Introduction
Have you ever heard of indices that combine cryptocurrencies and stocks in the same basket? Until recently, it seemed like pure science fiction.
But today, companies like Standard & Poor’s, BlackRock, and Franklin Templeton are introducing hybrid financial instruments that merge the stability of traditional finance with the innovation of the crypto world.
But what does this convergence really mean? And more importantly, could it be an opportunity for those of us who practice systematic trading?
Today, we’ll discover this together, starting with the macro-trend these hybrid instruments belong to, the tokenization of Real World Assets.
What Is the Tokenization of Real World Assets
In recent years, a phenomenon called Real World Assets, or RWAs, has exploded. These are real-world assets, such as real estate, bonds, gold, or money market funds, that are digitally represented on the blockchain.
This process, tokenization, transforms these traditional assets into digital tokens, which are easier to trade, divide, and track in real-time. The result? More liquidity, more access, and more transparency.
According to Boston Consulting Group, for example, the value of tokenized assets could exceed $10 trillion by 2030.
And in this vast digital ecosystem, hybrid instruments, like indices and funds combining crypto and stocks, are just the tip of the iceberg.
Major Institutions Are Investing in New Financial Instruments
This trend is no longer theoretical; major institutions are moving in this direction.
For instance, BlackRock has launched BUIDL, its first tokenized fund on a public blockchain, while Franklin Templeton has brought a Money Market Fund on-chain and continues to expand its offerings.
Then there’s Standard & Poor’s, which has announced a hybrid index that combines 15 cryptocurrencies and 35 stocks from the digital economy, all linked to the crypto world.
This proves that traditional finance and crypto are no longer ignoring or battling each other; they are collaborating to build the future of financial markets.
To further illustrate this, here’s an interesting anecdote. The name of BlackRock’s fund, BUIDL, is no coincidence. It’s a term that has become increasingly popular within crypto communities.
It’s actually a misspelling of the word “build,” which has become a symbol for one of the main movements within the crypto world.
It encourages individuals to go beyond passive investing in crypto and actively engage in developing and improving the blockchain ecosystem as a whole.
What Are Hybrid Instruments
But getting back to our topic, what exactly do we mean by hybrid instruments?
They are financial products that combine digital and traditional assets.
An example is the hybrid index from Standard & Poor’s, which includes Bitcoin, Ethereum, and other cryptocurrencies, alongside stocks linked to blockchain technology.
There are also tokenized funds, traditional funds whose shares exist as tokens on public blockchains, making them transferable and divisible in real time.
In practice, tokenization digitizes real-world finance, making it more efficient, accessible, and transparent. But let’s get to the part that might interest us most.
What Changes for Traders
What does this mean for systematic traders like us? Potentially, a lot.
A hybrid index can be treated as a single asset on which to apply strategies, whether classic or not. Think of trend-following, mean-reverting, risk parity, and so on.
However, the presence of such diverse assets, cryptos and stocks, within the same instrument makes these tools entirely new, opening up a world of opportunities to discover and test.
Moreover, tokenization expands operations to 24/7, just like in the crypto world, and allows for the creation of quantitative models based on more continuous data, without the disruptions of traditional markets during off-hours.
Additionally, if the price of a fund’s token deviates from its real value, known as NAV, an algorithm could potentially take advantage of these micro-differences to create statistical arbitrage strategies.
This could be another possibility. So, it’s potentially the perfect testing ground for those looking to try out automatic models in new markets with more data, higher frequency, and new correlations to explore.
Limitations and Key Considerations
But, of course, there are also limitations. Right now, we are clearly in the early stages, and many tokenized funds are reserved exclusively for qualified investors.
Moreover, regulations, both in Europe and the United States, are still evolving.
There’s also the risk of tracking errors, which means the difference between the token price and the real asset price, or limited liquidity, along with the typical crypto risks like higher volatility compared to traditional instruments.
But for a systematic trader, all of this always comes down to one key point: risk management.
It will require discipline, robust models, and perhaps tools like dynamic stop-losses, to adapt to market regime changes that these instruments might experience, just as we do with all the other tools we use.
Final Thoughts
In conclusion, the fusion of traditional finance and crypto is just beginning, but it is already rewriting the rules of the game. For those of us who use a systematic approach, it’s definitely a new frontier.
More data, more tools, more opportunities to innovate and develop something new.
What do you think about these hybrid instruments? Would you like to dive deeper into the topic?
Let us know in the comments, and we’ll see you in the next video.
