The Crypto Asset Iceberg
Authors and Contributors
Scott Canning, CFA
Erik A. Swords
If the scope of disruptive projects emerging from the crypto asset space is analogous to an iceberg, we hold the view that Bitcoin amounts to only what is above the surface. Having repeatedly taken out all-time highs in parabolic fashion, it is no surprise that the most capitalized cryptocurrency dominates headlines related to the fast-growing category. Viewing the meteoric rise of Bitcoin's price as the early validation of a new asset class, what might be some longer-term implications?
- Bitcoin has successfully proven that decentralized systems are viable in ecosystems that require trust, providing a peer-to-peer mechanism that puts centralized institutions on notice. We are devoting rigorous thought to identify industries that may be overly reliant on inefficient data infrastructure, as well as operating models that provide trusted intermediation, for example, settling and clearing.
- Initial blockchain implementations are imperfect; however, scaling solutions are evolving rapidly and a rift between winners and losers will emerge as the markets become more efficient. While Bitcoin is winning the cryptocurrency price race at the moment, we think less well-known but more flexible blockchain platforms like Ethereum transact more efficiently and have clearer roadmaps to further improve scalability.
- Institutions have indicated interest in allocating to these digital assets, but funds will remain largely sidelined until we see progress on three key fronts:
- Custody solutions: While crypto assets never leave the blockchain, accessing an account requires the paired private key. Managing the security of these keys is the most sensitive constraint given that they are the only inputs required to execute transactions. There are widely available solutions for retail investors to store keys, but scaling this for larger institutional clients creates obvious operational risks.
- Derivatives: Institutional investors require the ability to short, hedge and dynamically manage positions. While nascent, options contracts currently exist on Bitcoin and futures went live just this month.
- Regulatory: In the U.S., regulators have taken a hands-off approach so far, fostering rapid innovation as well as speculation. Domestically, we expect this regulation-light environment to remain given the current administration; however, there will likely be heightened oversight within the initial coin offering (ICO) space.
We have been following the development and implications of blockchain since 2015 and shared our initial thinking in a series of papers, the earliest of which discussed Bitcoin and cryptocurrencies (Bitcoin: The New Smart Money). We actively seek to research trends that have the potential to meaningfully remake the investment landscape. One such theme is blockchain technology, and crypto assets represent the earliest investable exposure.
On January 31, 2018, The Boston Company and Standish merged into Mellon Capital to form a combined entity, BNY Mellon Asset Management North America Corporation. Effective January 2, 2019, this entity was renamed Mellon Investments Corporation.
Any statements of opinion constitute only current opinions of the Firm, which are subject to change and which the Firm does not undertake to update. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors.
This publication or any portion thereof may not be copied or distributed without prior written approval from the Firm. Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Listed securities are being presented for illustrative purposes only. This is not a recommendation to buy, sell, or hold these securities.
Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by the Firm. The Firm makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.