Author: Alex Tapscott, CoinDesk; Compiled by Bai Shui, Jinse Finance
In less than 20 years, the assets managed by exchange-traded funds (ETFs) have skyrocketed from $1 trillion to over $10 trillion, and Bank of America predicts that the ETF market will reach $50 trillion by 2030. Investors are attracted to ETFs because they provide the diversification of mutual funds through the liquidity of stocks, often at a lower cost.
But this alone cannot explain their success.
The core of ETFs is a financial technology that democratizes asset classes and strategies that most investors have previously struggled to access. This includes everything from municipal bonds to foreign stocks, stock options to private credit. By reducing barriers to entry and enhancing flexibility, ETFs have fundamentally changed the way people invest.
The success of ETFs should not come as a surprise. Financial innovations throughout history have followed a similar trajectory - improving access, reducing friction, and expanding choice, which in turn can create entirely new markets. Mutual funds (1924) allowed investors to pool their money and invest in a portfolio of securities. The first charge card, the Diners Club card (1950), enabled consumers to pay for goods without carrying cash, creating a huge market for consumer credit in the process. Discount brokerages (1975) opened up stock trading to the average investor, while online banking and brokerages (1990s) made banking services more convenient and accessible for those who were less mobile or lived in remote areas.
These technologies all started on a small scale and took time to permeate their respective markets.
ETFs were initially viewed as a niche product, potentially suitable for a few DIY investors, but not for advisors, traders, institutions, high-net-worth individuals, or other major Wall Street participants.
While ETFs did indeed start with index funds, today the majority of ETF launches are focused on active strategies. According to BlackRock data, active ETFs accounted for 76% of all US-listed ETF issuance in 2023 and 21% of global ETF inflows that year. The firm expects managed active ETF assets to surge to $4 trillion by 2030, more than quadrupling from the current $900 billion.
The success of the ETF market is an example of Clay Christensen's innovator's dilemma. When new technologies emerge, the existing players in the market (in this case, traditional asset managers, banks, and brokerages) often adopt them slowly, allowing disruptive innovators to gain a critical head start. Christensen says their position is understandable. In the investment world, small DIY investors were initially the least interesting customers. They had little money to invest and were stingy on fees, making them easy to dismiss.
This perspective is shortsighted. It was precisely because of innovations like ETFs (and online brokerage) that existing firms misjudged the growth potential of the DIY segment. They wrongly assumed that ETFs might have broad appeal.
Christensen says you can't analyze a market that doesn't exist. ETFs created a previously non-existent $10 trillion market. The new markets are cannibalizing the old ones.
Like ETFs, tokens have the potential to further drive financial democratization.
When it comes to tokens, myths and misinformation abound. Often, all tokens are lumped together as "cryptocurrencies," just as "cryptocurrency" is a misnomer. This is unfortunate, because the term "cryptocurrency" is imprecise. In fact, many (if not most) tokens are not attempting to become a medium of exchange, store of value, and unit of account in the traditional sense. Instead, tokens are best viewed as simple containers of value. Imagine a standard shipping container that can hold anything from computers to automotive parts, potatoes to canned plums, and everything in between.
These programmable containers can represent any valuable thing - stocks, bonds, art, intellectual property - just as a website can be "programmed" to contain any type of online information, be it a storefront, a social media site, or a government landing page. Anyone with an internet connection anywhere in the world can use tokens, and they eliminate the need for many traditional intermediaries. Embedded technologies like smart contracts can automate functions once handled by brokers, exchanges, and transfer agents, reducing friction and costs.
So far, the killer app for tokens has been the US dollar. Tokenized US dollars, or stablecoins, allow users to transfer and store the value of the US dollar, and then deploy those dollars into various financial services, such as trading securities, depositing them into lending platforms to obtain loans, or using them to invest in a new startup. Today, the circulating supply of stablecoins exceeds $150 billion, processing trillions of dollars in payments annually. Now, billions of people can easily own US dollars. This is a breakthrough.
Just like ETFs, tokens have the potential to create new markets (billions of people not currently invested in financial markets) and make financial products more accessible and customizable (tokens are infinitely programmable). As banks and competitors struggle to adapt to this new technology, early adopters will be positioned as global leaders. Existing firms have no choice but to follow or partner with those driving the financial frontier.
Just as Wall Street giants like BlackRock, Vanguard, and State Street have grown into behemoths on the back of ETFs, the next generation of financial giants will also emerge from the token revolution. But who are they? There are contenders, but it still feels like anyone's game.
