Preamble: While the investment climate overview and trends were initially planned for a later release date, recent exciting developments in the crypto-verse have necessitated us bringing this topic to the fore.
In Part 2 of our informational miniseries, we aim to cover a few noteworthy trends on the investment climate and the timing for entering the market.
One reason for cryptocurrency's enduring popularity is its premise of decentralising money and trade (i.e. lead to less control and regulation by entities like the SEC, central banks, and other political institutions), with the ultimate goal of a more equitable and "democratic" ecosystem[1], while providing some level of transparency and auditability as required[2].
In recent history, however, we have seen movement by regulators seeking to "regulate" the crypto market to "protect" investors[3]; while we share the view that properly thought out and executed regulation can contribute to stability and security over the longer term, it has been historically applied to ward-off potential investors from the crypto space, back towards conventional finance which they deem "safer" (for now).
Donald Trump, an outspoken supporter of digital assets and cryptocurrencies, was non-consecutively re-elected as the 46th president of the US, and share Thomson Reuters's[4] view that Trump's stance favouring deregulation will eventually reduce the bureaucratic red tape hindering the crypto space in recent times, greatly improving its future prospects.
This has resulted in Bitcoin, one of the leading indicators for cryptocurrencies[5] gaining upward momentum, culminating in its peak valuation on the back of the recent US election results.
According to Gemini, "nearly two in three crypto owners globally (65%) buy and hold cryptocurrency because they believe in its long-term investment potential. And nearly two in five (38%) hold crypto to protect against inflation"[6].
We see traditional financial institutions such as BlackRock and Fidelity moving into the crypto space with both firms’ submissions including the use of crypto exchanges for market surveillance. Goldman Sachs, BNP Paribas, Deloitte and more than 30 firms announced the Canton Network, a new global blockchain network of networks for financial market participants and institutional assets as the financial services sector’s first privacy-enabled interoperable blockchain network of networks designed for institutions focused on the tokenisation of real world assets using Digital Asset’s DAML, a network member and the technology provider for the network.
As expected, any potential for economic gain would be of interest to large Financial Institutions (FI), which are already starting to enter the crypto-verse - on one hand, their involvement is expected to improve its prospects given their immense resources and potential to increase adoption via increased use cases, as well as foster good governance and some regulation; on the other hand, it will likely decrease opportunities over time, given FIs are intermediaries between investors and profits, diminishing the opportunities for direct exposure to returns.
The FIs entering the space will likely be able to have substantial control over the direction of the crypto-verse, given their resources as behemoths in the traditional financial services space. What this would mean for investors is that over time, the opportunity for returns will likely diminish on the back of fees and administrative costs leading us back to the systemic issues of today's financial services industry, and in opposition of what crypto was initially offered - an opportunity for cleaner risk-return dynamics, uncoloured by fees and charges by FIs for their "work done", where in today's crypto investing environment, risk mitigation options are already readily available via portfolio diversification into other investments and asset classes by investors themselves, without the need of FIs.
In our view, one of the core disconnects between regulators and the crypto-verse is information and disclosure requirements, which is something required by regulators for most FI, but is still in its nascent stages in the crypto-verse; with that said, we put this forward, as food for thought: despite all the disclosure requirements, just because a FI has disclosed something does not mean it is in a form understood or usable by investors to form a basis of decision.
There is a reason the majority of entrants into the crypto-verse have adopted a HODL strategy - for their belief in its ultimate utility, but, equally likely, they recognise that they needed to get in before the massive profit dilution event on the horizon occurs, once the bigger players enter the field. For those yet to invest and interested in investing in the crypto-verse, all we have to say is that "the best time was yesterday; but now will have to do".
This post constitutes the author's personal opinions, and should not be taken as a recommendation or advice for any kind of investment or securities. Kindly consult your financial, legal, tax, or any such other advisors for your specific needs accordingly.
[1] https://www.wsj.com/articles/why-consumers-will-still-want-to-use-cryptocurrencies-11666990617
[2] https://www.sciencedirect.com/science/article/abs/pii/S006524582030067X
[3] https://www.imf.org/en/Blogs/Articles/2023/07/18/crypto-needs-comprehensive-policies-to-protect-economies-and-investors
[4] https://www.thomsonreuters.com/en-us/posts/government/trump-economic-regulatory-implications/
[5] https://www.quantconnect.com/research/17902/bitcoin-as-a-leading-indicator/p1
[6] https://www.gemini.com/state-of-crypto-2024
[7] https://www.forbes.com/sites/lawrencewintermeyer/2023/07/06/big-financial-institutions-are-adopting-crypto-and-blockchain---what-does-the-technology-offer-smbs/
