Bitcoin and the broader cryptocurrency market have seen a resurgence since Trump’s election victory became clear. An industry formerly on the fringe of finance has drawn in institutional interest, interest from young investors, and interest from those interested in disrupting the current financial system.
The recent shift in the political environment is likely to lead to a change in the regulatory perspective on the industry, and recent financial innovations have made cryptocurrencies more accessible than ever. Furthermore, various interest groups associated with the industry lobbied the Trump campaign heavily and have touted his victory as a major win for the ecosystem
Following the election, crypto assets and equities associated with the industry, such as crypto exchanges, have seen significant appreciation. The recent performance, breadth of the market, and the potential for a shift in the regulatory environment necessitates a discussion around whether or not crypto deserves to be viewed as an independent asset class in a broader diversified portfolio. In particular, advocates for the asset class have touted its value as ‘digital gold’, as a potential payments platform, and as a disruptive component of the modern financial industry. Skeptics have pointed to its lack of utility, substantial volatility, and speculative nature.
Can You Use Crypto As a Payment System?
One of the primary arguments for crypto to investors is that it offers a cleaner and faster way to transact payments. But from where we stand today, crypto’s volatility undermines its utility in any payments ecosystem. The price swings for most large crypto instruments are dramatic: Bitcoin, the largest crypto asset, went from being below $1,000 in 2017 to reaching $69,000 in 2021, followed by a crash to $30,000 within months. You need an iron stomach to block out the noise that comes with owning an asset like that. Such volatility is almost unprecedented compared to other stable currencies like the Dollar or the Euro. Rather, that volatility even stands above that seen in far more speculative equity markets or bond markets. The ability to use Bitcoin for peer-to-peer transactions is significantly undercut by its price swings. Reliability and price stability is essential for a payments network.
Real world evidence supports this perspective. Crypto generally isn’t used for transactions in a place where a stable currency is available. According to the Federal Reserve, only 7 percent of U.S. households held or used cryptocurrency in 2023, down 8 percent from 2021. That number encompasses the broad crypto ecosystem with more than 10,000 different cryptocurrencies – no single asset has any sort of significant payment volume, even if some assets like Bitcoin have seen dramatic price increases in the past few months. Furthermore, when crypto is used in payment it’s often not for the kinds of purchases an ecosystem wants to be proud of. Crypto assets like Bitcoin are the preferred route for dark web transactions, ransomware attacks, and illegal gambling sites even though it’s estimated that less than 1% of Bitcoin transactions are criminal.
However, while a significant payment ecosystem has yet to mature, digital currency technology continues to advance. Large players like Visa and Mastercard are excited by blockchain technology and there are a lot of start ups and small companies working on building blockchain systems explicitly for payments.
Is Crypto Digital Gold?
So, if your average Joe isn’t going to use crypto to transact, then where’s the value?
Many advocates have pointed to the potential for Bitcoin and other crypto assets to be a hedge against inflation and normal market volatility. Bitcoin in particular draws attention as its total future supply is capped at 21 million coins. This artificial scarcity sets it apart from fiat currencies, where central banks have control over how much to print into circulation. In an era of rising inflation and unprecedented monetary stimulus, Bitcoin evangelists see it as a potential hedge against the devaluation of traditional currencies and bet on its recognition as a store of value worldwide. An advocate’s perspective is not that Bitcoin is a replacement for stocks, but rather an insurance contract for a fiat currency meltdown – similar to the argument used to push for gold.
Gold has served this function for investors for a long time – nobody uses gold to transact, yet many investors still incorporate it into their portfolios, thereby giving it value. Outside of its few industrial applications, gold bugs use the metal as a hedge against volatility and inflation even though imagining a situation where we barter with gold bars is pure fantasy. The argument for Bitcoin to still be worth something while not being a particularly useful asset may lead it down a path similar to the metal’s – a speculative asset devoid of intrinsic value and entirely dependent on sentiment.
Are Crypto Ecosystems Disrupting or Conforming?
Crypto has gone mainstream over the past few years through a combination of consistent promotion from the exchanges, outsized returns, and some dramatic collapses. The collapse of exchanges like FTX and the subsequent pushes to regulate the industry have made crypto feel less like a disruptive new wave of finance, and more like another part of the broader financial system. Rather than pioneer new ways to run the financial system, crypto assets have actually come closer to traditional finance. In particular, the introductions of ETFs to allow investors easier access to crypto assets like Bitcoin is noteworthy. Institutional offerings like ETFs bring ease of access to the previously esoteric market.
The introduction of regulated access points allows retail investors and institutions alike to start thinking about crypto as a potential asset class, rather than needing to focus solely on the risks associated with a frontier market. The broader financial system has regulations and systems in place to deter and prevent fraud and mismanagement like what we saw with FTX, and the financial system is similarly used to the risks associated with leverage and counterparty risk like what happened with crypto hedge fund Three Arrows. Having ETFs from established financial institutions like Blackrock may allow investors to start looking past systemic problems with the ecosystem.
It’s also important to note that while the push for crypto in developed economies has been towards regulation, it is acting as a disruptive technology in less developed economies. In places with less stable currencies crypto has become a way for people to move wealth outside of the traditional financial system and to hedge against hyperinflation and local currency instability. Peer-to-peer trading platforms are much more prevalent outside of the G7 countries and in many cases this allows crypto to be more well received.
Investing Upstream
While investing in crypto assets is fraught with risk, there are other ways to tap into the growth of the ecosystem and still have some exposure. One area we see talked about a lot right now is with the miners whose stock prices generally follow the price of bitcoin but give investors upstream exposure. Companies like Marathon Digital Holdings (MARA) or MicroStrategy (MSTR) are directly involved in the business of mining and owning crypto assets. However, while the idea of investing in a miner may be attractive, they are essentially leveraged bets on the crypto assets they’re holding. Small changes in the price of the asset they’re working with have outsized impacts on the price of the stock.
If we ignore miners and break down the essential inputs needed for crypto more broadly, we come away with two sectors with substantially stronger tailwinds. Semiconductors and power. These two spaces benefit not only from tailwinds in crypto, but are also exposed to the broader acceleration in AI and technology more broadly. Chip behemoths like Nvidia (NVDA) and Advanced Micro Devices (AMD) not only get to develop chips used for crypto, but also have huge opportunities in the AI data center market.
Similarly, utilities providing energy to both miners and AI hyperscalers will stand to benefit from the ever-increasing competition – whether that be in nuclear with companies like Talen Energy (TLN) and Constellation Energy Corp. (CEG) or broader renewables like NextEra Energy (NEE). The bitcoin mining community is already receptive to renewables with over 50% of its energy consumption powered by renewable sources. Even companies like Tesla (TSLA) are exposed to the renewable space through their sales of their solar panels, battery packs, and energy management systems to power data centers or crypto mining operations that need uninterrupted power.
Final Thoughts
Crypto assets have gone more mainstream by integrating with the rest of the financial system, but we believe they still fall short of being considered an essential asset class. The absence of intrinsic value and exceptional volatility are major obstacles. While the price increases can be exciting, that volatility can go both ways and losses can accrue just as quickly. Despite the significant increase in institutional adoption in 2024, we believe there are other more reliable ways to participate in the market. We prefer looking at the energy consumption or semiconductor suppliers as opposed to the crypto assets themselves.
