As published on Wealthmanagement.com, by CIO, Stuart Katz
December 31, 2021 – We have witnessed bitcoin’s historic trajectory, emerging from cryptographic obscurity to spawn a generation of newly-minted millionaires with shattering highs in little over a decade. But investors looking to gain from bitcoin’s success and the ensuing explosion of cryptocurrency trading should not make the mistake of becoming distracted by this storied ascent.
The reality is that many external factors contributed to bitcoin’s rapid adoption and it is those enduring forces that serve as the true catalysts of societal change and ultimately reshape the investment landscape.
Over time, currencies have evolved from commodities such as seashells and silver coins, to bank-issued notes backed by gold or other precious metals, to the fiat money and digital currencies we have today. While new monetary assets do not come around often, they typically emerge as part of a growing trend when they do.
That is why it is critical for investors to understand the range of durable themes that have served as tailwinds to the crypto industry. On a practical level, the question to ask is not which cryptocurrency to buy, but which broader secular trends are driving cryptocurrencies and how to invest in this new growth vector?
Technology is by far the most dominant theme to prime the landscape for mainstream adoption. Cryptocurrencies rely on distributed ledger technology, typically blockchain technology, to transact on peer-to-peer networks.
Distributed ledgers, which have enabled major advancements in everything from artificial intelligence to supply chain management, hold the potential to generate wealth and disrupt a cross-section of industries. New blockchain applications are emerging in the private markets in areas such as payments, decentralized finance and nonfungible tokens (NFTs).
Blockchain tokenization, for example, could help democratize alternative investments by making them more accessible to investors, while allowing asset managers to potentially expand investment solutions by creating alternative asset tokens.
Cryptocurrencies are also seen by some as a populist response to centralized decision-making in monetary and fiscal policies around the world. Blockchain’s decentralized structure and associated digital assets align with the perspective of populists who believe they are disregarded by “elite establishments” and often distrust institutions.
A similar tailwind has come from younger, technology-savvy or digitally-native generations, including millennials, currently experiencing the greatest transfer of wealth in modern history from their baby boomer parents. Those generations will likely direct more money to digital assets.
Additionally, we see momentum from geopolitical uncertainty, particularly from countries with authoritarian regimes and histories of confiscating personal property or devaluing it through hyperinflation. Citizens in those countries have begun to adopt cryptocurrencies as a safe-haven against their fiat currency or as a mechanism to transfer wealth across borders.
Bitcoin’s history is too short and volatile for us to gauge its true role in balancing portfolios, but we do know its meteoric rise has upstaged the investment potential of the broader crypto ecosystem. Investing in a portfolio of companies associated with these trends can offer exposure to the growth of the digital economy without the complexity and risk of a direct cryptocurrency investment.
It was Mark Twain who was credited with saying, “During the gold rush, it’s a good time to be in the pick and shovel business.” Digital assets present a new realm of opportunity—as long as investors know where to look.
Stuart Katz is Chief Investment Officer of Robertson Stephens, a wealth management firm striving to provide comprehensive and innovative investment solutions and wealth strategies to its clients through an intelligent digital platform.