REBEKAH ROBINSON, HOST:
New alternatives to the stock market are popping up in New York City like mushrooms after a spring rain.
One new exchange offers shares in commercial buildings.
DAVID MARQUEZ, HOST:
Another lets investors bet on the outcome of events - like who will win an election.
But Investing is almost always risky. Mark Gilchrist investigates why so many of these new markets have been appearing, and if they increase investor risk.
MARK GILCHRIST, BYLINE: Marie Floro lives in New York. She’s an analyst at a hospitality company.
She invests in traditional mutual funds to save for retirement, but she also loves to trade cryptocurrencies. MARIE FLORO:
“Currently, I think I am invested in about, like, fifteen cryptocurrencies on Coinbase.”
GILCHRIST:
Coinbase is an app that lets users buy, sell, and store cryptocurrencies.
The exchange listed on NASDAQ last fall.
It’s part of the new trend of alternative exchanges going more mainstream.
FLORO:
“I like it because it has volatility. It’s perfect for day trading because you could always like, when, you know, enter and pull out at the right time, you could really make great money. And, it’s fun.
GILCHRIST: Floro holds up the Coinbase app on her cell phone. It has brightly colored charts showing the value of each of the different currencies she owns. The app lights up like a slot machine.
Her eyes dance with excitement when she looks at the display even though she’s suffered a huge trading loss recently. Floro had $3,000 - and she’s lost almost half of that.
FLORO:
This is a gamble, but I personally love gambling, um even like the, I like the thrill of it. Um, I have had great returns. I mean, during the pandemic, it had become an extra source of income, and with this you could always sell. Um, you could always know when to just stop.”
GILCHRIST:
But she hasn’t stopped - she still trusts Coinbase. It’s one of many new exchanges enticing investors like FLORO to bet on high-risk assets like crypto currencies. But, many financial titans including Warren Buffet, question if cryptocurrencies have any long term value at all which means investors could lose a lot. And, Coinbase is regulated. Its listing on NASDAQ can make it appear that NASDAQ is approving the app.
FLORO
It’s trustworthy, which is kind of difficult when you’re in crypto. I think that being listed in NASDAQ makes Coinbase more reliable, um, it has more credibility. It is like, you know, a publicly traded company. So I think, you know, they need to be transparent about their numbers and everything. Um, and I think I prefer that.”
GILCHRIST:
Professor Kevin Mirabile teaches finance at Fordham University’s Gabelli School of Business. He says one reason for the growing popularity of the new exchanges is the wealth gap in the U.S. It’s created a sense of despair among many young people. So they feel the system is rigged against them and favoring the wealthy. And that’s made do-it-yourself investing with alternatives like Coinbase more popular.
PROFESSOR KEVIN MIRABILE:
“Some people talk about these exchanges and these products as an extension of the Occupy Wall Street movement, that this is really a movement away from traditional structures, because the younger generation wants to be independent of the rules and structures that their parents and their parents parents established for them, because they believe that some of them are broken.
GILCHRIST:
Mirabile says younger investors are skeptical of traditional offerings like mutual funds. They’re willing to take a gamble. And, often they think it’s the only way they can get ahead.
MIRABILE:
“So as a result, the get rich quick scheme, the make a quick investment, let's all follow the crowd approach to investing has become very popular.” GILCHRIST:
Lex Markets is another of the new investment options. It sees itself as offering investors an opportunity to participate in a sector that historically has only been open to the wealthy or corporations. Real Estate.It lets owners of expensive buildings - such as office towers, warehouses, and apartment buildings - sell small pieces to raise cash - for just two-hundred-and-fifty dollars a share.
But there’s a potential problem. Building owners tell Lex Markets what they see as the value of their property and it could be wildly overvalued. That means the owner of a $10 million dollar skyscraper could tell the app that its tower is worth $20 million, and try to overly inflate the price that everyday investors would pay for their small slice.
Jesse Daugherty, is Lex Markets’ Co-Founder. He says things like this are possible, but the company is on the ball to stop it.
JESSE DAUGHERTY:
“Yeah, so we're definitely super conscious about that. And, you know, we do throw out most of the buildings that come to us because of this exact thing. Our diligence team takes a look at the tenants of the building, the expected cash flows, the risks, And, if we can get to an evaluation, we agree with the owner on, and it's, you know, the type of asset we want to take to market, then we proceed with the offering.”
GILCHRIST:
And, then there’s Kalshi, a new market also out of New York City. In some ways, Kalshi seems more akin to gambling than traditional exchanges like the New York Stock Exchange. You invest by placing a bet on a future event - like whether it will rain next week in Iowa.
Each wager costs less than a dollar. But, the losers get no money back. There are other ways to use the app - investors can try to sell bets they’ve made ahead of the date. But, that can be complicated to figure out for the average investor.
Kalshi says on its website that its top 10% of traders win 59% of the time. Translation: Investors with expertise win disproportionately against newbies. When you invest in traditional stocks, even if the prices go down, you still have something. But when you lose on Kalshi, you’ve lost your entire investment.
Professor Joshua Mitts at Columbia Law School is an expert on capital markets.
I asked him if platforms like this could be dangerous for average investors.
PROFESSOR JOSHUA MITTS: I think the question of whether we should prohibit zero sum trading in general, is a question really having more to do with how we think about gambling and society? It's, you know, it's long, it's sort of a part of the human DNA, if you will. Casinos have been around for a very long time.
GILCHRIST:
Mitts says it's hard for the government to pick and choose what investors can and can’t invest in. Still, this is the first time the Commodity Futures Trading Commission has authorized a market like Kalshi.
Marie Floro, the cryptocurrency trader, says that betting on events on Kalshi sounds exciting, but it seems too risky right now, even to her.
But, even with interest rates rising and her portfolio plunging more than forty percent in recent weeks, she is still committed to her Coinbase app trading.
FLORO:
“Yea, I lost money, but I also already gained last year, so pretty much this is my play money. I’m OK with a gamble for now. I weigh the risk and reward, and I think in the long-run it is going to pay off!”
GILCHRIST:
And soon Floro will have more places to invest. This fall, Coincheck, a cryptocurrency trading platform in Japan, is also expected to list on NASDAQ.
Mark Gilchrist. Columbia Radio News.