March 12 2021

Crypto as a New Asset Class

There is often a fine confusion between crypto and bitcoin. Bitcoin is what got the whole thing started, with a blockchain protocol setting immutable mining and exchange rules of a finite asset. The fact that it got dubbed cryptocurrency didn’t do it great favour. It got in the crossed-wires of regulators, and is still muddying the water for most to this day.

Why? The currency acronym positioned Bitcoin as a potential challenge to fiat currency. It may and it may not, but the point is that the permissionless series-of-blocks protocol that it started is now having wider ramifications, which force rethinking the global financial rails and asset management towards more decentralization.

So, what are cryptos? They are alternative assets, insofar as they deliver uncorrelated returns to the stock markets. It is ranked among private investments, and some credit and hedge funds. First restricted to utility tokens serving various purposes in closed-up systems, the coming of smart contracts with Ethereum (ETH) unlocked the ability to design protocols that communicate with one another to define a crypto network. A new system is born.

Cryptos actually live across different asset classes. Non-fungible tokens (NFTs) are unique cryptographic encryptions that define a new art form. More interestingly, the cryptosphere now embeds the possibility to earn a yield, a game-changing factor to punch at the asset class level. Crypto is no longer, only, buying BTC, ETH, UNI, LTC and LINK and sitting on your exposure, it is offering distributions. These distributions are a mix of (1) interests for lending your collateral, (2) token rewards for “staking” existing protocols, and (3) re-manufactured capital gains. The next Eldorado is to define risk-return and reporting functions to make it palatable for non-crypto hard heads.

What all crypto assets have in common is the sheer speed of their development. A single NFT by artist Beeple got sold in minutes for $69m at Christies, stunning. The growth in DeFi (Decentralized Finance) is notably measured by the TVL (total value locked) that grew from 0 to $40bn over the past year. The value top 14 DeFi tokens grew 7x over since Oct20. Mesmerizing.

Crypto is definitely a turbo-charged asset class, with adoption running faster than what we ever saw in our lifetime. This new gold rush would reward those providing pans and shovels. Get ready to dig.

360 Advisory – Markets