Authored by Steven Novakovic, CAIA, CFA, Managing Director, Educational Programs
Crypto: The Only Constant is Change
In my former life as an LP, investing in alternatives was a lot like one of my favorite Warren Buffet quotes:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Alternatives often follow a similar rhythm: invest today and wait five years (or more) to truly see the results. As someone with a long-term mindset, this aspect of alts is very appealing.
It won’t come as a surprise, then, that writing about cryptocurrency gives me a touch of anxiety. It can sometimes feel like the crypto markets undergo five years’ worth of change in just a few hours, and the landscape continues to evolve rapidly. New regulations, political shifts, and speculation drive constant volatility, making it difficult to keep up — let alone to predict the future (I hope the articles I’ve selected endure by the time this newsletter is published!).
In all seriousness, it’s an exciting time to be involved in digital assets, and with recent shifts in U.S. policy, we may be at the beginning of a whole new era for crypto adoption and investment. As such, now seems like a great time to check in, see what’s changed, consider what we know (and what we don’t know), and reflect on future opportunities in the world of digital assets.
Mining for Access: Crypto’s Regulatory Gold Rush?
While many countries have embraced and supported the digital assets ecosystem over the years, the fact that U.S. policymakers were historically unfriendly likely slowed innovation and adoption (even if it did protect against bad actors to some degree). Therefore, it was no surprise to investors that Bitcoin (and other digital assets) experienced substantial appreciation after the results of the U.S. election became clear. Investors who prognosticated years ago that Bitcoin would go to $100,000 (and beyond) were finally proven right. Perhaps more impressively, price levels have remained fairly resilient thus far, showing this was not simply a euphoric momentum trade.
We can be pretty confident that U.S. regulatory bodies will be far less hostile towards cryptocurrencies and the digital assets ecosystem moving forward. This does not mean that 300 million people in the U.S. will suddenly start buying Bitcoin, but it is reasonable to believe that, over time, retail investors will see more opportunities to invest in or gain access to digital assets. Meanwhile, institutional investors (e.g., venture capital funds) will not be as concerned with legal battles and uncertain regulatory environments, which may prove stimulative for institutional investment activity.
A New Kid on the Block(chain)
Aside from retail and institutional investors, there may be another major investor on the horizon. Currently, the U.S. government holds over $21 billion of crypto assets and previously intended to sell those holdings. However, new legislation proposes that the U.S. government hold crypto indefinitely. While the fate of this legislation is uncertain, the current administration appears receptive to the idea. Across the pond, the ECB ruled out the idea of banks holding Bitcoin as a reserve. Although, the head of the Czech National Bank recently indicated they are interested in holding as much as 5% of their reserves in Bitcoin. Ultimately, we still operate in a world of mixed political perspectives.
Not Just a Token Trend
Where does this leave us? I think it’s fair for digital assets enthusiasts to be more optimistic about the future. I certainly believe we’ll see further developments in the ecosystem and digital assets infrastructure. However, I would also be wary of an increase in scams, rug pulls, fraud, etc. in a looser regulatory environment. More lax regulation can open doors for both innovators and bad actors, so a healthy dose of skepticism is apropos.
Does all this mean that Bitcoin (and other coins) are positioned to go even higher? That’s the $100,000 question. How much of this enthusiasm is priced in? How much more widespread will Bitcoin and cryptocurrencies become as investment assets? The good news: I don’t think we’ll have to wait five years to find out!
If you want to check in on the latest goings-on in the world of digital assets, here are some great resources.
The implications of new leaders at SEC and their possible approach to digital assets
The SEC is creating a crypto task force to evaluate regulations and digital asset policies
What is the U.S. administration’s thinking on holding bitcoin as a strategic reserve?
More on regulatory changes already taking place in the U.S.
Weekly vlog by Coinbase covering a range of current topics impacting digital assets
The ECB perspective on holding bitcoin reserves
The ECB perspective on Central Bank Digital Currencies
PS – Please join us for our virtual chapter webinar covering the latest in crypto markets.