Asset volatility and bad actors have clouded the true value proposition of Digital Assets and Blockchain technology, with endless media references to industry failures such as “FTX”, “Terra Luna”, “3AC”, and “Celsius” painting a negative picture of the entire ecosystem.
With all the current headwinds and obstacles to overcome, the question now becomes around why you should be thinking about defining a Digital Assets strategy. The Security and Exchange Commission (‘’SEC’’) has brought regulatory actions against high profile exchanges in the U.S. and declared that “altcoins” should be considered securities, as they continue to struggle to rebound from their previous lows. After FTX’s implosion, exchange trading volumes and supply remain low, and institutional confidence in Digital Assets has diminished.
The Digital Assets ecosystem has been resilient, and the underlying technology continues to prove value across several use cases. Most importantly, the foundational pillars of Blockchain technology have remained intact and the innovators in space have continued building technology that will revolutionize the way we interact with finance on a global scale.
Bullish price action in the liquid token market will continue to drive Traditional Finance (“TradFi”) interest in Digital Assets and underlying client demand for investment products. There are catalysts that are widely agreed to be bullish indicators for institutional adoption of Digital Assets, the first being the Bitcoin Halving. Bitcoin Halving is the event in which miner rewards for validating transactions via the Proof of Work on the Bitcoin blockchain are cut in half as the global supply of mined Bitcoin increases. In the Halving that occurred this past April, rewards dropped from 6.25 Bitcoin to 3.125 Bitcoin per block. Theoretically, this means that the price of a single Bitcoin needs to double to make miners whole (relative to the rewards they received before the halving) to continue to validate transactions. In practice, this event has been a catalyst to help jump start previous bull cycles.
Second, the SEC’s approval of Bitcoin and Ethereum Spot ETF products not only provides Institutional, High Net Worth and Retail investors with a new distribution mechanism for safely and securely obtaining physical exposure, but it legitimizes Digital Assets as an asset class. Investors are able to get exposure to Spot that is marked to market daily to its NAV, without concerns of discounts to NAV or incurring futures costs. Investors also now have a Spot exposure vehicle that does not require them to self-custody and have an extra layer of security given the SEC’s custodian requirements. The benefits of these investment vehicles have been made evident through the success of the Bitcoin Spot ETF, with inflows signaling the most successful launch of an ETF in the last 30 years. Despite the SEC’s historically hawkish stance on Digital Assets, these approvals signal to investors that they are getting comfortable with Digital Assets as an asset class and the success exemplifies the significant interest from Institutional and Retail investors.
Lastly, we are beginning to see the legislation passed globally to support the adoption of Digital Assets, while the U.S. continues to lag behind. The emergence of the Spot ETFs also paves the way for legislation to be drafted to regulate the ecosystem in the proper way (e.g. enabling continued growth and innovation in the space while still protecting investors). Given that approximately 70% of global funding and activity in Digital Assets occurs in the U.S., regulatory clarity will give TradFi firms a supportive foundation for offering Digital Assets products to their clients.
As these catalysts materialize and reduce the investment barriers, new money currently waiting on the sidelines will enter the Digital Assets ecosystem, providing developers with access to funding and liquidity to further accelerate innovation. This innovation will allow TradFi firms to improve operational efficiency, more easily distribute products on a global level, and deliver a better level of service to clients. As consulting partners to Asset and Wealth Managers, we support our clients to define their strategy for engaging with Digital Assets, if, how, and when they decide to do so, so please get in touch.
About the Authors
Christian Pellegrino
Senior Manager
Christian Pellegrino is a Senior Manager at Alpha with significant experience in designing operating models, selecting technologies and implementing end-state solutions for clients within Alpha’s Investments Practice, including advising clients on their Digital Assets investment capabilities. Prior to joining Alpha, Christian led Operations at CoinFund, a Digital Assets focused investment firm with hedge fund and venture strategies. Christian holds a Masters of Business Administration in FinTech, Corporate Finance and Management from NYU Stern, along with a Bachelors of Science. He is also a CAIA Charterholder, including the Digital Assets microcredential.
Kenji Walker
Senior Manager
Kenji is Senior Manager at Alpha based in Boston. He brings 6+ years of experience supporting Asset Managers and Allocators across their business – including Front Office, Middle Office, Compliance, Distribution, Finance, Corporate Strategy, and Product functional teams. He has been advising Alpha clients on their digital asset strategy across both tokenization and “crypto as an asset class”. Kenji has completed the MIT Sloan Blockchain Technologies: Business Innovation & Application course, and CAIA Digital Asset microcredential.