August 3, 2022

This article was originally posted on this site.

What stops the average person investing in the highest-performing funds in the world?

About $417,905, to take one example. The class-A shares for Berkshire Hathaway — a strong contender for “world’s best investment company” — closed yesterday at a price of $417,905 each.

They have never been split in the history of the company, and probably never will — because that unit price brings a lot of prestige.

In the name of this prestige, anyone with less than $400k is simply locked out. It’s a big club, and you ain’t in it.

We consider these barriers a normal part of finance — for both people and firms. In fact, what does it take to get a company onto the New York Stock Exchange? What do you think the material requirements are for that? First one that comes to mind.

One of the most strictly monitored requirements in the book is stock price. The requirement — $4 starting on the NYSE, $1 permanently — is ruthlessly enforced. Why? Technical limitation.

Pick up a newspaper and turn to the financial pages, and there’s a good chance you’ll find stocks being valued fractionally at 33 ⅜, or 4 ⅞, even now.

Stocks were (and sometimes are) valued fractionally because the systems used to track them were, primarily, human brains accompanied by chalkboards — which struggle to deal with even the granularity of basic decimalization.

Stocks trading at less than $1 per share were relegated to trading as penny stocks which were of course riskier and usually less established bets — with less prestige.

market shares

Technology, of course, solved that issue, and now prices are decimalized. That minimum pricing requirement created by fractionalisation, however, remains in place — largely because over time the finance industry and people in general have come to associate high unit prices with “playing in the big leagues”. Which is why Berkshire Hathaway stock costs over $400k per unit.

Of course, those in finance should know better. Mostly, they do — yet, some part of them, if only because of the perceptions of others, still assigns prestige value to unit pricing — and that creates a blind spot. And these attitudes very much exist in crypto.

2020’s yearn.finance stock split debate brought some of this to the fore. For those unfamiliar: yearn.finance is, in essence, a product suite for Ethereum DeFi, and was an early darling of the Ethereum DeFi boom. As yearn.finance took off, so did its governance token, YFI. In fact, it took all the way off, to the degree that at one point it actually traded above Bitcoin’s own unit price. This, in turn, prompted the question: should YFI undergo re-denomination — that is, reduce its unit price, in order to make itself more accessible?

This was discussed extensively by the yearn community, and every time, the responses were 65%+ no to the prospect of lowering the unit price. Many fair arguments were made, of course, in regards to the token being explicitly designed as a pure governance tool and never as a speculative instrument. Yet, one of the surprising undercurrents that ran throughout was that an argument for a higher price simply because of the prestige that it would bring — specifically, the prestige of trading above BTC. Any perceived costs in terms of accessibility of the product itself were outweighed by the supposed prestige factor.

bitcoin rises in value

At the same time, there’s plenty of evidence that accessibility is good for markets. Research in the 90s and 00s examined MTU (minimum trading unit) relaxation — the MTU being the minimum number of shares that can be traded in a single lot. In the case of Tokyo specifically, decision making in terms of MTUs had been partly decentralized — MTUs were set by companies rather than uniformly across the exchange. The result?

Comparatively, a significant increase in value (5.9% cumulative abnormal returns over the next 200 trading days, to be exact). Why? Simply because it brought a huge number of new shareholders into the market; the reduction (which, for reference, worked out on average as minimum purchases going from $24,000 to $2,400) meant a median 50% jump in shareholders in the companies in question.

Share stats

In other words, private clubs and prestige increase perceived value, but accessibility drives real and very tangible benefits in terms of market performance — simply because it allows more people to participate. This is why more and more firms in traditional markets are pushing for more accessible unit pricing. Look at Tesla and its 5:1 stock split; look at the rush from traditional brokerages and neobrokers alike to get involved in share fractionalisation. While higher unit pricing drives prestige, lower unit pricing drives accessibility — and thus better returns.

This is why we want Solrise to be the exact opposite of Berkshire Hathaway — we want to create a whole ecosystem of funds that have no barrier to entry at all. Solrise as a platform allows an unprecedented level of granularity in fund management and investing. You can literally invest in top-performing Solrise funds with $20 — which means no barrier to entry for smaller investors, and also allows those with more capital or experience to get their feet wet with Solrise funds at whatever pace or scale they like.

We can do this because we’re building on Solana — the cheapest (and fastest) Blockchain to date. Transaction costs on Solana are trivially low — way below a cent — which means that we can split the atom in terms of fund management and open up access to investors who were previously locked out of the market. The benefit, of course, is that we will disrupt the market in the most classic sense — by moving down to profitably address the needs of consumers who were previously considered “too small”, and bringing these people both into Solrise and into the wider Solana ecosystem.

Technical steps forward in finance tend to be transformative, if underappreciated. With the Solana ecosystem in general, and Solrise specifically, there’s an opportunity to open up the market for fund investment to an extent that’s simply never happened before — to take that seismic change that started in the 90s simply by virtue of the old finance heads moving from the chalkboard to the terminal, and multiply it exponentially. Lack of granularity is one of the last things keeping blockchain from truly democratizing the world of investment funds — with that problem gone, we enter a whole new world.

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