As the New York-based CIO of digital assets at Forest Road Co., a wealth manager with institutional clients, Chris Solarz is a recognized crypto bull. But Mr. Solarz concedes that a number of conditions must be met before this sector can be truly accepted by investors.
“There are currently over 300 million crypto users worldwide, and the three things we need to see before we add the next 300 million users are more regulatory clarity, easier-to-use front-end interfaces for trading digital assets, and more Security,” said Mr. Solarz. “The number of hacks and frozen accounts has negatively impacted user confidence in the security of the entire crypto ecosystem, and confidence will ultimately be restored with increased security.”
Speculations about the future of digital assets come at a time when investment sentiment towards the sector has been decidedly bearish. After increasing in market value more than tenfold over a three-year period to an all-time high of over $68,000 last November, Bitcoin has since fallen more than 70%. Even a more diversified crypto game, the actively managed Amplify Transformation Data Sharing ETF, is also down nearly 70% from its November high. In contrast, the Invesco QQQ Trust, a proxy for technology stocks, is down 27% from its all-time high hit in late December.
As digital asset prices have fallen, criticism of these investments has accelerated. Crypto assets like Bitcoin and even stocks like crypto trading platform Coinbase Global Inc., which were once lauded for being relatively uncorrelated with US stock and bond markets, are more closely correlated with speculative tech stocks. Even the process by which bitcoin units are created has been attacked by environmentalists and advocates of sustainable investing because of the additional demand for fossil fuels used in the electricity that powers the “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 evidence of performance and a greater degree of certainty about future performance,” said Keith Brainard, research director of the National Association of State in Georgetown, Texas pension administrators.
However, crypto naysayers may be missing out on an opportunity to learn about technologies that are transforming the way business and finance is done, said Joe Marenda, San Francisco-based partner and global head of digital assets investing at Investment Advisory Cambridge Associates LLC.
Mr. Marenda has a simple counter-argument to the criticism that crypto investing is highly correlated with the speculative tech stocks.
“Blockchain is a disruptive technology, and if you hold that view, you’ve never engaged in the uncorrelated asset argument,” he said. He also claims that the environmental arguments against crypto mining will diminish over time as the process becomes more energy efficient thanks to the increased use of renewable sources such as wind, solar and hydropower.
Mr. Marenda said that most crypto-related investments are best suited for investors who have the patience to watch as a new paradigm of the financial system unfolds over the next decade or more. “As with the Internet, this is a transformation that will take many years to fully materialize,” he said. “We’re still early in the second inning.”
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