Video: All About Crypto
In the latest video from ADISA’s Focus on Alternatives, an educational series that covers key topics in alternative investing, Greg Mausz, ADISA’s past president and chief operating officer of Preferred Capital Securities, sat down with Anastasia Amoroso, the chief investment strategist at iCapital Network, to discuss cryptocurrencies and crypto-related assets.
Decentralized digital currencies, such as Bitcoin and Ethereum, have exploded in popularity and performance in recent years as institutional and consumer acceptance of this new asset class continues to gain momentum. Amoroso explains what led to cryptos going mainstream in 2021, how cryptos are valued, the associated costs of production, and what a typical conservative portfolio allocation looks like.
Video Transcript
Graig Mausz 00:08
On alternatives brought to you by ADISA, the Alternative and Direct Investment Securities Association. For more content like this please check out the resource library at adisa.org. My name is Greg Mausz and I’m joined today by Anastasia Amoroso, the chief investment strategist at iCapital Network. Good afternoon.
Anastasia Amoroso 00:29
Good to see you, Greg
Graig Mausz 00:30
Welcome to the show here. So, we’re talking cryptocurrency crypto assets they seem like they’ve officially gone mainstream is that true or is this still a bunch of hype.
Anastasia Amoroso 00:42
I think they have gone mainstream, and I do think that this has been a breakout year for cryptocurrencies and the whole ecosystem. And I see this not only in terms of performance but also in terms of institutional adoption. First of all, if you look at the performance of Bitcoin or Ethereum it really you know it really is done stunningly well in 2021. But what really gets me encouraged that this is not just a fad, and this is here to stay is that so many businesses so many financial institutions so many more consumers decided to add to their Bitcoin holdings. So, I want to give you a couple of examples of how we measure this institutional adoption. First of all, we’ll look at the companies out there who say they accept Bitcoin and you’ll be amazed but something close to 30% of small businesses that were surveyed say they are willing or do accept Bitcoin.
Graig Mausz 01:28
Really? That’s higher than I would have thought.
Anastasia Amoroso 01:29
Yeah, and by the way you know saying they accepted doesn’t mean that consumers are actually dealing in Bitcoin but at least you know there’s this understanding that we want to make this available. Then you’ve got some of the banks that historically maybe shy away from blockchain and blockchain payments and Bitcoin they’re increasingly making Bitcoin investing available to their customers. And by the way there are also working on designing their own payment system they operate on blockchain, so there’s just a lot of institutional adoption that’s building. And then we look a lot to the private markets and what I see playing out in the private markets is just stunning amount of private capital that is flowing to the blockchain and crypto ecosystem. And in the last year I think we’ve funded the ecosystem three times as much as we have in the last three years.
Graig Mausz 02:17
That sounds a lot of positive… positive movement out there but there’s also a lot of skeptics. I mean is there real value in cryptocurrency?
Anastasia Amoroso 02:26
Well, there definitely a lot of skeptics and there’s many people who said that this has no intrinsic value and that is going to zero. And you know look, if there’s not in consumer if there’s not an end user demand for crypto of course it’s really you know you can make that case. But if the fact that you have over 100 million wallets between Bitcoin and Ethereum suggests to us that this is not about to go away, and I think that 100 million wallets is going to continue to grow. Now I think the question Greg you’re really asking is how in the world do we value crypto you know where does the intrinsic value come from? there’s a number of models out there but there’s three that I find particularly compelling.
The first one is the scarcity element and this stock to flow model that calculates how long would it take to replace the current stock of something like Bitcoin given the annual production. And so that’s one way to gauge the value of Bitcoin. And according to those doctor flow models that value is higher than what it is today. The other way to think about it is the network effect, how many more users how many more wallets are going to be opened up whether it’s Bitcoin or Ethereum or something else? And the evidence that institutional adoption and consumer adoption that we were talking about suggests is likely to be more of those than less. By the way if you think about Facebook or Google and Netflix all of them started with a network of users all of them built and scaled this network effect and that’s how they were initially valued. So again, looking at this Metcalfe’s law which is one of the evaluation models again that suggests the price of Bitcoin should be higher than what it is today.
Now that’s kind of the upside case and maybe a little bit of the ceiling, but what’s propping up and what’s supporting what’s putting the floor under cryptocurrency and it’s really the cost of production. It takes equipment it takes powerful semiconductor it takes a whole lot of electricity to mine Bitcoin and today the cost of that is somewhere around $11,000. It’s likely going to continue to go up but if you’re wondering where that fundamental level of support maybe I think a cost of production is we good way to look at it.
Graig Mausz 04:34
That makes a lot of sense. I’m also seeing people viewing Bitcoin as an inflation hedge, but I’m also seeing people view it as a growth stock and investing in pure speculation. Where do you come out on that argument?
Anastasia Amoroso 04:50
It’s interesting because all of those attributes are really true, and rarely do you come across an investment that gives you you know two or three different investable angles, but I do think that’s what we have with Bitcoin today. So yes, some have said that this is a form of digital gold because there’s a scarcity element to it there’s only 21 million units of Bitcoin that could ever be produced. And as long as the usage is there the scarcity should support the price of it. So because of that Bitcoin tends to be correlated with gold that’s not always the case but if you think back to when the Federal Reserve was on the cusp of cutting interest rates and you know the economic activity was slowing down Bitcoin was definitely highly correlated with gold now then that flipped where gold didn’t really move higher and yet Bitcoin continued to move higher because now Bitcoin was negatively correlated to the US dollar. The fiat currency was being debased by central banks around the world printing money and engaging in quantitative easing.
And so now Bitcoin really kind of acted as a store of value as a hedge against fiat currencies. But then some another shift happened and now for the last a year or so Bitcoin has traded more in line with the risk assets with the stock market and that’s because at the heart of it this Is technology, this is a technological innovation. And there’s currencies and assets that are tied to it. So, it doesn’t surprise me that it kind of trades in line with the risk on assets as well. So going forward what I think we can say is that this is an asset that offers very different correlation dynamics versus anything else in your portfolio. Those correlation dynamics are not always going to be static, so you have to understand which of these drivers is going to be dominant at what period of time. But bottom line is as low correlation to the rest of the assets in your portfolio and the risk adjusted returns even despite the volatility have been quite amazing.
Graig Mausz 06:51
I agree with you and that’s really building the momentum that we’re seeing here. So investors are beginning to allocate into Bitcoin where do you see cryptocurrency as a portfolio allocation for an investor.
Anastasia Amoroso 07:07
Yeah, I think it’s an important conversation to have right now. The reason I think it’s so topical is because now we’re looking at market cap of cryptosphere of over $2 trillion. And it’s not catching up to this you know market cap of the stock market certainly not but it’s starting to catch up to the market cap of let’s say the money markets and pretty soon the muni bond market. So it is a viable asset class and there’s two reasons why someone should add a new asset class to the portfolio. One as we discussed it has a low correlation to the rest of the portfolio which is a check for a lot of the crypto assets.
The second one is the risk adjusted returns or more technically speaking the sharp ratio if the asset class offers a higher sharp ratio than rest of the assets in the portfolio that would be another case for an allocation. So, in the case for crypto that checks both of those boxes so to me it deserves an allocation. The question is where from and how much? Well if you look at the volatility of Bitcoin or theorem you’re talking 70 80 a 120% volatility for some of these currencies so I would very much size it according to the high volatility and I would think of it as a tech investment that offers potentially great return but also a lot of the volatility. So let’s talk about numbers how much should that be in your portfolio? I think 1 to 3% allocation is what you might normally start with if you were allocating to a high tech highly volatile stocks I think that’s a good conservative place to start with.
Graig Mausz 08:41
And I couldn’t agree with you more, start small get the experience that seems to be about the right percentage. There are 6,000 or so different cryptocurrencies out there. How do investors pick which ones to go into.
Anastasia Amoroso 08:57
So that’s the exciting development about the crypto ecosystem, is there’s so much innovation there’s 6,000 of them but you’re absolutely right from the investor perspective it is very important to do the due diligence around the protocol and know which one are the right ones to be investing in. So, I will say at this juncture having the longest history of blockchain having the longest tenure of the technology is a big deal, so I would initially stick with some of the more established cryptocurrencies. Doesn’t mean you could only do Bitcoin. I think there’s other currencies to look at. But I would think about how establishes the protocol. How proven is it you know what are the applications can we quantify some of those network value that we talked about? And so, it requires a little bit of work to select the right basket of currencies, but I think deciding that you will have an allocation to the space and doing it in a diversified fashion just like you would with any other investment makes the most sense to us.
Graig Mausz 09:55
Anastasia, thank you for walking us through that. And for more information about cryptocurrencies and other educational videos please visit adisa.org. Thank you.
For more ADISA news, please visit their directory page.
