Dub Bets on the Social Appeal of Copy-Trading
Plus, satisfaction with Klarna, Afterpay and Affirm lag incumbent BNPL rivals.
Number of the Week: $1 billion (explanation below)
Dub Bets on the Social Appeal of Copy-Trading
As the sweeping influence of social media pervades all aspects of society, dramatically reshaping business, culture and politics, the copy-trading phenomenon is accelerating as digital natives increasingly ditch conventional investing practices and follow high-profile traders and financial influencers on social trading platforms, replicating their trades and performance to build wealth.
The rise of copy-trading among retail investors is being driven primarily by three things: access to high-speed internet, massive smartphone adoption, and the ability to automatically copy the positions of high-profile traders and hedge fund managers (aka signal providers) in real-time. While younger investors are an important target “follower” market for copy-trading platforms, “older individuals with higher incomes are more inclined to make well-informed decisions in copy trading, which further contributes to its rapid growth,” said Mingwen Yang, assistant professor, department of information systems and operations management at the University of Washington’s Foster School of Business, in an email to FIN. Other factors that could impact the adoption rate of copy-trading include social media’s large user base, culture with mutual trust and good financial regulation, said Eric Zheng, a professor in the department of information systems and operations management at The University of Texas at Dallas’ Jindal School of Management, in an email to FIN.
A study from The Insight Partners, “Social Trading Platform Market Forecast to 2028,” projects the social trading platform market globally will grow from $2.23 billion in 2021 to more than $3.77 billion by 2028, reflecting a compound annual growth rate of 7.8%. It attributes the platform market growth, in part, to the increasing benefits of chatbot integration with trading platforms and the impact of artificial intelligence as a driver of social trading platform adoption.
For digital natives, notably Millennials and Gen Z, the greater the transparency on social media, the greater the trust. With copy-trading, that trust of expert traders translates into more “social accreditation.” That’s what the newest market entrant, dub, is betting with its copy-trading app that allows social media-savvy retail investors to replicate the portfolios of emerging investment managers, high-profile hedge fund managers, financial influencers and elected officials. Founded by 22-year-old Steven Wang, who dropped out of Harvard to start the company, dub launched its app publicly and closed $17 million in seed funding to expand operations and development in February. The round was led by Tusk Venture Partners, with Uber's Dara Khosrowshahi, Robinhood's Nathan Rodland, Apex Fintech Solutions' Bill Capuzzi, and others participating as individual investors. The funding also included a $2 million venture debt facility from Silicon Valley Bank.
Dub, which Wang leads as CEO, is pushing into a crowded field where copy-trading is increasingly being promoted by established social trading platforms, the likes of which include eToro, TradeZero, ZuluTrade, and PrimeXBT, among others. The platforms offer differing pricing structures and the ability to trade in various assets (forex, stocks, crypto, indices, commodities and metals). Unlike its rivals, dub positions itself as the first-ever copy-trading app where an investor can automatically copy other investors with one-tap trading while “seeing their validated performance.” In an email to FIN, Wang said dub’s biggest differentiator is that “it is the only company to offer copy-trading in the United States for U.S. equities. eToro and the others offer copy-trading internationally for much more esoteric asset classes with less strict regulation, namely futures or forex. U.S. equities, or stocks and ETFs, are by far the most-traded asset class for retail investors, leading us to believe [that] bringing the innovation of copy-trading to something retail investors are already extremely familiar with will open a much easier path to adoption.”
Further, Wang said that with other copy-trading platforms, “you are copying the trades of the people you copy, rather than their entire portfolio. dub's copy-trading is centered around portfolio management, “very similar to how you'd think an ETF or a hedge fund is constructed: a basket of assets based on an investment strategy. We believe this is the better way for retail investors to copy-trade; thoughtful and risk-adjusted portfolio construction is key to investing for the long run.” He contends that its product design will be its greatest strength. “We've simplified the entire experience to mirror investing in a stock. In the same way you'd invest $10 in Tesla, you can invest $10 to copy anyone on the platform. It's pretty magical—users should almost know how to use the app without any education involved. And from early feedback, we haven't had any issues with users understanding how to ‘copy-trade,’ which in itself is a very unique and new concept.”
As Wang sees it, a shortlist of cultural, social, and economic factors is going to drive the adoption of copy trading, including the continued rise of the “creator economy” and trusted narratives from influential individuals on investing—think ARK Invest’s Cathie Wood and Pershing Square’s Bill Ackman, for example; a potential soft landing and interest rate cuts, which means more money to invest and inject back into the economy; and the democratization of alternative assets for better portfolio diversification. (dub is not yet active in alt assets.) “A rising tide floats all boats,” Wang said of what he expects in the near term. “And with our unique innovation of copy-trading, the first of its kind in the U.S., we have a major opportunity to scale quickly.”
The way that Wang is positioning the copy-trading app reflects a huge departure from the marketing of more established social trading platforms, with his social messaging capturing the full-on transparency vibe of the trader and investor audience that the company is targeting. “For everyone out there who thinks they're good at investing, I challenge you. Put your portfolio on dub. Prove it to the masses and let the people share in your wins. If you do, I will do everything I can to make sure you're the most distributed portfolio on the market. Thank you @kiantrades @TheLongInvest @ResearchGrizzly @lawrencerfuller and more for taking the first leap,” Wang said in an X post this week. When asked how dub will solicit the participation of top-performing hedge fund managers, traders, politicians and other financial influencers on its app, Wang said that Dub tracks the trades of high-profile individuals, such as U.S. House Representative Nancy Pelosi, for example, by using 13F filings, “layering in other signals and data sources to augment the strategies and make them the app’s own.” These are then published by dub Capital, which is its registered investment advisor. “The app serves as a valuable resource for creators seeking to build investment communities and enhance engagement,” accessing a wider audience and connecting with customers not reached through traditional marketing channels.
Some market observers caution that the growing enthusiasm for copy-trading presents the broader social-trading platform market with a thorny revenue model “conundrum”—that is, how to compel investors who are following and evaluating traders’ detailed public transaction information to pay for copy-trading without losing the information transparency that’s critical to platforms. The study, “How Much Is Financial Advice Worth? The Transparency-Revenue Tension in Social Trading,” published by professors Mingwen Yang, Eric Zheng, and Vijay Mookerjee at The University of Texas at Dallas’ Jindal School of Management, examined the real-time value of trade information—to followers and social trading platforms—in copy-trading scenarios. “Information transparency significantly contributes to the success of social trading platforms. Each trader's public profile displays detailed transaction information, allowing thorough evaluation by the public,” said Yang. “However, [it is possible] for investors to leverage this information without actively using the auto-copy function or fully engaging with the platform. To enhance market penetration and generate profits, social trading platforms could introduce a time delay on the transaction information made freely available to the public. This delay could be customized for each trader, based on the value of the information they provide.”
Beyond this, Yang says that advancements in artificial intelligence can help trading platforms contend with copy-trading risks associated with investors gravitating toward “a select few highly popular leaders, a phenomenon known as the long tail effect,” employing similar trading strategies, which increases the risk if the market moves in the opposite direction. “To mitigate this, the platform can utilize artificial intelligence to oversee the collective risk exposure of all investors, thereby promoting a more diverse range of trading strategies on the platform,” she said.
Another “probable” issue: Retail investors might downplay the at-times considerable risks posed by copying other traders whose appetite for risk and ability to absorb losses is much greater. “Social interactions within these platforms play a crucial role, often encouraging investors to mimic the actions of other traders, potentially leading them to assume greater risks,” Yang said.
Zheng put a finer point on the potential risks of copy-trading: Risks could be amplified “if all these savvy users copy each other, leading to the risk of mini-flash crash.”
Wang is optimistic about the ability of retail investors to navigate the inherent risks of copy-trading and the benefits of more “transparent” wealth creation. “There is always a risk involved.… Instead of blindly following other influential traders on social media, [investors] can instead copy someone on dub where [they] can see their validated track record, performance and trading history. You can't fake it on dub—we are the actual brokerage. …We can give retail investors a vastly better, safer and more educated way to do what they're already doing.”
Noted & Noteworthy
About those bitcoin gains missing in your Coinbase account this week: Bitcoin briefly surged to $64,000 before retreating to the $60,000 level on February 28th, yet some customers of Coinbase’s U.S. crypto exchange reported that their accounts were showing as having zero balances. Attempting to explain the exchange outage, Coinbase CEO Brian Armstrong said in a post on X that “we had modeled a ~10x surge in traffic and load tested it. This exceeded that number. It’s expensive to keep services over-provisioned, but we’ll need to keep working on auto-scaling solutions and killing any remaining bottlenecks.” Given ARK Invest chief Cathie Wood’s lofty projection late last year that bitcoin could be worth $1.48 million per unit by 2030—driven largely by greater institutional allocations and use cases—Armstrong and team might want to prioritize the crypto exchange’s over-provisioning of services.
Buy Now, Pay Later (BNPL) providers Klarna, Afterpay and Affirm trail American Express Plan It, My Chase Plan and Citi Flex Pay in overall U.S. consumer satisfaction, according to J.D. Power’s 2024 U.S. Buy Now Pay Later Satisfaction Study, which also found that overall customer satisfaction with BNPL services jumped 16 points year over year. On a 1,000-point scale, Plan It ranks highest in BNPL satisfaction with a score of 695, followed by My Chase Plan (686) and Citi Flex Pay (676), as compared to Klarna (633), Afterpay (626) and Affirm (618). Customer satisfaction was measured across six dimensions: customer support, making purchases where desired, perks for making purchases, reasonableness of terms, digital review and account management, and security of account information.
The biggest increases in satisfaction were driven by digital account management, account information security and reasonableness of terms. “Klarna and Affirm receive below-average scores across most of the dimensions. They are increasing acceptance with merchants, but need to make improvements to attract and retain additional consumer customers, particularly as more BNPL plans launch with strong existing acceptance,” said J.D. Power’s Miles Tullo, managing director, banking and payments, in an email to FIN.
To no surprise, the happiest consumers are financially healthy ones, who have the “highest overall satisfaction (731) with BNPL services.” Financially health consumers account for 21% of all BNPL users, are less likely to be concerned about missing a payment, and use BNPL services to budget and spread out repayments, according to Tullo. Meanwhile, financially vulnerable consumers, who account for 32% of BNPL usage, have a “considerably lower overall satisfaction score (593),” with less favorable experiences with repayment terms and digital account management, Tullo notes.
And speaking of BNPL service providers, Affirm joins a growing list of payments companies cutting jobs this year. Affirm laid off 140 people, or six percent of its workforce, in mid-February. PayPal announced that it would eliminate 2,500 jobs in 2024, while Block said it would cut 112 jobs by March 30th as part of a larger workforce reduction effort. The bottom line: Market pressures are compelling payments companies to do a lot of belt-tightening, with more expected as players wade deeper into the year.
With International Women’s Day on March 8th, it seems fitting to point out five global fintech trends that Accion is watching in 2024, all of which directly affect women as founders, customers, and community leaders confronting poverty and hunger, climate change, and conflict, particularly in emerging markets. The five trends are focused on the development of digital tools and services to address the following critical areas, with corresponding fintechs representing the work underway: expanding inclusion with embedded finance (Kuunda); creating solutions for the next generation of workers (MyRobin); building resilience to climate change (Verqor); unlocking the economic potential of women (Showroom); and exploring the inclusive potential of artificial intelligence (Apollo Agriculture).
FINvestments
🦈 Number of the Week: Stripe’s valuation jumped to $65 billion in a deal that offers former and current employees the chance to sell more than $1 billion worth of stock as the company delays a much-anticipated initial public offering. (The company’s robust valuation, though, is down from $95 billion in 2021.) Reuters reported that investors are providing a majority of the deal’s funds, but that Stripe will also use some of its own capital to repurchase employee shares in a “tender offer.”
🦈 Ether.Fi, a liquid restaking protocol with $1.66 billion in total locked value, raised $23 million in a Series A round led by Bullish Capital and CoinFund, with investment participation by OKX Ventures and Foresight Ventures, among others.
Follow FIN: The Fast Forward on Fintech on LinkedIn here and X (aka Twitter) here.
Great debut, Holly!