Why Information Asymmetries Matter

Why and how you can profit from information asymmetries. As an investor would say, you're looking for alpha in inefficient markets.
Photo by Vitalis Hirschmann on Unsplash

In the digital age, it’s important to find and create information asymmetries that can be arbitraged when connected to larger networks. As an investor would say, you’re looking for alpha in inefficient markets. Profit is made finding pockets of well curated information that are poorly distributed and sharing them with the world.

Taking a step back, there is a lopsided nature to information on the internet. You can find a lot of really great content on a topic in a small number of places. But because their is so much information on the internet, it’s easy to lose the quality signal among the noise. Meaning that most people will struggle to find value even when they know what to look for. And you can use this information asymmetry to your advantage.

Information Asymmetry – A Simple Definition

Think of symmetry as you would a reflection, what you see in the mirrored reflection matches the real world object. Objects or things that have symmetry have a sameness to them, a balance, or are equal-like. An example in data distribution: a bell curve. In statistics, it represents normal distribution. The general analogy with information assets that are normally distributed is that most people have access to a broad range of info on a topic, while some have less and some have more.

Bell curves and probability... - Cate Bakos Property ...
A bell curve represents “normal distribution”

If symmetry represents balance and equality, then it’s inverse, asymmetry, represents an imbalance and unequal distribution. Take for example, insider trading. A primary reason company insiders cannot freely trade their own stocks is because they have access to information the public markets do not. (It’s also like when players bet on themselves in sports, they could throw the game in their favor).

Insider trading actually provides a great example of information asymmetry. Insiders, have unequal access to important information that the public markets do not otherwise have. Details on performance, expected future strategies, and an understanding of when key personnel may decide to retire or move on from the company. This access to information provides what the SEC would see as an unfair advantage.

In short, think of information asymmetry as when a person, group, or a resource provides access to valuable information that others don’t have access to. Having access to valuable information that others don’t can provide many opportunities to profit.

Taking Advantage of Information Asymmetries

The crypto asset industry is a great modern example of how information asymmetry can be taken advantage of for personal gain. A significant driver of successful investing in the space comes down to having access to the right information before everyone else does. Because when you have the right information, you can act decisively on it, investing in a project that doesn’t yet have mainstream attention. And as the project gains notoriety, you profit not necessarily from success of the project itself but from the information arbitrage between what you know and the public catching up.

What if you knew the Covid-19 lockdown was coming a month before it did? How might you benefit from this knowledge?

There are many opportunities to arbitrage information asymmetries in the digital asset space.

But not all asymmetric information is valuable. Just because you have access to something other’s don’t doesn’t create value. So what is the right type of asymmetric information?

Think of it in terms of curation value. The information is valuable to others when its organized and provides depth and breadth on a topic. Messari.io is a good example, an organization founded by individuals with a significate amount of crypto industry experience. By paying for access, you tap into their industry experience that empowers significantly more informed investment decisions. Messari creates information asymmetry by providing insights and analysis that the general public does not have access to.

The key with crypto investments is that valuable information is still not curated. And as a result, investment opportunities are inconsistently available. There are also many new investors coming into the space with less information. This creates an interesting information asymmetry to exploit. It presents significant arbitrage opportunities to the investors that are early to investments that are inconsistently listed.

Combining With Information Capital Assets

Finding and building information asymmetries is how Sovereign Individuals will profit in the digital age. 

It pays to think in terms of asymmetry and arbitrage when accumulating information capital assets. The questions you can ask yourself: Am I early to a trend? Will this asset be valuable to a large group of people? Does this asset have the potential for a liquid market – meaning – is it easily transacted by a large number of people? Or perhaps you don’t want a very liquid market (collectibles).

Most importantly, once you find an information asymmetry it’s essential to act decisively. The knowledge gap will close quickly. Especially as more people come online and begin adding to the collective knowledge of the world. You will want to move quickly, gain a competitive position, and wait for the gap to close. As it does, that’s your chance to profit.

I’m building a digital age worldview. Every Monday, I write and curate a publication called The Sovereign Individual. A weekly newsletter that includes news roundups and analysis to help digital age workers adapt and thrive in our changing society. Topics intersect at geopolitics, fintech, crypto, individual responsibility, and personal freedom. Don’t get left behind, subscribe below.

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