As the New York-based CIO of digital assets at Forest Road Co., an asset manager with institutional clients, Chris Solarz is a recognized crypto bull. But Mr. Solarz concedes that a number of conditions need to take place before this sector can be truly accepted by investors.
“There are currently over 300 million crypto users globally, and the three things we need to see before adding the next 300 million users are increased regulatory clarity, more user-friendly front-end interfaces for the digital asset trading and more security,” says Solarz. “The number of hacks and frozen accounts has damaged the trust users place in the security of the global crypto ecosystem, and trust will ultimately be restored through increased security.”
Speculation about the future of digital assets comes at a time when investment sentiment regarding this sector is decidedly bearish. After increasing its market value more than tenfold in three years to an all-time high of over $68,000 last November, bitcoin has since fallen more than 70%. Even a more diversified crypto play, the actively managed data sharing ETF Amplify Transformation, has also fallen nearly 70% from its November peak. In contrast, the Invesco QQQ Trust, a proxy for tech stocks, fell 27% from its all-time high reached in late December.
As the prices of digital assets have fallen, criticism of these investments has accelerated. Once lauded for being relatively uncorrelated to US stock and bond markets, crypto investments like bitcoin and even stocks like crypto-trading platform Coinbase Global Inc. have become more closely correlated with speculative tech stocks. Even the process by which bitcoin units are created has come under attack from environmentalists and sustainable investing advocates due to the increased demand for fossil fuels used in the electricity that powers “mining” efforts.
All of these concerns make it easy for most public pension funds to sit on the sidelines – at least for now.
“For pension funds to commit to an asset class, they would need more track record and a greater level of assurance about future performance,” said Keith Brainard, director of research based in Georgetown, Texas, for the National Association of State Pension Administrators.
However, crypto naysayers could miss an opportunity to learn about the technology that is transforming the way business and finance are conducted, said Joe Marenda, San Francisco-based partner and global head of digital assets investing at the consultancy. in investment Cambridge Associates LLC.
Mr. Marenda has a simple counter-argument to the criticism that crypto investing has become highly correlated with speculative tech stocks.
“Blockchain is a disruptive technology and if you have that view, you never bought into the uncorrelated asset argument in the first place,” he said. He also argues that the environmental arguments against cryptocurrency mining will lessen over time as the process becomes more energy efficient, thanks to the increasing use of renewable sources such as wind, solar and energy. hydroelectric.
Marenda said most crypto-related investments are best suited to investors who have the patience to watch a new financial system paradigm unfold over the next decade or more. “Like the Internet, this is a transformation that will take many years to materialize,” he said. “We are still at the start of the second run.”