Digital Assets Council of Financial Professionals founder Ric Edelman, ETF.com senior analyst Sumit Roy, Bitwise CIO Matt Hougan, and 21 Shares co-founder and president Ophelia Snyder discussed the recent crypto downturn and what’s in store for the nascent asset class on the panel Waiting For Crypto Spring: What to Expect Between Now & Then.
With prices down 50-70% or more in some cases, crypto has been struggling this year. “What some people call a crypto winter could represent a great opportunity for long-term investors,” Roy said, introducing the topic.
With lots of jargon and deep references to obscure computer sciences, there’s more to crypto than digital art, according to Roy, who thinks of crypto as a computing system not owned by a single entity.
Snyder said, “crypto can be a very wide range of things. I don’t like to define it all together, I think it’s far more useful to split things up by use cases.” Looking at the ecosystem holistically results in losing some of the nuances.
Edelman sees bitcoin as more than a payment system or mere store of value. “Bitcoin is a marketing opportunity. It’s as simple as that.” He sees it as potentially useful to advisors. Even something like “hating bitcoin” can create an opportunity.
“There are so many people who are reflexively skeptical of it,” Hougan said, continuing, “It’s not a way to buy a cup of coffee. It’s a technology.” Edelman also sees crypto as an asymmetric investment opportunity where you can lose 100% of your investment, but can also see it grow 10x.
Ethereum’s Coming Upgrade
The Ethereum merge is the single largest software update that has ever happened in crypto. People have been working on this for years. It will create scarcity in the asset and help diminish the energy intensity of the asset. “It is probably one of the most exciting new innovations we’ll see in crypto this year, if not for the next several years,” said Snyder.
Edelman said the merge will remove one of the biggest objections to crypto, as it will cut 99% of its energy use and make it more compatible with an ESG-focused world. Edelman sees many investors thinking this could push Ethereum past Bitcoin to become the largest crypto by market share.
“People are now realizing that Bitcoin and Ethereum are as different as Google and Salesforce. You can’t have just one,” Hougan said. Hougan also sees the merge as paving the way for an immense increase in scalability. Ethereum currently processes 15 transactions a second. Hougan sees it as going up to 100,000 in a few years, paving the way for more mainstream adoption.
Ethereum has more broad and practical applications than Bitcoin, according to Edelman.
“I think of ether like I think of real estate,” Hougan said, noting that people who think of bitcoin as “digital gold” can look at Ethereum more as “digital real estate.”
Snyder observed that Ethereum “lets you capture yield that isn’t tied to bond markets or whatever the Fed is doing today.” Edelman agreed, noting that the IRS hasn’t been able to figure out how to tax it, making it extra important in this market environment.
Betting on Bitcoin
“You’re still dealing with a very risk-on asset,” Snyder noted, “that being said, we’re looking at significantly reduced prices.” Snyder sees the prices as still being elevated significantly over where they have been in the long run and sees a lot of positive signs.
Hougan thinks Bitcoin has done a great job in the face of inflation. “Bitcoin is a hedge of future inflation,” Hougan said, noting that Bitcoin is still up three or four times since COVID, even with the drawdown.
With many investors seeing clients put small thematic allocations to things like robotics or cybersecurity, Edelman wonders how anyone wouldn’t see crypto in the same way. “To be at zero [in crypto exposure] you are likely to be 100% wrong,” Edelman said.
Crypto Is a Diverse Space
“I think this is an early-stage disruptive technology,” Hougan said. Hougan thinks crypto will be more important in five years than it is today, though it is unclear which crypto will come out on top. Hougan argued for diversity beyond just Bitcoin. “Invest for the long term.”
Snyder concurred, making the case for index exposures to crypto and noting that single names such as Bitcoin used to take up all the oxygen, but now crypto has a variety of currencies, associated technologies, and all kinds of potential exposures.
“You don’t have to become a crypto manager any more than you do a stock manager,” Edelman said, noting that advisors are probably much better at it than they give themselves credit for.
Hougan thinks between 1-5% portfolio exposure to crypto is good portfolio exposure for most, while Edelman says advisors have a fiduciary responsibility to engage with crypto, likening clients to teenagers drinking beer. “They’re doing it even if you don’t know about it.”
There are unexpected uses for crypto even as it is in the midst of its winter. Bitcoin and Ethereum are not subject to the watch-sell rule, according to Edelman. Meaning you can have clients sell their bitcoin and Ethereum, record a loss for tax purposes, and then rebuy the same bitcoin and Ethereum. Advisors who don’t know that are costing their clients money.
“You don’t have to change your practice for crypto. Crypto has changed to accommodate your practice,” Edelman said.
For more news, information, and strategy, visit the Crypto Channel.