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2023 is winding down, and we saw a big year of cleanup within the cryptocurrency space and a lot of regulatory focus both in the U.S. and around the globe.
We are on the precipice of an exciting 2024 with a lot of news, activity and anticipation of spot bitcoin ETF approvals and potentially large influxes of capital into the space.
Financial advisors and their clients should prepare for a potential transformative leap forward for the crypto asset class in 2024. Significant advances in market structure in 2023 and deep industry innovation in the new year indicate that rapid institutional adoption, meaningfully improved advisor investment accessibility and bullish catalysts for asset prices (not just bitcoin) may lie ahead. Below, we provide a 2024 crypto outlook for investors seeking to diversify their overall asset mix and enact a thoughtful digital assets allocation plan.
2024 Crypto Market Outlook
When it comes to digital assets, advisors should ask themselves the following two questions: one, why crypto and two why now?
1. Only a few of us have been around for the inception of a new asset class, particularly one uniquely powered by modern technology and in certain cases specifically programmed to combat the glut and frictions of traditional financial markets. Obtaining exposure to an alternative set of assets rooted in legitimate value – measurable by blockchain metrics – is a diversifying and generational opportunity.
2. The industry is transitioning from early adoption to mass adoption. A sea change in industry leadership, product development and fiduciary commitment swept crypto in 2023, enabling a new suite of increasingly institutional-grade on-ramps into the asset class.
Besides general industry trends, conspicuous catalysts in 2024 may also trigger rapid investor adoption of digital assets. These events include the potential (and seemingly likely) regulatory approval of Bitcoin and Ethereum spot ETFs, the Bitcoin halving scheduled for April 2024 (a once-every-four-years event that reduces the supply of new bitcoin), and a dovish macroeconomic backdrop and slowing inflationary environment – each on their own a meaningful bullish nod for crypto, but together a potentially rare opportunity for portfolio positioning.
With context in place for crypto as part of an overall asset allocation mix, we turn to considerations within the asset class.
From a traditional allocator’s standpoint, crypto has a lopsidedness problem. Two megacap assets – bitcoin and ether – dominate 70% of the market capitalization for digital assets. Well-supported investment theses exist for both assets, but it is critical not to overlook the fundamental value of blockchain-powered technologies driving new business sectors like decentralized financial services and smart contract platforms.
As advisors progress on their crypto learning journey and position themselves for 2024, remaining open to the investment cases for other sectors is key. Just like crypto can be diversified to stocks and bonds, different crypto sectors can be diversified to each other (see Figures 1 and 2). Diversifying crypto exposure to encompass a broad range of investable assets reduces single-token concentration and grows investor expertise in the asset class and its value.
Figure 1: Quilt Chart of Sector Rankings by Monthly Performance (YTD as of Dec. 13, 2023)
Improved Market Structure
Moving from analysis to implementation, advisors should also consider the various methods of allocating to digital assets in the new year.
2023 marked a turning point for institutional readiness. Advances in qualified custody and new, thoughtful linkages between custodians and trading exchanges provide a more solid ground for advisors to plan their digital asset exposure. Reporting, tax statements and ease-of-use are coming into view, with U.S. crypto custodians honing compliant RIA platforms to meet the needs of advisors. The next wave of market innovation will likely come from asset managers competing on intelligent exposure to crypto markets as the product adoption cycle moves from basic passive exposure to sophisticated active exposure.
Perspective for Advisors in 2024
While multiple events point to potentially favorable conditions for crypto in the upcoming year, it is also critical to understand how crypto’s brief and volatile history has led to better, more durable options for investors.
Repeated industry failures in 2022 stigmatized the asset class, and mixed regulatory responses have blocked timely solutions by prominent traditional asset managers to help destigmatize it all, drawing focus away from the fundamental value of blockchain innovation and leaving investors scarred by fiduciary ignorance.
These events, however, have driven efforts by trained financial engineers, CFAs, and traditional asset managers to migrate legitimate investment solutions over from the traditional asset class world, with prominent “TradFi” figures now helming key crypto leadership positions at digital and traditional asset management companies. These efforts crystallized more strongly in 2023 and appear to be trending faster in this direction.
Supported by sturdier industry infrastructure informed by lessons learned, advisors now have a better – but still nascent – array of investment education, product options and platforms not only to help avoid the pitfalls of early-adopter risk, but to exploit early-adopter premia in 2024.
– Connor Farley, CEO, Truvius
Q. Crypto has become more mainstream and sought after as a new asset class. What are some of the ways investors can access this new and exciting frontier market?
A. Many people who look to invest in digital assets come from a traditional financial markets background and are often surprised by the complexity and fundamental differences between the two. Crypto is a nuanced and highly fragmented market, with hundreds of centralized exchanges globally. Yet only about 20 capture significant volumes, and then about five get most of the trades. The largest exchanges with the deepest liquidity are based outside of the U.S. At the same time, there are just three relevant exchanges based in the U.S. Additionally, there are decentralized exchanges (DEX), which are peer-to-peer marketplaces where trades occur on a chain directly between crypto traders. Centralized exchanges run internal ledgers that balance positions across their clients. There are over-the-counter (OTC) desks that provide more white glove service to institutional investors.
Q. Given this complexity, what is a good way for investors to gain access to crypto strategies?
A. Within the web of this fragmented market are multitudes of trading strategies that offer yield generation, arbitrage opportunity (as all frontier markets do) and superior proxies to the major currencies like BTC and ETH. One way to access these opportunities is to find fund structures that manage the investing, such as classic hedge fund structures or asset management firms that create institutional-grade products using digital assets. There are innovative managed accounts platforms that allow investors access to many of these strategies in a more transparent, secure and controlled environment.
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