The Future of Cryptocurrency Investing

Since 2009, when Bitcoin was quietly launched by its creator, the technology has spurred thousands of digital money projects, creating a vibrant and profitable landscape for investors.

Investors now come in all kinds of flavors. What was once a small group of geeky believers is now a diverse crowd of people, from cypherpunks to large mainstream companies and major investment funds.

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With cryptocurrencies gaining traction as an investment asset, investors are showing interest in a wider variety of crypto assets – not just bitcoin, experts told CoinDesk.

The landscape for institutional crypto investors has certainly changed recently, says Ajit Tripathi, former investment banker at Barclays and Goldman Sachs and until recently head of institutional business at decentralized finance (DeFi) project Aave.

“I spoke to some sovereign fund [managers] last week, and them [have] started making token investments,” Tripathi told CoinDesk in an interview. He said that at least some of the funds that manage the sovereign wealth of entire countries are starting to take baby steps in crypto beyond bitcoin.

Investments of this kind usually do not exceed 1% of such funds’ total allocation, and the bulk of that will be in bitcoin and crypto-exposed hedge funds such as Pantera and a16z, among others. However, some of that allocation can also be invested in other, smaller cryptocurrencies.

“You can’t invest a hundred million dollars in as**tcoin. So you’ll put half in bitcoin and ether, and the other half in hedge funds, like Pantera and a16z, and a small part, as a learning exercise, in other tokens,” Tripathi said.

Previously, bitcoin seemed like the safest bet in the eyes of institutions because of the “inflation hedge” and “digital gold” narratives. Bitcoin was also one of only two crypto-assets to be cleared of regulatory risks by the US Securities and Exchange Commission. But now the bitcoin narrative is changing and attention is slowly shifting to newer projects, including ether, MATIC, ATOM and SOL, as well as games and DeFi tokens, Tripathi said.

“Until 2019, crypto wasn’t really seen as an asset class by institutions,” Tripathi said. Since then, however, a few things have helped bring serious attention to crypto: the US government unleashed the “money printer” during the COVID-19 pandemic and PayPal launched its cryptocurrency trading and custody service, Tripathi said.

“The legitimization and mainstreaming of crypto as an asset class has been quite accelerated,” he added.

Tyler Spalding, co-founder of payments startup Flexa, agrees. He said institutional funds are increasingly looking at tokens issued by decentralized trading protocols, including Uniswap, Compound and SushiSwap.

One of the crucial parts of the crypto market infrastructure are stablecoins, or cryptocurrencies that maintain a stable price by tying the coin to an asset such as a fiat currency such as the US dollar. The two largest dollar-backed stablecoins are tether (USDT) and USDC.

Stablecoins may soon be challenged by central bank digital currencies (CBDC), according to Cornell University professor Eswar Prasad, a former International Monetary Fund (IMF) official and author of “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finances.”

“The emergence of CBDCs and the movement of cash through CBDCs will almost certainly become reality. We are already seeing China, Japan and Sweden central banks starting experiments with CBDcs, and I suspect that all these economies will adopt CBDCs in the next three to five years will issue,” Prasad told CoinDesk.

Unlike the stablecoins that run on decentralized permissionless ledgers like Ethereum or Tron, central banks favor ecosystems they can control. There is therefore little chance that the governments of the world will allow stablecoins to be on par with CBDCs once the latter are in place, said John Kiff, former senior financial sector expert at the IMF.

There will always be a place for private stablecoins for gray market use cases and capital control avoidance, he added. But there is a larger market that will likely only be open to stablecoins, Kiff said: tokenized securities.

Some countries are already experimenting with issuing securities on blockchain and settling them with digital currencies, such as the Helvetia project recently launched by the Bank of International Settlements, Swiss National Bank and SIX Exchange, Kiff said.

He sees projects like this expanding in the coming years, especially in developing economies. However, in the advanced economies with a sophisticated bond market, it will take some time to put all the infrastructure on the new rails, he added. In the US, we won’t see as much as a limited pilot of this kind in the next three to five years, Kiff said.

Christopher Giancarlo, former Commodity and Futures Trading Commission chairman and “Crypto Dad” for his friendly attitude towards crypto, believes there is room for “healthy competition” between CBDCs and privately issued stablecoins, “at least in the free world,” he said. .

Ajit Tripathi thinks differently: CBDCs will find no real use case in developed economies, but privately issued stablecoins will become an integral part of the banking system. They will be much more regulated than they are now and will likely become something more akin to banks in a regulatory sense. “And then, as long as you follow the rules, you’re part of the pay rails,” Tripathi said.

Stablecoins obtaining bank charters or similar regulatory status are one or two years away, Tripathi believes.

What does this mean for investors? As the technical and legal infrastructure for the next generation of digital payments will be created – those who build that infrastructure will benefit from the transformation and those who invest in the builders.

For example, projects that create enterprise systems on Ethereum or R3’s Corda, which have been popular for CBDC pilots around the world, may be where investors should look, Kiff said. Projects like Stellar, Algorand and Avalanche could also be likely candidates to provide countries with technology for CBDCs, he added.

Flexa’s Spalding believes that decentralized protocols with their own management tokens, such as Compound or Uniswap, will become “ultra-successful” in the coming years if they use a model where the platforms’ income is distributed among token holders, just as traditional companies do with their shareholders.

Alex McDougall, CEO of tech startup Stablecorp, believes viable, “hardened, tested and contested” decentralized governance models will be worked out by the industry in the next seven to 10 years. However, it will take up to 20 years for those models to withstand expected battles in courts and with regulators.

Meanwhile, companies that build bridges between blockchains, fiat currencies and trading platforms, not necessarily in a decentralized way, will reap the benefits and unlock the “trillion dollars of frictional taxes that are locked up in the financial services system right now,” McDougall said, with referring to the fees and service hiccups that happen while switching from one currency or blockchain to another.

All these trends do not mean that the oldest and largest cryptocurrency by market capitalization has lost its attractiveness to investors, experts say. If anything, it is considered the benchmark of the crypto market, not as profitable as some other coins, but also not as uncertain.

“Bitcoin is kind of a reserve currency for the crypto market,” Kiff said. “I think of it almost like an index fund of the crypto market. It’s a good place to park my money when I’m not investing in anything in particular.”

Bitcoin will most likely retain this status, especially “if it sticks to its roots, to the proof-of-work [system], although we complain about it so much,” Kiff said. He added that of all cryptocurrencies, bitcoin remains the most decentralized.

“It’s been going without any glitches or anything so far. Bitcoin has worked like clockwork since 2009. That’s pretty impressive,” Kiff said.

Giancarlo, the former CFTC chairman, said the past few weeks have revealed an interesting trend: While the US dollar has strengthened over the past year, other global reserve currencies have lost steam. But not bitcoin. While British traders sold pounds to buy dollars, bitcoin continues to trade in a tight range around $20,000.

Traders “don’t sell bitcoin to buy dollars like they sell yen to buy dollars, or they sell pounds to buy dollars. In a time of global economic stress, when many traditional currencies are reduced in value, bitcoin is not,” Giancarlo said.