The past informs the present
2022 was a challenging year for markets broadly but specifically bad for digital assets. The very public failures of large, centralized lenders such as BlockFi, Genesis, and Celsius, followed by the collapse of behemoth exchange FTX, left many investors with feelings of uncertainty and doubt—and understandably so.
However, one could argue that these events were a good thing for the future of this emerging asset class and even a sign of maturation. Sure, there are still some uncertainties around contagion and fallout from the FTX debacle, and there’s some work that will need to happen on the regulatory front, but none of this altered the long-term, fundamental value of decentralized blockchain technology and its many associated assets.
Following such a turbulent and discouraging finish to the year, talking heads and skeptics alike have sparked the debating question: Is crypto just a dwindling fad?
Why digital assets are more than just a trend
Popular opinions surrounding crypto tend to vary these days, and, as mentioned, the recent market failings haven’t done optics any favors. While investor sentiment continues to be a mixed bag, technology leaders such as Google and Amazon Web Services, payment leaders such as Mastercard and Visa, and financial leaders such as Fidelity and BNY Mellon have announced strategies that demonstrate a strong belief in the potential future of digital assets.
Also, in the midst of increased adoption, correlation patterns between the S&P 500 and the crypto market shifted to a more paired position, changing the way investors viewed the asset class in their portfolio strategies. It’s a well-known tactic that low-correlation assets are a crucial part of any investor portfolio for many reasons, not the least of which is diversification. In 2023, correlations have already started to decline, a trend expected to continue as the marginal buyers and sellers of digital assets has significantly shifted from last year. And correlations between assets in the crypto market itself have and continue to remain high, with bitcoin continuing to hold market dominance.
Building a strategy for 2023
Trying to predict where asset prices will be at some point in the future is a tall order, especially in a volatile asset class like crypto. However, directionally speaking, it’s possible that there will be a slow recovery in crypto activity with modest price appreciation. This movement would be predicated on a few macro factors such as inflation data, the Fed Funds terminal rate, the Chinese economy, and general recession fears.
Economic data is currently mixed, so there are several possible outcomes. If inflation continues its downward trajectory toward the Fed’s 2% target level for inflation, the terminal Fed Funds rate will likely peak in 2023, and this could be positive for risk assets, including crypto. However, if inflation remains sticky and the Fed has to keep rates higher for longer, this could pressure asset prices. All that said, there will potentially be higher volatility for crypto but lower correlation to equities.
Here are three things to keep in mind as you build your strategic framework to advise both the crypto-invested and the growing crypto-curious clients coming your way:
- Consider your crypto investment timeline Blockchain technology and the digital assets they underpin have the ability to transform the existing framework of both the internet and our financial system. However, the asset class still shows signs of being in its infancy stages, such as significant volatility and the occasional shameless opportunist that over-leverages liquidity. In the last quarter of 2022, we saw an increase in long-term investors (sometimes referred to as HODL’ers), signaling that many investors are playing the long game and giving the industry time to find its footing.
- Tune out the noise and focus on relative metrics. One of crypto’s greatest feats and concurrent weaknesses is its ability to drive change. But the path toward innovation can be bumpy, and crypto is no stranger to criticism. With a carousel of opinions and narratives dominating the headlines, sound investing requires patience, diligence, and discipline. Although the health of a project is often measured by the price of a respective coin or token, native metrics are emerging that more accurately convey the success of a blockchain or protocol. These metrics could include (but are not limited to) market capitalization, Total Valued Locked (“TVL”), developer activity, or the number of applications/protocols hosted that would be reflective of network demand and usage. It’s important to be cautious of messaging by market participants that don’t have a deep understanding of this asset class and focus on the performance data telling an objective story.
- Education is essential; lean on your digital asset partners. Crypto is a new asset class, and with this comes new terminology, new conventions, new metrics, and new indicators to consider. If you’re not already well acquainted, it can feel incredibly intimidating to discuss or speak about crypto with clients. Having a crypto partner can help lower the barrier to entry and provide advisors with the comfort to move forward within the space.
Looking forward and being prepared
We often hear anecdotally and have seen personally that many high-net-worth individuals have crypto on their balance sheet, whether you’ve advised them on it or not. Many others are crypto-curious and want some hand-holding but haven’t found the right team to help them through it. Being able to speak strategically on this asset class is going to be a skill set that may help generate new long-term relationships, especially for the younger generations coming into or inheriting wealth. Developing thoughts and opinions on how to allocate in a bear market will best position your firm and your clients before market sentiment changes. While timing markets is impossible, it is possible that sentiment can change very quickly, and advisors need to be prepared with a strategy. Khelp and Onramp are aiming to be the preferred digital asset partners for financial advisors and investment professionals by providing a full-service tech stack coupled with actively managed investment solutions, strategic consulting and advisory, market insights, and educational content.
Disclaimer: This article and the information contained herein is not an offer to sell or the solicitation of an offer to buy any securities or instruments, or a recommendation, representation of suitability or endorsement of any security or investment. Since Khelp Financial cannot anticipate all the requisites of each individual viewer, there is no consideration given for the specific investment needs, objectives or tolerances of any of the viewers.
This is not investment advice. The content is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed do not express the views or opinions of Blockforce Capital or Onramp Invest.