Personal finance is one of the fastest-growing segments in the financial industry. Not long ago, personal finance was a vehicle of wealth management and growth for just savvy, middle-aged men. Over the past 20 years, society has changed drastically as technology has made previously limited services and resources widely accessible.
One of the greatest advantages of this has been the expansion of financial products available to households. Personal finance is still in a nascent stage; the incredibly higher annualized growth rate is great evidence for this. The personal finance market grew by nearly 48% from 2019 to 2020.
The high growth figure may deceptively hint the market is currently too small. The reality is that the personal finance market is on par to hit $1.1 trillion by the end of 2020.
A trillion-dollar market that is growing by nearly 50% year on year.
The growth in the personal finance market is being led by growing retail involvement in the stock market. This is a product of two things:
Growing desire among everyday people to take control of their financial state and pursue financial independence
Innovative new financial products that make retail participation in the equity markets incredible easy
Champions of this shift are apps like Robinhood and the many apps offering robo-advisors. Societal shifts, such as the growing desire among retail to put their money to work, are only a part of the progress personal finance has made across the world. Advancements in fintech have made the management of personal finance exciting, with additions of safety.
The average household has fewer funds and hence is more risk-averse. Stock market participation has moved from having to hire a broker, to using a pay-per-trade broker, to become free. With each step, more retail participants have become involved.
Hiring a broker was naturally beyond the capacity of the mass households. Paying $20 per trade entry and exit, while more affordable than hiring a broker, was a high-risk decision for small portfolios, and the average retail portfolio is small.
Free online participation was the perfect mix of excitement and safety. Having exposure to resources furthered the ease of involvement, and here we are: the personal finance market is growing at 50% a year and has crossed the trillion-dollar mark.
But personal finance is just getting started.
Equity markets give retail exposure to the success of some of the greatest companies in the world, after they have already 100x’d or even 1,000x’d from their venture rounds. Yet retail participation in venture capital is insignificant.
The global VC market has hit nearly $300B. Personal finance is on its way to touch $1.1 trillion.
Annual retail participation in VC ranges from a measly $2B to a measly $5B. Meaning retail participation barely scratches 1% of the global VC market, and venture participation is just 0.2% of the personal finance market.
Yet the venture market is one of the most important segments for wealth creation, ahead of even the equity markets.
Retail’s aversion to venture markets is understandable. The average VC fund participates in a venture knowing that the investment carries a potential 100% loss. Such incidents, while in venture participation, are extremely uncommon in the equity markets. The small portfolios of most households are not capable of weathering a 100% loss on an investment.
Venture Capital is the next frontier for personal finance, but the present stage of the venture market is somewhere between the broker and e-broker state of stock investments. The major portion of venture investment is done through dedicated middlemen, and while the market does have online facilitation, it’s still too risky for retail.
Similar to most retail’s aversion to joining stock investments when simply entering and exiting a trade could eat up 1% of their portfolio, the retail market is not able to enter a market where they can face 100% loss on investment. At least not at mass scale.
This demands a new approach to venture participation, one that makes it safer, without taking away the excitement.
Before continuing on this, there’s a need to touch upon a different market that will play a vital role in the creation of structured venture products for retail.
Lending markets for taking leveraged positions on assets is nothing new, but it has become the talk only recently in the cryptocurrency market.
Borrowing to margin on stocks is a well-established market that is valued at nearly $800B in just the US. Money is provided to investors of all sizes so that they may take leveraged positions on their stock or even bond portfolios. The limitation, though, is that in the traditional markets, this opportunity is exclusively available to large investment institutions or large brokers.
This powerful and stable source of interest on capital has not been available to retail, except in the cryptocurrency market. DeFi has recently shed light on this opportunity, but margin lending is not new in the cryptocurrency space.
Exchanges like Bitfinex have been offering this for years, to the tune of billions of dollars in loan originations. CeFi apps further grew the market. DeFi is just the newest player in town, in an otherwise well-developed market, in which capital is lent to finance traders who want to multiply their trade size.
At the same time, retail participation in margin funding across both CeFi and DeFi is hitting record levels. CeFi lenders like Celsius and BlockFi have amassed $1B to $1.5B in lendable deposits, each. Industry exchanges are offering similar services, allowing retail to become a part of the market, with exchanges like Binance, Huobi, Bitfinex, and other large operators each managing multi-billion-dollar margin funding markets.
DeFi, on the other hand, has also hit record levels with over $10B in participation.
Given that margin funding is not new, the market has evolved rapidly, picking up features from the traditional market, where necessary.
We are now at a stage where billions of dollars are generating stable interest on principal deposits, while having ample resources to insure the principal. Still, this market only managed to attract people once it promised triple-digit returns through unsustainable farming. That’s because people can not care about 8% to 10% annualized returns from a new market, if they can already have this in traditional markets.
The historical stable yields in CeFi and DeFi have hovered between 8% to 10%. While that may seem good, it’s nothing outstanding.
In fact, it’s just a bit higher than the S&P500’s average annual return over the past 20 years, and lower than the S&P500’s average annual return over the past 10 years.
Meanwhile, the ease of accessing exposure to the S&P500 index is extremely easy, while also being a tried and tested means of acquiring wealth.
So let’s see the puzzle pieces:
Personal finance is growing rapidly
Retail is becoming actively involved in personal portfolio management
CeFi and DeFi provide stable return on capital
The sustainable CeFi and DeFi yields are nothing special (8% to 10%)
Venture investment is beyond the risk appetite of most retail