Transcript

Amada Agati:  

It's time for the November edition of "Adding Alpha." And this month we're falling down the crypto rabbit hole. Whether you're a skeptic, a believer, or somewhere in between, crypto is no longer just a passing fad. It's got some staying power. So let's quickly unpack how we got here, what's driving recent momentum, and what we have our eye on next.

Crypto is a digital or virtual form of currency that uses cryptography for security. Crypto operates on decentralized networks built on blockchain technology, which is a distributed ledger that records transactions across many independent users of a network.

Bitcoin was the first cryptocurrency and remains the most widely recognized. It's also the largest by market cap at $2.2 trillion. Yes, that's trillion with a T. And keep in mind, the total market cap of the crypto industry is presently $3.7 trillion.

Ethereum is the second largest and is known for enabling smart contracts and decentralized applications. At last count, there's around 20,000 other tokens, according to CoinGecko data. But most of them are just highly speculative meme coins.

Some of the key characteristics that make crypto so unique to traditional finance include decentralization --No central authority, like a bank or government, controls it.

Security 

Transactions are secured through cryptographic algorithms. 

Transparency --The blockchain ensures all transactions are publicly verifiable. Limited supply -- Some cryptocurrencies, like Bitcoin, have a capped supply, which contributes to their value proposition.

And finally, peer-to-peer. This enables direct transactions without intermediaries. We've come a long way from the dark days of the 2022 lows. Bitcoin is up 89% annualized since then, while Ethereum is up about 45% annualized.

And that includes both being up about 20% year to date. Institutional flows are accelerating due to the creation of several crypto ETFs, which have made investor access much easier to adopt crypto in a multi-asset portfolio.

We're also seeing the crypto infrastructure finally beginning to mature, as several traditional financial institutions have recently begun developing innovative crypto custody solutions.

So with all of this momentum and investor interest growing, what is attracting investors to crypto?

Diversification

Crypto behaves differently from stocks and bonds, offering non-correlated exposure to public markets. And innovation. Because this technology is only 15 years old, we're still in the early innings.

Blockchain technology enables decentralized finance, tokenization, and smart contracts, potentially opening new frontiers in financial technology. However, crypto isn't risk-free. The number-one risk to crypto is volatility.

I'm sure you know by now crypto has incredibly high volatility given that it trades 24/7,  with crypto market volatility about four times that of public equities.

So if you're not careful, like the Queen of Hearts would say, off with your head. And the second-most critical risk for crypto is regulatory uncertainty. It is improving. But there is still a lot of uncertainty around how to define it, whether it is an asset class or not.

Is it a security? Is it a commodity? Is it something different altogether? And where is the oversight? It's tough to see meaningful use cases take hold without these important questions being answered.

While there are still some unknowns, we are getting more clarity, and the backdrop has shifted so much in just the last year, as both the administration and the regulatory environment have become much more supportive of the crypto industry.

The Clarity Act passed the House back in July and is under Senate consideration. This landmark legislation, if passed and signed into law, would create a market structure framework for digital assets.

It would help clarify regulatory jurisdiction to ultimately pave the way for a potentially significant wave of new innovation for crypto use cases that many market participants have been waiting on for years.

Crypto is still highly speculative and not at all suitable for all investors. However, the industry is growing rapidly, and blockchain technology has the potential to offer attractive investment opportunities.

If you don't know where you're going, so stay tuned for future editions of "Adding Alpha," where we will explore deeper realms of the crypto rabbit hole.