In our constantly evolving world, continuous improvements are expected and begin to affect every sphere of our lives. Thanks to the software development, creation of advanced algorithms and progress of artificial intelligence, these changes also occur in the sphere of investing. People believe that advanced programs will help them achieve more satisfying results from trading their investments. Due to the newly emerging demand for new ways of investing, mainly via the Internet, many new alternatives have been created, as well as devices and algorithms that aim to achieve better results than more conservative approaches.
There are 3 very popular innovative investments:
- Algorithmic Trading
- Equity Crowdfunding
An algorithm is a set of directions for solving a problem. Algorithmic trading is an investment method involving the creation of comprehensive formulas and complex mathematical models in order to create a pattern that the computer will be guided by when buying and selling financial securities. This method is created based on an analysis of the behavior of thousands of indexes and charts, with the intention of finding regularities repeated there and using these schemes to achieve a better return on investment.
The popularity of algorithimc trading is constantly growing, mainly due to promises of a relatively large and stable earnings with minimal effort and time. Many companies advertise newly discovered, "revolutionary" formulas that are supposed to bring very satisfying results. These companies are focused on obtaining as much funds as possible from consumers and trading them in accordance with the advertised formula.Of course, for this service they charge the appropriate commission, regardless of future results and are not responsible for any potential losses. Investing in this type of funds is associated with higher risk, strongly correlated with high-frequency trading risk. It should also be borne in mind that it has not been clearly proven that such investments bring better results than conservative investing.
„Following” other investors
Recently, the method of imitating other traders is becoming more and more popular. In websites and mobile applications such as eToro, the option to copy other users of the application has appeared.It aims to copy purchases and sales of the chosen trader, and tries to do so with the least possible delay and the smallest possible deviations from the price at which the tracked trader bought the assets. Of course, the trader mentioned above must agree to copy his investment strategy by hundreds if not thousands of other users. This method may seem particularly attractive to inexperienced investors or people who have no time or simply do not want to engage in investing professionally, although there is no clear evidence of the infallibility of the method.
Equity Crowdfunding is a form of financing companies at the development stage, in which the necessary capital flow is provided by small payments from many people. Companies participating in crowdfunding, present their company, its management board, level of development and business model, show their visions for the future of the company or its plans for development. They show potential investors their financial reports, profit and loss balances and potential future profits from operations, often taking into account the capital raised in the above-mentioned crowdfunding action and present a plan for the use of the funds obtained in this way. In exchange for investments in the company, individual investors receive shares in the company which also connects with part of the future profits of the company.
More and more companies are interested in this type of investment method, especially start-ups. This method is characterized by a relative simplicity in implementation and a lower risk associated with raising capital for investments. In addition, a small amount of formalities, no commission on the purchase of shares and the fact that there is practically no lower threshold for investment in crowdfunding actions makes this method seem attractive even for the most inexperienced investors. However, the investor should take into account the potential risk of this type of investment. The company may present potential profits, but investors must take into account the possibility of losing invested capital due to unpredictable events. The company, despite assurances, may not, however, enter the stock exchange which may cause a serious problem with the liquidation of the investment. In addition, the share price after the debut on the stock exchange may differ from the one for which the shares were bought on the crowdfunding platform. What's more, history shows that the vast majority of crowdfunding investments or similar IPOs (Initial Public Offering) resulted in the loss of a large amount of invested capital.
Cryptocurrencies (Bitcoin,Ethereum,Litecoin etc.) are modern payment system based on a blockchain technology. Cryptocurrencies do not have a physical equivalent, which makes them quite a controversial investment asset, although there will be many admirers who praise their impact on ease of concluding transactions and full anonymity.
The most popular cryptocurrencies:
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
The multitude of advantages of cryptocurrencies has caused a sharp increase in interest around cryptocurrencies, especially bitcoin and ethereum. This resulted in a sudden and tremendous increase in the value of the above-mentioned currencies, which resulted in the creation of a self-propelling spiral, commonly known as a speculative bubble. Inexperienced investors, seeing an incredible increase in the value of cryptocurrencies, speculated and invested in the potential profits of these assets in the future, hoping that they would also catch up on this "opportunity." The increase in popularity of these 2 cryptocurrencies resulted in the multiplication of hundreds of other cryptocurrencies that investors eagerly bought expecting quick profits. Unfortunately, like any bubble, in 2018 the speculative bubble on bitcoin burst, where its value fell by about 65%, which caused the rest of the cryptocurrency to collapse. The losses were frightening and many naive investors lost their life savings. Nowadays cryptocurrencies are still popular, but investors approach them with greater caution and if they invest in them it is usually as part of investment diversification. As cryptocurrencies are an intangible asset, it is relatively difficult to determine the risk of this type of investment.
- Terrence Hendershot,Ryan Riordan (2011) Algorithmic Trading and Information
- Katarzyna Kozioł-Nadolna (2015) Crowdfunding jako źródło finansowania innowacyjnych projektów ZESZYTY NAUKOWE UNIWERSYTETU SZCZECIŃSKIEGO nr 854 Finanse, Rynki Finansowe, Ubezpieczenia nr 73 (2015) s. 671–683
- Arvind Narayanan, Edward Felten, Joseph Bonneau, Steven Goldfeder, Andrew Miller (2016) Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction
Author: Przemysław Majewski