Love it or hate it cryptocurrencies have become a standalone asset class in the past few years and they look like they’re here to stay. With market caps of ~435B USD on BTC and ~190B USD on ETH (at the time of the writing of this article) they by far rival some companies you would typically find in the S&P 500. The spectacular rise and meteoric fall of cryptocurrencies & businesses related to the asset class have been the topics of many discussions and have destroyed and created wealth in a matter of days.
As part of our ongoing series on the investors’ perception on various asset classes we also gauged the ecosystems’ expectations in regards to crypto and the expected returns . We were surprised by the high expected returns among 80% of the respondents (between 3x and 30x) especially given the fact that the survey was running in October & November when the market was under the effect of the FTX collapse and its contagion to other companies. These expectations rival and sometimes outright surpass expected returns in the VC space which is traditionally viewed as a risky but high-yield asset.
Crypto seems to be a realm of extremes, where you either have bulls that look at very high returns in a medium span of time (3-5 years as of the writing of this post) or bears that think the asset class will completely vanish in a couple of years and that it was all a short-term bubble.
Although we like to keep an eye on the evolution of the space we differed to a few more active players on the market to validate & cross reference the results and, to our surprise, the market expectations were quite close to what the active players shared.
Traders seem to be quite bullish on a comeback of the market in the next few years, citing reasons such as adoption & the upcoming BTC halving among others. Whether you’re on one side of the fence or the other it’s an interesting perspective to take in and to analyze later, with the benefit of hindsight.
We’ve gone out and cherrypicked a few insights from our short foray into the topic which we’d like to share.
Insight I Timing and Time in: You know how stock market investors say, time in the market beats timing the market, well apparently Crypto is a bit different, as it is a much younger asset class its bear and bull runs are much more severe and, as such, high returns are conditioned by timing and also time in. One aspect shared among all the active players we’ve spoken with is the believe that the 3x-30x returns might be possible give the right timing and the right time in
Insight II Ecosystem events are key: Events such as BTC halving or the ETH merge are important to the price of the asset, when analyzing historic data there have indeed been some strong short-term moves in the price & market caps of the asset.
Insight III The Illiquidity Discount: Something not many investors take into account when investing in very liquid assets or assets that can be tracked in real time is human nature and our tendency to make rash, emotion-driven decisions. This is most visible in markets such as crypto in which selling your assets, at a loss, is something that can happen at a moment’s notice, and this is usually one of the reasons (along with strong volatility) why passive or casual investors have smaller or negative returns. This topic is detailed at length by AQR’s Cliff Asness in this article and I highly suggest you read it.
All in all, this article’s goal is to spark a discussion among investors with regards to the future of the asset class; if it’s a worthwhile asset to hold, if it is one that should be actively managed on a day-by-day basis or if it has any place in an investors’ portfolio at all.
As VC fund managers, we always advise the potential LPs towards a diversified portfolio with exposure in multiple risk-on and risk-off assets for long-term solid yields, bearing in mind that the assets hold a fundamental value-creating characteristic, a portfolio where alongside the VC money there’s space for crypto.
But what is your take on it ?, Whether you’re a day trader, an active, passive or part-time investor is crypto an asset to hold? Should it be actively managed? Or there’s no place for it in a well thought portfolio?