Dive deeper into the world of investing and applied AI.

Is every news and media station predicting a recession for attention, or do all the events and fluctuations indicate something will happen? Fear, the typical emotion on the market, takes hold of investors, regardless of the legitimacy of a recession. Instead of acting out based on an irrational thought process, it’s time to understand why fear is the setback, not the recession. Explore essential investing strategies for economic recessions. Learn how to protect your portfolio, seize opportunities, and navigate turbulent times with confidence. Discover expert tips for financial success in challenging conditions.

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Fearful Actions Are Setbacks, Not Recessions 

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Investors aren’t at the mercy of the market during a downturn; there is a plethora of strategies to implement, but unfortunately, they’re often left unconsidered. A helpless state is often assumed when the bear (bear market) starts approaching, and an emotional investment follows. 

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These fear-driven responses during a recession cause more issues than they solve; 

• Failure to Reassess Goals 
• Panic Selling 
• Ruining a Diversified Portfolio
• Waiting to Invest
• High-Risk Investments 

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It’s doubtful that the average investor thinks, “I would love to ruin my diversified portfolio because of my tunnel vision from fear, so let me sell all my assets and then decide not to buy anything because I don’t want any returns.” However, that’s precisely what he/she commits to when the climate gets in his/her head. 

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Instead of falling into that trap, it’s time to remember the big picture. 

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Prevent Fear Through Understanding 

Recessions always turn around. The emotional decisions that end up being a setback do not consider this factor. The U.S. has always come out of every recession it has experienced. Remember that, along with these critical factors;

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• Recessions are a normal part of the economic cycle.
• Recessions create opportunities for new businesses. 
• Recessions encourage legal and technological advances (ex. SEC).
• Recessions are the best times to buy high-value stocks for low prices. 

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Find Opportunity Through Reframing 

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If an investor’s mind immediately thinks about all the loss, it’s a gut reaction, but at the same time, cheap valuations of valuable assets mean an opportunity.   

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How do I reframe my mindset? Reflecting on how you’ve approached these events before and then considering how to benefit from them in the future. 

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Old mindset: Letting fear fuel your focus to be only on the present and all the potential losses during a downturn. 

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New Mindset: Adapting strategies to poor conditions through rebalancing and long-term decisions, then when the moment strikes, you’ll be positioned to capitalize on significant market booms early on.

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alphaAI Assists Investors in Recessions 

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If you’re concerned that you can’t help but panic during downturns but still want to capitalize off of the circumstances, use alphaAI! The innovative machine learning (ML) technology will defend, protect, and capitalize on market opportunities during downturns. The AI incorporates Defense Mode into every strategy to protect your portfolio. 

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What is defense mode? Under poor market conditions, your portfolio switches to Defense mode to focus on capital preservation.

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Essentially, defense mode evaluates market conditions, considers your financial goals/criteria, and preserves your capital so you don’t get set back during a downturn. 

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The AI technology utilizes several decades of data spanning over 10,000 global stocks. It picks up on patterns, performs with predictive capabilities, and uses multiple models (a single model has over 10 billion data points) to make decisions. It is never based on the news, panic, fear, or emotions. 

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Takeaways 

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Don’t let fear cause you to sell in a frenzy and lose potential gains; use the objective data-backed approach with alphaAI, which will adjust your portfolio automatically to poor conditions to achieve your financial goals. 

In the world of investments, there is always an element of risk. However, not all risks are created equal. Unsystematic risk, also known as company-specific or diversifiable risk, is the type of risk that can be mitigated through careful planning and diversification. In this article, we'll explore how you can use AI to protect your investments from unsystematic risk and safeguard your financial future.

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Understanding Unsystematic Risk

Before delving into how AI can help, it's important to understand what unsystematic risk is. Investors face unsystematic risk when they put their money into a single company or industry. This risk arises from factors specific to that company or industry, such as poor management decisions, product recalls, or market competition. Essentially, it's the risk that something could go wrong with a particular investment.

Diversification: Your Shield Against Unsystematic Risk

One of the most effective ways to protect your investments from unsystematic risk is through diversification. Diversification involves spreading your investments across different assets, industries, and geographic regions. The idea is that when one investment underperforms or faces difficulties, others in your portfolio can offset those losses. This age-old strategy has been a staple of prudent investing for decades.

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Introducing alphaAI

Now, let's talk about alphaAI and how it leverages artificial intelligence to enhance the diversification of your investment portfolio. alphaAI is a cutting-edge solution that harnesses the power of AI-driven strategies to optimize your investments. By using AI, alphaAI identifies and selects a diverse range of assets for your portfolio, reducing your exposure to unsystematic risk.

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How AI Strategies Protect Your Portfolio

• Data Analysis: AI has the capability to analyze vast amounts of data in real-time. It can assess the financial health of companies, industry trends, and market sentiment to make informed investment decisions.
  

• Risk Management: AI can identify potential risks associated with specific investments. It can detect warning signs and take proactive measures to minimize losses.
  

• Portfolio Optimization: alphaAI uses sophisticated algorithms to optimize your portfolio for maximum diversification. It selects assets that have low correlation, ensuring that the performance of one asset does not heavily impact the entire portfolio.
  

• Adaptive Strategies: AI can adapt to changing market conditions. It continuously monitors your portfolio and makes adjustments as needed to maintain a balanced and diversified portfolio.

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In an unpredictable financial landscape, protecting your investments from unsystematic risk is crucial. Diversification is your shield against such risks, and alphaAI is your ally in achieving it. By harnessing the power of artificial intelligence, you can build a portfolio that is resilient, adaptive, and poised for long-term growth. So, take advantage of AI strategies to safeguard your investments and secure your financial future. Remember, in the world of investing, knowledge is power, and AI is the key to unlocking that power.

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What about alphaAI?

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our robo advisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

If you're an investor, you've likely experienced the irrational decision-making that can accompany investments. In fact, some investment decisions are heavily influenced by cognitive biases, which can lead to poor investment choices and missed opportunities. Understanding these biases and finding ways to overcome them is crucial for making sound financial decisions.

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The Human Side of Investing

Investing isn't just about numbers and data; it's also about emotions, instincts, and cognitive processes. Behavioral finance is a field of study that explores how psychological factors impact financial decisions. It recognizes that investors aren't always rational beings and that their choices can be heavily influenced by biases.
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Common Cognitive Biases in Investing

Let's take a look at some common cognitive biases that affect investors:

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1. Overconfidence Bias: Investors tend to overestimate their knowledge and abilities, leading to excessive risk-taking. This overconfidence can result in significant losses, especially in volatile markets.
2. Confirmation Bias: People seek information that confirms their existing beliefs while ignoring contradictory evidence. This bias can prevent investors from seeing the full picture and making informed decisions.
3. Loss Aversion: Investors fear losses more than they value gains, which can lead to overly conservative investment strategies. This bias can cause investors to miss out on potential high-reward opportunities.
4. Herd Mentality: Many investors follow the crowd, even when it doesn't make logical sense, due to the fear of missing out (FOMO). This can lead to market bubbles and crashes.
5. Anchoring Bias: People rely too heavily on the first piece of information they receive, often leading to misjudgments. For example, an investor might fixate on a stock's initial price and ignore subsequent changes in its value.
6. Recency Bias: Investors give too much weight to recent events, causing them to overlook long-term trends. This bias can lead to poor investment decisions based on short-term market fluctuations.

How Cognitive Biases Affect Investment Decisions

Cognitive biases can significantly impact investment decisions in various ways:

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1. Risk Assessment: Overconfidence bias can lead investors to underestimate risks and overestimate their ability to predict market movements. This can result in taking on excessive risk and suffering substantial losses.
2. Portfolio Diversification: Confirmation bias can cause investors to stick to familiar investments and avoid diversifying their portfolios. This lack of diversification increases the risk of significant losses if one investment performs poorly.
3. Market Timing: Loss aversion and recency bias can lead investors to make poor market timing decisions. For example, they might sell assets during a market downturn to avoid further losses, only to miss out on the subsequent recovery.
4. Investment Choices: Herd mentality can drive investors to follow popular trends without conducting thorough research. This can lead to investing in overvalued assets and experiencing losses when the market corrects.
5. Long-Term Planning: Anchoring bias can cause investors to make decisions based on outdated information, hindering their ability to adapt to changing market conditions. This can negatively impact long-term financial planning and goal achievement.

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How alphaAI Addresses Cognitive Biases

alphaAI employs advanced machine learning algorithms and artificial intelligence to make sense of vast amounts of data and market information. Here's how it can help investors overcome cognitive biases:

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• Data-Driven Decision-Making: alphaAI relies on data and historical patterns, not emotions or biases, to make investment decisions. It analyzes a wide range of financial data without being swayed by overconfidence or confirmation bias.
• Risk Management: alphaAI's algorithms are programmed to assess and manage risk objectively. This helps counter loss aversion and herd mentality by ensuring that investments are made based on rational risk-reward analyses.
• Diversification Strategies: One way to combat biases is through diversification. alphaAI can suggest diversified portfolios based on statistical data rather than emotional attachment to specific assets.
• Constant Monitoring: Cognitive biases often lead to an undue focus on recent events. alphaAI, on the other hand, continuously monitors and analyzes the market, ensuring that investment decisions are based on a broader perspective.
• Behavioral Alerts: Some AI systems can even provide behavioral alerts to investors, warning them when their decisions may be influenced by cognitive biases. This serves as a valuable tool for self-awareness and decision improvement.

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Investment psychology and behavioral biases are significant challenges for investors. Recognizing and mitigating these biases is crucial for achieving long-term success in the stock market. alphaAI's reliance on data, objective analysis, and continuous monitoring makes it an invaluable resource for investors looking to overcome cognitive biases and make more rational investment decisions. By combining the power of artificial intelligence with an understanding of behavioral finance, investors can enhance their financial outcomes and minimize the impact of human biases on their portfolios. Remember, investing is not just about numbers; it's also about mastering the psychology behind the decisions.

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What about alphaAI?

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

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Disclaimer: Investing in the stock market involves risks, and past performance is not indicative of future results. The information provided in this blog is for educational purposes and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.

As you may have seen, the world is going through a massive transformative shift. In finance, the forefront of these changes are robo-advisors. These digital financial platforms are redefining how individuals, both novice and experienced investors, manage their wealth. In this blog, we'll delve into how robo-advisors are shaping the future of investment and finance.

The Rise of Robo-Advisors

Robo-advisors are automated, algorithm-driven platforms that provide investment management services online, with little to no human intervention. They have gained immense popularity over the past decade, and their growth shows no signs of slowing down. Here's how they are revolutionizing the investment landscape:

1. Accessibility and Inclusivity

Traditionally, access to professional financial advice and investment management was often limited to high-net-worth individuals due to high fees and account minimums. Robo-advisors have democratized investing by offering low-cost, accessible solutions to investors of all backgrounds.

Whether you have a modest or substantial portfolio, robo-advisors provide you with the tools and expertise to manage your investments effectively. They make it possible for anyone with an internet connection to start building wealth, thereby fostering financial inclusivity.

2. Personalized Investment Strategies

Robo-advisors excel in creating personalized investment strategies tailored to individual goals and risk tolerance. They utilize sophisticated algorithms to analyze your financial situation and objectives, subsequently recommending diversified portfolios that align with your needs.

This personalization is a game-changer, as it allows investors to achieve their financial goals with precision and confidence. Whether you're saving for retirement, a home, or a child's education, robo-advisors can optimize your investments accordingly.

3. Cost-Effective Investment Management

High fees have long been a concern for investors, as they can erode returns over time. Robo-advisors typically charge much lower fees compared to traditional financial advisors, making them an attractive choice for cost-conscious investors.

Additionally, the transparent fee structures of robo-advisors ensure that you're fully aware of what you're paying, with no hidden charges. This transparency enhances trust and allows you to keep more of your hard-earned money.

4. Data-Driven Decision Making

Robo-advisors leverage vast datasets and historical market data to make investment decisions. These algorithms continuously analyze market conditions, news, and economic indicators to adapt portfolios in real-time. This data-driven approach minimizes emotional bias and enhances decision-making, particularly during market volatility.

5. 24/7 Accessibility

Investing doesn't adhere to a 9-to-5 schedule, and neither do robo-advisors. These platforms offer 24/7 accessibility, allowing you to monitor your investments and make adjustments whenever necessary. This flexibility empowers you to stay in control of your financial future, no matter your schedule.

The Future of Finance: A Hybrid Model

While robo-advisors have already made a substantial impact on the investment landscape, the future holds even more promise. Many financial institutions are adopting a hybrid model, combining the strengths of automated technology with human expertise.

This hybrid approach acknowledges that some investors may still desire human interaction, especially during complex financial situations or major life events. Consequently, investors can enjoy the best of both worlds: the efficiency and accessibility of robo-advisors and the personalized guidance of experienced financial professionals.

The future of investing is undeniably being shaped by robo-advisors. These digital platforms offer accessibility, personalization, cost-effectiveness, data-driven decision-making, and 24/7 accessibility. As they continue to evolve, it's clear that robo-advisors are not just a trend but a fundamental transformation in how we approach finance and investments. Embracing this evolution may be the key to unlocking your financial goals and securing a brighter financial future.

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What about alphaAI?

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In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

In today's rapidly evolving financial landscape, managing investment risks has become more crucial than ever. Whether you're a seasoned investor or just starting out, finding a reliable partner to help navigate the complex terrain of investments is essential. Enter alphaAI, the AI-powered investment platform that's revolutionizing the industry by dynamically adjusting to market conditions and providing effective risk management strategies.

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Your Trusted Partner in Investment

At alphaAI, we understand that the investment landscape can be intimidating. That's why we're here to empower you with knowledge and provide the tools you need to make informed decisions. Let's delve into how alphaAI helps you effectively manage investment risks using AI technology:

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1. Customization Tailored to Your Risk Appetite

One size does not fit all when it comes to investments. We believe in empowering our users to customize their portfolios according to their unique risk preferences and financial goals. Whether you're a risk-averse investor or looking to embrace higher-risk opportunities, alphaAI allows you to set your risk level with ease.

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Our platform takes your risk tolerance into account and strategically allocates your assets to optimize returns while managing risk effectively. This personalized approach ensures that your investments align with your financial aspirations.

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2. Dynamic Risk Management and Loss Minimization

alphaAI adjusts your portfolio in response to the ebbs and flows of the market. This means that when the market isn’t performing so well, we will automatically reduce risk to help minimize losses. On the flip side, we will buy into assets when the time is right to capitalize on market upside.

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We are able to do this through our leading-edge AI system, which analyzes thousands of data points per day for every single US-listed stock to determine overall market risk. Based on this market risk and your unique investor profile, we are then able to make decisions best tailored to your goals and risk tolerance.

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3. Transparent and Affordable Fee Structure

We understand the importance of keeping investment costs in check. alphaAI offers a simple and cost-effective fee structure, with just one low fee of 0.25% per year. This transparent pricing ensures that your hard-earned money works harder for you without hidden charges or surprises.

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4. Regulatory Compliance and Security

alphaAI takes your financial security seriously. We are proud to be SEC-registered and regulated, providing you with peace of mind that your investments are managed in accordance with industry standards and guidelines. Our commitment to regulatory compliance ensures transparency, accountability, and fairness.

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Moreover, we prioritize the safety of your funds. Your cash account with alphaAI is FDIC-insured up to $2,750,000, safeguarding your capital against unexpected events. This extra layer of protection demonstrates our dedication to your financial well-being.

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5. Cutting-Edge Security Measures

In the digital age, cybersecurity is paramount. alphaAI employs the highest digital encryption standards, utilizing 128-bit or higher encryption to secure your personal and financial data. Our robust security measures are designed to thwart cyber threats and keep your information safe from unauthorized access.

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How AI Technology Enhances Risk Management

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Real-Time Data Analysis

One of the most significant advantages of using AI technology in investment risk management is the ability to analyze vast amounts of data in real-time. alphaAI's AI algorithms continuously scan market conditions, economic indicators, and financial news to provide up-to-the-minute insights. This real-time analysis allows for timely adjustments to your investment strategy, minimizing potential losses and maximizing gains.

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Predictive Analytics

AI technology excels in predictive analytics, which involves forecasting future market trends based on historical data and current market conditions. alphaAI leverages predictive analytics to anticipate market movements and adjust your portfolio accordingly. This proactive approach to risk management helps you stay ahead of market volatility and make more informed investment decisions.

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Machine Learning and Adaptability

Machine learning, a subset of AI, enables alphaAI to learn from past market behaviors and improve its decision-making processes over time. As the AI system processes more data, it becomes increasingly adept at identifying patterns and predicting market movements. This continuous learning process ensures that your investment strategy evolves with changing market conditions, providing a robust defense against risk.

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Diversification Strategies

AI technology also enhances diversification strategies, which are crucial for managing investment risks. alphaAI's algorithms can identify a wide range of investment opportunities across different asset classes, sectors, and geographic regions. By diversifying your portfolio, alphaAI reduces the impact of any single investment's poor performance on your overall portfolio, thereby mitigating risk.

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The alphaAI Advantage

In a crowded market of investment platforms, alphaAI stands out as a trusted and innovative partner. Our commitment to personalized risk management, transparent pricing, regulatory compliance, and top-tier security measures sets us apart from the competition.

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With alphaAI, you can confidently navigate the investment landscape, knowing that your financial future is in capable hands. Whether you're new to investing or a seasoned pro, our platform empowers you to make informed decisions and manage risks effectively.

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Don't let uncertainty hold you back from achieving your financial goals. Join alphaAI today and experience the benefits of a dynamic, secure, and personalized approach to investment management. Your journey to financial success starts here.

June 7, 2022

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In this piece, I will discuss three reasons why there has been a paradigm shift in the markets. I want to preface by saying I am not predicting a recession nor do I wish to sow fear. I merely want to present a perspective that will hopefully help investors understand and adapt to current market events.

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Here are my three reasons:

1. COVID-19 led to massive monetary stimulus
2. Monetary tightening is stressing the economy
3. There has been a paradigm shift in how companies are valued

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1. COVID-19 led to massive monetary stimulus.

In the face of COVID-19, countries around the world shut down and went into quarantine. The sudden disruption of supply and demand threatened to create a severe recession. In order to avoid the worst, governments swiftly implemented massive monetary stimulus designed to help replace demand that was lost to the pandemic. In the US, the Federal Reserve (Fed) lowered the Federal Funds rate to near 0% and pumped money into the economy as its balance sheet ballooned from $4 trillion in February 2020 to nearly $9 trillion as of the time of writing. These policies largely worked to save the US from a certain pandemic-induced recession, but also exacerbated economic issues caused by more than a decade of the easy money policies that followed the Great Recession.

Federal Funds Rate

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Federal Reserve Balance Sheet

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As money was printed, asset prices increased across the board. The stock prices of “work-from-home” companies, such as Peloton and Zoom, soared. Companies involved in ecommerce and direct-to-consumer also greatly benefitted. As valuations became inflated, investors, running out of room in the markets, were forced to take on more risk in order to meet or beat their benchmarks. Companies that prioritized growth over profitability were rewarded while those who saved were penalized. Speculative assets, such as crypto, skyrocketed. The average price to sales ratio of the Nasdaq nearly doubled from 2020 to 2021. It was an extraordinary period marked by fast gains and easy money. So what happens when capital becomes more expensive?

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Nasdaq Price to Sales Ratio

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2. Monetary tightening is stressing the economy.

As the economy reopened, all of the excess liquidity created by the Fed led to a huge imbalance of supply and demand. Supply chains severely backed up as demand overwhelmed, causing prices to shoot up across the board. The war in Ukraine further fueled the fire by pressuring commodity prices, an effect that has rippled through supply chains globally. All of these circumstances have resulted in the highest inflation levels seen in decades.

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US Inflation Rate

In order to combat inflation, the Fed has quickly reversed its easy money policies. Within 3 months, the Fed funds rate was raised ~0.75% with at least another 0.50% increase coming soon, marking the fastest increase seen since the Great Recession. At the same time, the Fed will begin unloading its massive balance sheet this month. All of these actions will serve to tighten liquidity and hopefully tame inflation. However, one does not simply reverse decades-long easy money policies without significant consequences.

3. There has been a paradigm shift in how companies are valued.

When capital was cheap, the best performing assets prioritized growth over profitability. In the wake of the Great Recession, companies were expected to borrow or raise capital to grow. Indeed, “growth at all costs” seemed to become the mantra of many companies, especially high-flying technology-based ones. This trend was further exacerbated by the swift return to easy money policies following the pandemic. Now that capital has become more expensive, the best performing assets are now the worst. Crypto has had a significant meltdown as Bitcoin has lost more than 55% of its market cap. The tech-heavy Nasdaq is down 25%+ from its 2021 highs and is in bear market territory.

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Bitcoin Price

Nasdaq Composite Index

So what does all of this mean for investors? As we’ve seen in the first half of 2022, there has been a shift away from hypergrowth and towards near-term profitability. This shift is actually something that has happened multiple times since 2008, but this time, it’s different. In prior instances, valuation cuts were little more than temporary as easy money policies made it simple for companies to continue consuming capital to fuel growth. This time, easy money is not coming to bail these companies out. In fact, business models are likely to permanently change from capital consumptive to capital preserving. Investors have been reassessing not just valuation multiples, but the actual ability of companies to generate future cash flow in a tighter monetary environment. This change marks a paradigm shift in the entire investing framework that we have known for the past decade. Whether this shift is permanent or more fleeting will depend on inflation, among many other factors. However, it seems more likely than not that this new market regime is here to stay for at least the near to medium term.

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What about alphaAI?

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In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

How did UST crash and tank the entire crypto market?

The collapse of TerraUSD (UST) sent shockwaves through the cryptocurrency market, highlighting the vulnerabilities of algorithmic stablecoins and the broader implications for crypto investors. Understanding the events leading up to the UST crash and its aftermath is crucial for anyone involved in cryptocurrency investments.

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What do Venezuela and Terra have in common? Well, it turns out that printing money leads to massive inflation and a subsequent devaluation of the currency being printed. Who would’ve thought?

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But to understand why this is relevant to Terra, let’s take a step back and first discuss what Terra even is. Terra is a crypto project founded in early 2018 by Do Kwon (currently CEO) and Daniel Shin (left in 2020). Terra is (or was?) an ecosystem of decentralized stablecoins, with its largest being TerraUSD, or UST for short. LUNA is Terra’s native cryptocurrency coin and is separate from UST.

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What is a stablecoin?

Stablecoins are cryptocurrencies that are supposed to track the value of fiat currencies. Most stablecoins, such as Tether (or USDT for short), are pegged to the US dollar. This means that 1 USDT should, in theory, be worth 1 USD.

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But how do stablecoins retain their value? USDT is backed by fiat held as collateral, similar to how the US dollar used to be backed by the gold standard. This means that Tether holds in its reserves USD (and similar assets such as US Treasuries) equivalent in value to all outstanding USDT. So in theory, 1 USDT should always be able to be exchanged for $1, providing a floor for USDT.

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Algorithmic stablecoins: Good intentions with a bad outcome

Now that we know what a stablecoin is, what is UST (TerraUSD) and how is it different? UST is what’s known as an algorithmic stablecoin. Unlike normal stablecoins, which are backed by real reserves, algorithmic stablecoins are not backed by any sort of collateral.

So if normal stablecoins were doing so well, why experiment with algorithmic ones? Well, the main problem with fully-backed stablecoins is that there may not be enough collateral to meet demand. For a while, Terra successfully solved this problem and became the third largest stablecoin by market cap. However, as we all saw, this achievement was short-lived given fatal flaws in its underlying regulation mechanism.

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How does (or did?) UST work?

UST attempted to maintain its peg to USD through a supply regulation mechanism known as mint and burn. This is where LUNA comes in: 1 UST is worth $1 worth of LUNA. Keep this in mind as we look at two simple examples.

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1. UST is trading above USD, i.e. 1 UST is worth more than $1

Let’s say for some reason 1 UST is trading at $1.05. When this happens, an arbitrage opportunity arises: Borrow $1 to buy $1 worth of LUNA → Give $1 worth of LUNA to the Terra system and get back 1 UST → Sell 1 UST on the open market for $1.05  → Pay back the borrowed $1, resulting a 5% profit. This increases the supply of UST in the open market, thereby pushing the price down until 1 UST once again equals $1.

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What happens to the $1 worth of LUNA that was exchanged? It’s burned by the Terra system. This decreases the amount of LUNA in circulation, which increases its price. Keep this in mind for later.

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2. UST is trading below USD, i.e. 1 UST is worth less than $1

In this example, let’s say 1 UST is trading at $0.95. Another arbitrage opportunity presents itself: Borrow $0.95 to buy 1 UST → Give 1 UST to the Terra system in exchange for $1 worth of LUNA → Sell $1 worth of LUNA for $1 on the open market → Pay back the borrowed $0.95, resulting in a 5% profit. This reduces the supply of UST in the open market, thereby increasing the price of UST until 1 UST equals $1.

In this example, where did the Terra system get the $1 worth of LUNA? It was minted. This increases the amount of LUNA in circulation and decreases its price.

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So in summary, as UST goes above its peg, LUNA is bought and burned, which pushes LUNA’s price up. As UST goes below its peg, LUNA is minted and sold, pushing LUNA’s price down.

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Everything is fine and dandy so long as there is demand for UST and LUNA. People buy UST → UST maintains its peg by getting exchanged for LUNA → LUNA is burned, leading to an increase in its value → LUNA’s increase in value leads to an increase in demand for UST → And the cycle is repeated. Everyone is making money. Everyone wins.

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This all sounds great until we realize that LUNA, the anchor of the mint and burn mechanism, doesn’t have any intrinsic value. So what happens when $1 worth of LUNA is no longer worth $1? Well, the entire regulation mechanism breaks down and leads to a death spiral.

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Terra’s Death Spiral

Let’s look at a third example. Assume that 1 UST is trading at $0.95, but $1 worth of LUNA is now also trading at $0.95. Here, there is no arbitrage opportunity and, therefore, no incentive to convert UST into LUNA. UST loses its peg to USD as the regulation mechanism breaks down. This is exactly what happened to Terra.

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The Fed started increasing interest rates to fight inflation, which triggered a global sell-off of risky assets. In the stock market, this included high valuation stocks such as tech stocks. In crypto, it was virtually everything. There were some very large sales of both UST and LUNA, which some speculate was a deliberate attack while others believe was purely due to market events. In any case, the sell-offs happened and put significant downward pressure on LUNA and UST, which initiated a death spiral:

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People sell UST → UST loses its peg → LUNA is minted and exchanged for UST in order to stabilize UST’s price → LUNA’s supply increases, which decreases LUNA’s value → UST holders lose faith in LUNA and sell UST → And the spiral continues.

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We saw this death spiral play out the week of May 1st, 2022. At its high, LUNA was trading above $100. Within a matter of days, the amount of LUNA in circulation went from a few hundred thousand to 6.5 trillion, which caused its value to go to nearly $0 and UST to trade significantly below its intended $1 peg. At the time of writing, LUNA is trading at just $0.0001 and UST is trading at just $0.06. Yikes.

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Terra’s Future

Although the future of Terra is uncertain, it seems likely that the Terra blockchain will be forked. Do Kwon proposed that the new chain will be called Terra (token: LUNA) and will not have algorithmic stablecoins. The old chain will continue to exist as Terra Classic (token: LUNC).

If everything goes according to plan, the new blockchain will be live by May 27th, 2022. According to Kwon, new LUNA tokens will be airdropped to LUNC stakers, holders, residual UST holders, and essential app developers of the Terra Classic blockchain. The drops will happen in a way that compensates holders before the crash more than speculative buyers post-crash.

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Regardless of what happens, Terra’s downfall will serve as a painful but important lesson for the crypto community. I am hoping for the best outcome for all those who are affected.

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What about alphaAI?

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

If you're new to investing or you've been investing for a while, you know diversification is a fundamental rule of investing that has stood the test of time. Just look at Warren Buffet. It's the idea that you should not put all your eggs in one basket. Instead, you spread your investments across various asset classes, sectors, and regions to reduce risk and enhance your long-term gains. While the concept is generally well-known, the real challenge lies in implementing it effectively.

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The Importance of Diversification

Diversification is all about risk management. When you diversify your investment portfolio, you are essentially spreading your risk. Here's why it's crucial:

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• Risk Reduction: Different assets have different risk profiles. By diversifying, you reduce the impact of a poor-performing asset on your overall portfolio.
• Enhanced Consistency: Diversification can smooth out the ups and downs in your portfolio's value over time, providing a more consistent investment experience.
• Increased Opportunity: Diversifying across various asset classes allows you to tap into multiple opportunities for growth, not just relying on a single investment.
• Protecting Against Market Volatility: Diversification helps you weather market volatility by balancing high-risk assets with lower-risk ones.

Challenges in Implementing Diversification

While the concept of diversification is straightforward, the execution can be complex. Many investors struggle with the following challenges:

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• Asset Selection: Which assets should you include in your portfolio? How much should you allocate to each?
• Rebalancing: As asset values change, your portfolio's allocation can drift from your target. Regular rebalancing is necessary to maintain diversification.
• Data Overload: With a multitude of assets to consider and vast amounts of data to analyze, the task of diversification can become overwhelming.
  

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How alphaAI Optimizes Diversification

alphaAI leverages the power of artificial intelligence to address these challenges and optimize diversification:

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• Advanced Algorithms: alphaAI's AI tools use sophisticated algorithms to analyze a vast array of historical and real-time data. This helps in selecting the right mix of assets for your portfolio.
• Risk Assessment: The AI system assesses the risk associated with each asset, ensuring that your portfolio is aligned with your risk tolerance.
• Continuous Monitoring: alphaAI continuously monitors the market, assessing changes in asset performance. It can automatically trigger rebalancing when needed, ensuring your portfolio remains diversified.
• Personalization: Every investor is unique. alphaAI tailors diversification strategies to your specific financial goals and preferences.
• Adaptability: Markets evolve, and so do investment opportunities. alphaAI adapts to changing market conditions and adjusts your portfolio accordingly.

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Diversification is not just a buzzword in investing; it's a time-tested strategy for risk reduction and long-term growth. However, implementing diversification effectively can be challenging, especially in today's complex and data-rich financial landscape. alphaAI's AI tools are designed to make diversification easier and more efficient. By leveraging advanced algorithms and continuous monitoring, alphaAI helps investors create diversified portfolios that align with their unique goals and risk tolerances. Whether you're a seasoned investor or just starting, alphaAI can be a valuable partner in optimizing your investment portfolio for a brighter financial future.

‍

What about alphaAI?

‍

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

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Disclaimer: Investing in the stock market involves risks, and past performance is not indicative of future results. The information provided in this blog is for educational purposes and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.‍

Hi there,

My name is Richard Sun, and I’m the Founder of alphaAI. Thanks for your interest in us! You’re probably wondering who we are, where we came from, and what we stand for. I’d love to answer those questions for you now.

Who am I?

I am the first generation in my family to be born in the United States. Like many others who have settled in this country, my parents immigrated here with hopes to achieve the American Dream.

Having come from humble beginnings, I have always had an interest in attaining financial independence. My parents believed the best way to do so was for me to be a doctor or a lawyer (something I’m sure at least a few of you can relate to), but life had other plans. By the time I was in college, I still wasn’t sure what I wanted to do. I always had a natural affinity for math, so that’s what I majored in.

After graduating, I went into Finance. I started my career as an Investment Banker at Barclays where I got the chance to work on some high-profile deals, like the Dell acquisition of EMC. I learned a ton but ultimately found myself more passionate about investing in the stock market, so I left Barclays and joined a hedge fund in San Francisco. At the hedge fund, I learned a great deal about investing and got the chance to see first-hand how it’s done on Wall Street.

Most stock market trades are made by machines.

While working on Wall Street, I realized that more than 90% of stock market trades are done by machines. That’s because AI-driven trading offers numerous benefits over human-driven trading. Machines are simply better equipped to deal with numbers than humans are. Machines can process more data, faster. And they make emotionless decisions. When it comes to generating consistent, risk-adjusted returns over a long period of time, it’s extremely hard to beat systematic, AI-driven strategies.

Wall Street caught on, but Main Street was left in the dust. While the 1% were reaping the benefits of AI-driven investing, the average investor was encouraged to employ antiquated buy-and-hold strategies. Passive strategies are sub-optimal because they are at the mercy of the markets. The bear market of 2022 was a prime example of where buy-and-hold fails.

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It was clear that traditional investing advice wasn’t working for everyone.

Every time someone found out I worked as a professional investor, I would inevitably always get the same questions: “What’s the market going to do? Which stocks should I buy? What should I do to prepare my portfolio for this upcoming event?”

Everyone had heard the same, tired advice: “Diversify your portfolio. Invest in ETFs. Invest for the long-term.” It’s good advice, but people still wanted something more sophisticated. They wanted to know how they could maximize their gains while also reducing their losses. They wanted a better way to manage their risk. These were things that were achievable, but not for the average person.

I saw a need to automate portfolio management.

I had considered recommending investment advisors and/or hedge funds, but their high minimums and fees meant they weren’t easily accessible to everyone. I felt that there must be a better way. That’s when I realized that, as a professional investor, my job could be broken down into a few key portfolio management functions: downside protection, risk management, diversification, and asset allocation.

So I set out to create a system that would automate all of these tasks. Doing so involved a lot of coding and a lot of math. Never in my wildest dreams did I think I would actually have to use calculus again. I guess my math professors are getting the last laugh now.

I built everything from the ground up — just me, myself, and I. I lost track of how many prototypes I created. I spent years testing my systems on my own capital. I had the full entirety of my net worth being managed by these systems — I was all in. After three years of painstaking development, I was finally ready to show the world.

Join us in the future of investing!

In 2021, I founded alphaAI to make sure anyone and everyone could tap into the power of AI-driven investing. We have two simple goals: to help everyone achieve their investment objectives through automation and to do so at an accessible price. In finance, “alpha” is a measure of the active return on an investment. Higher alpha values are better than lower ones. The idea behind our name, alphaAI, is simple: use AI to generate alpha for our clients.

I believe that most of a traditional investment advisor’s job can be automated. Of course, there will always be a need for human touch, especially when it comes to more ambiguous strategies. But for 99% of people out there, automation can deliver results that are just as good, if not significantly better, and at just a fraction of the cost.

There are other services that provide automated passive investing, but passive investing only goes so far. As we saw in the bear market of 2022, active portfolio management, when done properly, can help significantly reduce losses and maximize gains. It’s time that these more sophisticated products and strategies were made available to everyone in a scalable and cost-effective way — and that’s where we come in.

Thank you from the bottom of my heart for reading this far and for your continued interest in alphaAI. If my story speaks to you, then consider joining us in the future of investing. Many others have already signed on to be a part of our Founder’s Class, and we would love to have you onboard too!

Richard Sun

Founder @ alphaAI

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