Defrosting ‘Crypto Winter 2.0’

The digital asset market experienced a rocky start in 2022, with many pundits labeling the recent bear cycle “crypto winter 2.0.” This is a mischaracterization and does not accurately represent the current opportunity set.
 
Despite volatility and downward pressures, the burgeoning digital asset class continued to be adopted by institutional investors and integrated into the broader financial services ecosystem at a rapid pace in 2021. In the coming year, widespread adoption and global regulation will push digital assets into more institutional portfolios, as crypto reaffirms its position as the first and best performing new asset class of the past 30 years.
 
With any growing market, the long-term investment window is incredibly important. Movements in the short-run can cause excitement or concern depending on their direction, but how an asset class performs over the course of many years is a key indicator of its true strength. BTC is the best performing asset of the past decade. With total global market capitalization topping $3 trillion in 2021, it is hard to deny that digital assets have emerged as a new financial sector and asset class. One need only look at the number of dollars invested in the last 12 months and the sophistication of the current ecosystem to see that the structural drivers for widespread institutional adoption and growth of digital assets have never been stronger.
 
In 2022, regulation will play a major role in digital assets growth and adoption globally. When digital asset platforms began to emerge around five years ago, there was little regulation to guide development. This has changed in recent years. It’s now not just a handful of first mover players in the market, but traditional institutions with strict operational due diligence mandates. With better investor protection, proper regulation across the globe will facilitate more participation from traditional finance firms and institutional investors. We’ve already seen this in a number of key financial markets, such as Hong Kong, Singapore, Germany and Japan, and more regulation is expected in the influential UK and US markets in the very near future.
 
Earlier this month, Hong Kong’s Securities and Futures Commission and the Hong Kong Monetary Authority released joint regulatory guidance giving the green light for banks and brokers to participate in the territory’s regulated digital asset market, provided they deal with Hong Kong licensed virtual asset trading platform operators. Meanwhile, the Biden administration is rumored to be preparing an executive order that will outline a holistic strategy on digital assets, placing the White House firmly at the center of the global crypto regulatory debate.
 
We also see ‘traditional finance’ continuing to adopt and recommend digital assets to investors. A number of top-tier investment firms, including Fidelity, have recommended holding BTC as an investment, and more corporations are investing in the space, either through direct investments, or through investment companies via VC and equity investments. In January 2022 alone, a number of traditional financial firms announced their intention to explore the crypto market, including BlackRock, which said that it is planning a blockchain and technology ETF, and Brevan Howard, which launched its first digital asset fund on 19 January as part of a ‘massive’ push into digital assets.
 
We will undoubtedly see more digital asset ETFs, which have already taken hold in Brazil and Canada, another indication of institutionalization of this asset class.
 
The emergence of ETFs and other investment products Is great news for wealth and institutional investors, allowing them access into digital asset markets through listed fund instruments. In conjunction with this, markets will see an expansion of the prime brokerage product suite to institutional investors — a welcomed addition. As investors wish to express their views and hedge their digital asset positions, we’re going to see the strong evolution of products like futures and other derivatives. This is something that institutional investors demand as they come into markets; they expect to see the types of products that they utilize within traditional markets.
 
As institutional participation increases as a result of regulation and improved investment infrastructure, we should expect to see the correlation between BTC and stocks continue as well. Between 2017 and 2019, BTC and stocks had a correlation of only .01. In 2020, when the pandemic hit, this changed. With central bank intervention through stimulus, BTC and the S&P 500 now have correlation of .36 – stronger than that of gold. While this may diminish the argument of BTC being a hedging asset, it actually shows that institutional involvement is increasing. As that continues to grow, we should also see the ratio increase to its upper bound of 1.0. Notably, performance-based portfolio benchmarks have even started to include digital assets along with traditional finance products like stocks and bonds.
 
There is no crypto winter. The narrative in the financial services space has seen a remarkable shift — and digital assets have become the new emerging sector within finance. Increased regulatory certainty and institutional participation in the digital asset market is indicative of a broader global adoption of digital assets and the emergence of a new era in financial services.