On Monday, 19 October 1987, stock markets crashed around the world
It began in Hong Kong and spread to Europe. The Dow Jones fell over 22% within a few hours.
On Black Monday, Larry Fink was working at First Boston. Maybe the loss of $100 million of the bank’s money under his watch prompted him to found his own company with seven colleagues.
BlackRock’s goal was to provide institutional clients with asset management services from a risk management perspective. Working out of a single office with a credit line of $5 million, Fink and his co-founders grew their assets under management (AUM) to over $6 trillion by the end of 2017, making BlackRock the largest asset manager in the world.
Today, BlackRock owns a stake in almost every listed company in the United States and across the globe. Its holdings reach into corporate bonds, sovereign debt, commodities, hedge funds, and beyond.
Will cryptoassets see similar success stories?
The secret of BlackRock’s success is certainly shrewd entrepreneurship and partly serendipity — being at the right place at the right time. But Aladdin, BlackRock’s Asset Liability and Debt and Derivative Investment Network, is also a big factor. The software integrates portfolio management, trading, compliance, operations, and risk oversight with a consistent process that shares the same data. Aladdin handles about $18 trillion in assets, including BlackRock’s own. That’s about 7% of the world’s financial assets. Aladdin started out as BlackRock’s internal risk management tool, and its success comes down to grasping complexity that others couldn’t.
The inspired application of technology and algorithms is the heart of that competitive advantage.
“In times of crisis, new experts rise up to the top. The biggest companies today in investment management were started by a few guys in an apartment.” — Fabio Federici, CEO, Base58 Capital
Cryptoassets, as a class, are still in their infancy. Venture capital, for instance, had inflows of $84 billion and hedge funds grew by $59 billion in 2017. In comparison, 250 crypto funds had a total AUM of $5 billion as of April 2018. Most of these funds offer no institutional-grade investor protection, so the big money will remain on the sidelines until the regulation and investment infrastructure mature.
Part of what makes cryptoassets difficult to invest in is their market fragmentation. There are nearly 200 crypto exchanges. That hampers trade execution, liquidity, and historical data. Regardless, cryptoasset managers are tech entrepreneurs, otherwise they wouldn’t understand the asset class. They will find solutions that will give them a grip on the technology and the data. But that requires intelligent systems that will scale to accommodate the entire investment universe and unify tools and data for risk management, reporting, compliance, and new regulations.
So what will be the BlackRock of cryptocurrencies, and where will the next Aladdin come from? Who knows?
The aftermath of Black Monday demonstrates that new market leaders emerge in volatile times. They come up with solutions to problems that are too complex for the traditional players to understand.
BlackRock expects to leverage its dominance and generate 30% of their total revenues in five years with Aladdin and similar tech products.
Imagine you had invested in BlackRock when it just started out.
Initial coin offerings (ICOs) didn’t exist in those days, but the performance of a hypothetical BlackRock token might rival that of the currencies with the largest market caps today.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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