Crypto Asset Management After the Crash: What’s Next?
Since the all-time high in November 2021, crypto markets have lost significant value, falling from a total market capitalization of almost USD 3 trillion to around USD 900 billion. The question now is where the journey for professional crypto investors will go from here. In this short comment, we discuss what the next months may look like — despite the crash of the last months. — Authors: Maximilian Bruckner, Prof. Dr. Philipp Sandner
A familiar analogy: evolution of the Internet and of the crypto ecosystem
The Internet was invented in 1969. At that point, it was essentially useless. About 10 years later, in 1980, a small community found a first use case for it: Scientists used the Internet to send files from one computer to another. Then, another decade later, in the ’90s, the “World Wide Web” was invented. And since the ’90s, it has taken another 30 years to get to today’s innovation and level of adoption. The “killer applications” of the Internet (e.g., Spotify, Netflix, Amazon, social media) have only existed in their current form since roughly 2010, driven in part by the rise of the smartphone. An earlier killer application for example was the email. Now, in 2022, over 30 years after the “birth” of the World Wide Web, innovation has not slowed down, and new business models arise on a regular basis.
We assume that the global adoption of crypto will continue to follow a similar pattern to that of the Internet. Bitcoin launched in January 2009, Ethereum went live some years later in 2015. Hence, we are still in the first 10 to 15 years of blockchain technology, decentral applications and crypto assets. This is roughly the same time it took for the Internet to evolve from its useless form in the ’70s to the first attempts of real use in the 80s.
If the analogy holds in the future, we can estimate that it will take some more years before killer applications start to scale and — even more important — until societies are ready for them. Up until that point in time, such applications are only used by parts of societies. Killer applications in the blockchain space may include smart contract platforms, the financial market in the form of decentralized finance protocols, or the use of NFTs. Undoubtedly, Bitcoin — the largest crypto asset since years — also might evolve into a killer application. Interestingly, adoption of crypto assets seems 10 years faster than that of the internet. As seen in figure 1, adoption of crypto assets is comparable to the Internet of the late 90s, not the 80s. Our prediction is therefore that the adoption and development of crypto will continue to be somewhat faster than that of the Internet and accelerate further in years to come.
The institutionalization of crypto investing
Another trend that can already be observed today: More and more financial institutions are getting involved in crypto assets and blockchain. The phrase “yes to blockchain, no to bitcoin” is no longer valid (and never was, in our opinion). Boston Consulting Group estimates that 95% of crypto asset investments bypass traditional approaches to asset management. This already represents a significant lost market share for asset managers, between $0.8 and $1 trillion today . Going forward, this number will increase: If even 1% of assets are shifted out of stocks and bonds and into crypto assets as a new asset class, this would be trillions. Figure 2 shows specifically where capital is flowing: To crypto-native investment platforms; instead of touching traditional asset managers.
One of the main reasons why investors do not run their crypto investments through traditional wealth managers is simply because most existing asset managers currently do not offer any crypto asset products or services. At the same time, investors can conveniently and directly buy Bitcoin, Ethereum & Co. via specialized crypto exchanges.
We are certain, however, that wealth managers will not miss out on this new business. For those who decide to enter the space soon, there are several options of varying complexity. A crypto offering can range from indirect investments (e.g., shares of publicly listed companies with crypto exposure) to direct investments and custody, all the way to staking and decentralized finance (DeFi) strategies.
However, traditional asset managers often lack the required expertise to bring a serious crypto product to market. Also, with the lack of knowledge on crypto assets, traditional asset managers also cannot offer adequate portfolio advisory if, for example, a small share of 5% of crypto assets are added to an existing portfolio of equities. We expect the demand for expertise in crypto asset management to grow continuously. Also, a growing range of crypto investment products for professional and institutional investors can be expected to emerge.
Market/segment-covering products like indices and active strategies like funds offer added value
Currently, the bulk of the structured product offerings consists of Exchange Traded Products (ETPs) or Exchange Traded Commodities (ETCs) from various providers, which offer a more or less direct exposure to individual crypto assets. Investors can thus, for a rather high premium of up to 250 basis points, buy Bitcoin, Ethereum and other crypto assets via ETPs/ETCs. Against the backdrop of growing institutional offerings from crypto-native providers (e.g. Coinbase), we expect ETPs/ETCs for individual crypto-assets to soon lose some of their appeal. The costs are too high compared to competing offerings, and what’s more important, only a fraction of the crypto universe is represented in this way.
Market/segment-specific indices. Instead, there is an opportunity for total or partial market-covering indices. In the long term, such indices will offer added value compared to buying individual positions directly on crypto exchanges or via crypto providers, and can thus justify the higher costs. This does not necessarily mean a “market index” on the top crypto assets. We rather have in mind segment-specific indices, e.g. for protocol tokens of smart contract platform, DeFi protocol tokens or, in the future, for Metaverse tokens.
Crypto funds. Furthermore, we see a growing demand for active strategies in the form of crypto funds, comparable in certain aspects to hedge funds in the traditional world. Investors have the opportunity to invest in a regulated vehicle through their bank via a standard subscription process and do not have to worry about custody, tax rules, or other complexities. Similar to ETPs and ETCs, there is a low counterparty risk.
Currently, the assets under management of the global hedge fund industry are over $4 trillion . We expect that not only will more hedge fund investors look into crypto assets, but hedge fund managers themselves will also invest a portion of their assets under management in crypto-based products. Thus, significant capital inflows can be expected in the coming years. Professional and institutional investors may prefer fund solutions for crypto assets as well. In this way, the large knowledge gap in the crypto sector can be bridged: Individual crypto assets are not selected by professional investor’s themselves, but an expert is managing the positions of entire crypto portfolios.
Crypto fund-of-funds. In particular, we expect a rebirth of funds-of-funds. While funds-of-funds have become increasingly unattractive in the traditional space due to high costs and low added value, crypto funds-of-funds have a unique selling point. By diversifying across different crypto funds with different strategies (e.g., including market-neutral arbitrage strategies), one can greatly reduce the volatility and drawdowns of the asset class. Such effects cannot be achieved by direct investments in several different crypto assets, as there is still a high correlation within the universe. While one could also do the necessary fund selection himself or herself, this would be very time and capital consuming. The investor would need to be quite knowledgeable on crypto assets (e.g. issues of physical custody), and would require enough capital to handle the minimum investment amounts (i.e., often over €500,000) of several funds.
Three predictions for the future
In summary, our forecast can be condensed to the following three points: First, we are still in the early days of blockchain technology and crypto assets, more or less comparable to the Internet during the 90s. We are still far away from a significant adoption by society but this might come rather faster than slower. Second, we expect a generally increasing institutionalization and professionalization of crypto assets and related investment products in the coming years. Traditional asset managers will increasingly try to cover this segment due to demand of their clients. Third, concerning professional investors, we see a move away from investing in individual crypto assets in the near future. Instead, market-covering solutions will gain in importance (as they do in the equity market) and there will be opportunities to invest in different “industry sectors” of crypto assets via index products. In addition, the crypto fund universe will continue to grow with regard to active, volatility-reducing strategies.
About 21e6 Capital
21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products. We focus on risk management of crypto and digital asset exposure for family offices and institutional investors. Our expertise in crypto asset management stems from a team combining decades of experience in traditional financial services with native and in-depth knowledge in digital assets. 21e6 Capital has analyzed over 1,000 crypto hedge funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Our risk management solution, provided by OpenMetrics Solutions, is also trusted by the largest Swiss pension funds. The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance publications and research, ensuring state-of-the-art crypto investment solutions for the family office of the future.
Maximilian Bruckner is Head of Marketing & Sales bei 21e6 Capital AG. Previsouly, he was engaged as Executive Director of the International Token Standardization Association (ITSA) and was instrumental in creating the world’s largest token database for classification and identification data on tokens. In addition, Maximilian has conducted research at the Frankfurt School Blockchain Center.
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Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund, 21e6 Capital and Blockchain Founders Group — companies active in venture capital financing for blockchain startups and crypto asset investment management.
 Boston Consulting Group, Global Wealth 2022 https://web-assets.bcg.com/77/3d/6f72e93e4c5ebc95ee093cc91793/bcg-global-wealth-standing-still-is-not-an-option-jun-2022-r.pdf