extensive technical trading skills. This is increasingly important in volatile market such as the cryptocurrency market as it allows anyone, whether expert trader or interested novice to access this market in a secure and democratic way. On a technical level a robo-advisor is split into two fundamentally different but complementary sections, human and algorithmic.

The first tier of a robo-advisor is the algorithmic trading models on which the majority of financial decisions are made. These models account for thousands of factors in microseconds before making an investment decision, resulting in an optimised end-result for the user. Naturally this provides the obvious advantage of being active 24/7 compared to traditional fund managers or traders who, no matter of their endurance must sleep at some point. With emerging markets such as cryptocurrency spanning from Asia, to the US and Europe, the importance of this feature cannot be understated. Not only does this allow for a robo-advisor to take advantage of market opportunities stemming from different time zones but it also has the upside of protecting a client’s investment when negative market news comes from these different time zones. In the past six months, the immaturity of the cryptocurrency market has resulted in news of a minor security breach or hack having market-wide implications. With an effective robo-advisor, your investments will be moved to another, more stable asset mix, such as cash before significant capital loss can be suffered. This simply cannot happen if a user’s capital is managed by a human trader who must sleep 20% of their day and therefore is vulnerable to global market news. Human overview of a robo-advisory platform is equally important however, as initially robo-advisors may struggle to recognise which pieces of market news is significant in contrast to another.

And so the second tier of this technology is human-side fundamental analysis. While robo-advisors can make near-instant investment decisions, they currently lack in an ability to interpret and react to news and events that will have an effect on a user’s investment. Therefore, highly experienced traders and financial planning experts are utilised to interpret data in real-time, combining it with feedback from the algorithmic model to make the best investment decision for each individual user. The complementary nature of this dual model is obvious to see as an experienced human advisor can distinguish between an honest legislative investigation and a full-blown exchange hack, as well as the overall effect this will have on the cryptocurrency eco-system as a whole. Throughout time, an experienced robo-advisory platform, such as that currently being launched by British fintech company Automata will learn from the adjustments their human trading partners make and adjust their own algorithms accordingly. Although not currently in the necessarily advanced stage, advances in AI technology will additionally help this in the future.

Now back to the questions we raised in the opening paragraphs. Can these robo-advisors outperform traditional market trading strategies (such as buy and hold)? And can they be successfully adapted to an emerging or immature market like that currently seen in the digital currency eco-system? It doesn’t take a rocket scientist to observe the clear opportunity that this technology has for emerging markets, in capital growth but essentially, and more importantly in protection of client investments. A robo-advisor, such as the one Automata was successful in creating will, at its core ensure that positive market volatility is capitalised on while extended market downturns will be protected against as the robo-advisor instantly lessens the user’s exposure to this downturn and shifts user capital to stable assets such as cash. As this fluctuation cycle is repeated in the digital currency sphere, the user of a robo-advisor will see their initial investment grown, sometimes at rates that make traditional markets appear stagnant in their single figure rates of growth. Automata for example, experienced client returns upwards of 400% when trailing their platform over an 18-month period. This graph, and the overall investment strategies Automata use can be seen in their recently released whitepaper here.

Whenever revolutionary technology like robo-advisors are successfully adapted to alternative markets, the potential for the market is enormous. It is well known by the crypto sphere that the on-boarding of the largely untapped retail market remains a key challenge it must overcome before reaching a position of mass adoption. The successful democratisation of cryptocurrency investment via a proven platform such as Automata may be a catalyst in solving this problem and empowering millions around the world who do not currently have access to digital currencies.