How BlackRock, Hedge Funds & Institutions Make Money with 2 Cryptos
“AI-Powered Hedge Funds Vastly Outperformed, Research Shows — Hedge funds using artificial intelligence returned almost triple the global industry average” — Institutional Investor
That above article is certainly worth a read as it underpins the value provided datasets from companies we’ll discuss including Robinhood and two crypto companies Numerai (NMR) and Vectorspace AI (VXV), who also provide datasets and algorithms.
According to Bloomberg: “…demand for trading how-tos is off the charts. TikTok videos under #robinhoodstocks have more than 3.1 million views, and Coleman is near the top of the site’s #daytrading. The senior at Adams State University in Colorado studying business marketing offers explainers on everything from spotting a short squeeze to penny stock trading.
While Robinhood investors have picked some of the biggest winners during the latest rally, study after study has shown that beating the market with an actively managed portfolio is almost impossible over time.”
Robinhood is known to generate rich data. Some of this data helped hedge funds make over 30% more this year. Again according to another Bloomberg article, “By watching Robinhood traders, Sender is embracing the speculative fervor brought on by retail investors who have far less experience and insight into the companies. Robinhood has become a go-to trading platform for individual investors during the Covid-19 pandemic, who are largely stuck at home without much entertainment.
The day trading crowd has “created the late ’90s type of environment I thrive on,” Sender, 51, said in an interview, referring to the tech bubble of the late 1990s. A significant portion of the gains were also made by betting on S&P 500 and Nasdaq 100 futures, as well as large-cap technology names.”
Robinhood clearly provides an edge in enabling hedge funds and asset management companies to capture alpha. However, there are a few other unique datasets valued in the millions offered by a new breed of alternative data companies that are publicly tradable.
At our fund, we’ve been watching two cryptocurrency companies that have managed to produce data, algorithms and technology that’s starting to make real money for hedge funds and institutions.
An investment thesis we have says that if a crypto company has utility, datasets and algorithms that make money for a hedge fund, it would be in the best interest of that hedge fund to take a position in a crypto that is making it money. The next logical step would be for hedge funds to enable their clients to take long term positions in that crypto.
The same follows for institutions and asset management companies. The two crypto companies that landed on our radar by offering revenue producing financial products and solutions to hedge funds and institutions are described here:
Numeraire (NMR) is a cryptocurrency that powers Numerai, a San Francisco-based hedge fund that crowdsources artificial intelligence to make investments in major stock markets around the world. Numeraire (NMR) holders can stake their NMR tokens every week on specific predictions. Successful predictions are rewarded with more NMR.
In 2019 Numerai launched Erasure, a public prediction staking platform that is separate from the hedge fund business. Erasure is a decentralized data prediction marketplace similar to platforms like Augur. It allows anybody to upload predictions, stake them with the Numeraire cryptocurrency, build a track record that everyone can verify, and earn money.
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Numerai recently listed on Coinbase Pro described here, “Numeraire Price Soars 165pct after Coinbase Pro Listing”. Following the news, NMR was trading at $53.23 with a total market cap of $146 million.
The platform is built so that every prediction is submitted using a commit and reveal scheme. Users can commit to predictions and get it timestamped but only have to reveal what the prediction was later, when it is no longer valuable. It is designed so that every user’s historical predictions are revealed but their most recent predictions are concealed, and buyers can verify how good a user’s historical prediction feed has been without ever being able to use those predictions.
On Erasure, buyers can assess which prediction feeds have the highest quality and choose to buy the feed, which gives them a special key to see all the most recent predictions before anyone else and, therefore can trade on that information before anyone else. The platform allows any individual to sell any prediction feed to any hedge fund.
It was suggested by Numerai founder Richard Craib that the Erasure platform was built to help decentralize the Numeraire token. He explained that before the Erasure launch, it was “a token designed just for Numerai. Only Numerai data scientists use NMR for staking, only Numerai can buy predictions and destroy stakes, and all prediction datasets need to be uploaded to Numerai’s servers. In a word, NMR is centralized — and that’s bad because it limits NMRs potential. But today we are announcing that we are decentralizing NMR by making NMR the native token of Erasure.”
The Erasure platform is designed so that applications can be built on top of it that utilize its framework; they include:
- Erasure Quant — a tournament application used to crowdsource data on the Russell 3000 equity index. Participants submit daily price predictions on US stocks and are rewarded for contributing while building an immutable track record. Erasure Quant is built as a template that can be used by others to build their own tournaments.
- ErasureBay — an open marketplace for information of any kind. It can be used to create credible signals using the possession of local knowledge and attract a buyer willing to pay for it.
In June 2020, it was announced that Numerai raised ~US$3 million through a token sale of the native NMR token. The new capital will be used to fund the development of its information staking protocol Erasure. Purchasers of the tokens include Union Square Ventures, Placeholder, CoinFund, Dragonfly Capital, and Numerai founder Richard Craib.
If Numerai is making money for hedge funds small and large, then it follows that hedge funds small and large will by buying up NMR for a long time to come.
Symbol: NMR (CoinGecko Quote)
Site: numer.ai
Press Releases: https://twitter.com/numerai
Vectorspace AI got their start in life sciences. They produce datasets that mimic human cognition for the purpose of information arbitrage in the financial markets and scientific discovery (high-level AI/NLP (Natural Language Processing)/ML (Machine Learning) for Genentech, Lawrence Berkeley National Laboratory and the US Navy’s SPAWAR division.
They currently collaborate with CERN and financial data organizations like S&P Global. Their technology is best described in Alpha Week, a hedge fund industry trade publication in an article titled, “Dexamethasone Announcement Could Have Made Hedge Funds A Fortune”.
They also engage in “thematic investing” but in an automated way based on using Natural Language Processing (NLP) to connect stocks and cryptos to global events. They use these events as themes for what they call “Smart Baskets”. Using the the theme “coronavirus”, they generated a smart basket which returned greater than 3000% since Jan 21 2020 as described here.
Their focus is on NLP/NLU (Natural Language Processing/ Understanding) for hidden relationship detection in data for the purpose of powering advanced approaches in AI and ML. Their platform powers research groups, data vendors, hedge funds, institutions, asset management companies and life sciences by generating on-demand NLP/NLU correlation matrix datasets. Their objective is to enable any group analyzing data to save time by testing a hypothesis or running experiments with higher throughput. This can increase the speed of innovation, novel scientific breakthroughs and discoveries.
Interestingly, Vectorspace AI services multiple industries including the life sciences, chemical, food and energy sectors. According to the founding team, they “plan to use any metadata to triangulate new data points used in developing more novel and more powerful datasets and algorithms”. Currently, some of their work is being done in drug repurposing described here. Vectorspace AI is one of the few cryptos that generates revenue which they use to buy back VXV on the exchange.
Based on servicing multiple industries, the primary competitor to Vectorspace is Palantir, a $20B dataset company set to IPO in a few weeks. This bodes very well for the valuation of VXV overall as Palantir also powers hedge funds and institutions.
It’s clear that if Vectorspace AI makes money for hedge funds and institutions including asset management companies, they’ll be the first to buy up as much VXV as possible for their clients before any armchair crypto investors get word.
Symbol: VXV (CoinGecko quote)
Site: vectorspace.ai
Press Releases: https://vectorspace.ai/press.html
Telegram invite: https://t.me/joinchat/GrCYjA8rPgD8coAiEhRuBA
Conclusion
Deeply integrated cryptocurrency companies that expand their services inside hedge funds, asset management companies and institutions stand to gain the most. Send along any cryptos that you discovered which provide similar services and we’ll put them on our radar!
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