Crypto Must Overcome Its Perceived Illegitimacy To Scale

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This isn’t crypto’s best moment. The market value of the sector has plummeted from $3 trillion in … [+] November 2021 to $1 trillion.


The tide of public opinion hasn’t entirely turned against cryptocurrency, but one might be forgiven for thinking otherwise. In recent weeks, near unprecedented bitcoin volatility has sparked a firestorm of debate as pundits and investors argue about the value, monetary and otherwise, of cryptocurrency.

This isn’t crypto’s best moment. The market value of the sector has plummeted from $3 trillion in November 2021 to $1 trillion. The downward slide began after the Federal Reserve started reversing the stimulation policies it adopted during Covid-19 and has since eroded investor confidence in blockchain-based finance.

One of crypto’s most vocal critics, Warren Buffett, summarized his opinion at Berkshire Hathaway’s annual meeting in May, “If you … owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it,” further outlining his view that crypto doesn’t produce anything in the same way that farmland or apartment buildings do and thus lacks real value.

“It’s got a magic to it, and people have attached magic to lots of things,” concluded Buffet, a rather dramatic dismissal for a market valued at $1 trillion from an investor who for years did not invest in tech claiming that the industry relied on building a better digital mouse trap and who’s company Berkshire Hathaway now has a significant exposure to big tech like Amazon and is one of Apple’s biggest shareholders.

While cryptocurrency doesn’t have the same tangible output as farms or apartments, it’s pivotal role in facilitating the next generation of digital value transfer cannot be ignored. Blockchain-based finance is a fundamental building block for Web3, the much-heralded read/write/own version of the web, which will allow digital denizens to not only participate in online experiences, but have a say in their governance and are compensated for their contributions.

As CK Zheng, a 30-year Wall Street veteran and ZX Squared Capital co-founder, responded to such perspectives in a Blockworks article, “If you only think about the old ways of doing things, you miss the new things. If you think about a big investment return, you really have to think about the long-term trend and see where that trend leads to not today, not tomorrow, but 10 years down the road.”

Nothing outlines this point like an Amazon 10-year price chart, or better, 20-year or 30-year price chart. Even thought Jeff Bezos was publicly open about Amazon’s strategy (with its data) in the early 90’s, the share price like looked code-blue flatliner until after the financial crisis when market analysts finally worked out what Bezos had created and the share price took off like a rocket (as tech data geeks shook their heads with a dismissive “I told you so”).

Cryptocurrency is hardly the only asset class experiencing volatility in this economic environment. It’s a perfect storm of economic chaos with supply chains still under stress from the production constraints imposed by Covid-19, energy prices, and inflation on a sharp rise.

In January, US rates spiked to a 40-year high and sent many markets into a plunge, which are now coping with rates rising clipping at pace. Even “safe haven” commodities like gold and silver are trending downwards as rising bond yields come to bear on the precious metal market.

Cryptocurrency doesn’t maintain a monopoly on volatility, nor is it even the most volatile asset type trading today. Consider oil, in April, where the commodity’s 30-day volatility stood at 7.91 percent. The same month, 30-day volatility for Bitcoin dipped to a mere 2.2 percent.

While investors don’t make investments based on comparative volatility data from a single month, the figures illustrate why dismissing cryptocurrency on the basis of volatility, especially while espousing the value of a conventional commodity might be overly preemptive. Look at crude oil price chart over a 10 to 30 year period (or longer) and the price will range from $20-180.

Volatility is an attribute of market and is where many financial professionals make their returns. Cryptocurrency comes under undue censure often because of its position as a new and complex asset class, and the often excessive negative policymaker and popular media narrative focusing on scams, fraud, and crime.

It’s also worth noting that retail and professional investors don’t face an either/or choice when it comes to volatile or stable investments. While average folks might not want to pour their life’s savings into a volatile asset like oil or cryptocurrency, high-risk assets constitute a vital part of any diversified risk adjusted portfolio.

Retail investors account for roughly a quarter of total equities trading volume, a relatively volatile asset class. In the mass exodus of 2020, when the retail investors who had entered the market during the meme stock craze offloaded their investments once “memed” assets came crashing down from their artificial highs. According to Bloomberg, nearly 50 percent of single-stock retail positions in the Nasdaq 100 accumulated since January 2019 have been sold.

Non-professional investors tend to be more likely to make decisions based on hype and fear. In any event, during a major market correction, many asset classes are highly correlated and investors across all segments should have portfolio strategies for these occurrences.

High conviction investors will stand firm through periods of uncertainty and remain committed that their investment will provide financial returns. Professional investors may also choose to stay the course, believing that cryptocurrencies will ultimately play a role in the global financial market, though many don’t HODL and sell high and buy low and are experienced at moving in an out of markets advancing or declining.

Crypto analyst Noelle Acheson notes in a recent post, “The mighty have spoken: over the past two days, both JPMorgan and Citi have published reports that heavily hint that the crypto market bottom is in.”

Watch this space. Nevertheless, cryptocurrency advocates need to face the problem at the heart of greater cryptocurrency adoption – its perceived illegitimacy.

This is particularly the case among many governments, policymakers, central bankers, and regulators who have fined large market players for practices that have violated existing jurisdictional laws and regulations. Crypto regulation has also been slow in coming and this has created a great degree of regulatory uncertainty for the crypto industry, which itself can driven volatility, and undermine investor confidence in cryptocurrency.

To achieve a more widespread adoption, the crypto industry and policymakers must better collaborate to address uncertainty and volatility and focus on delivering a sustainable (global) framework for cryptoassets that helps better achieve investor confidence in the market.

Unpacking crypto mystery: how confusion constrains adoption

Blockchain-based finance can be notoriously complicated to the uninitiated. Achieving a baseline understanding of it can require a college lecture’s worth of research. To skeptical investors, a high-level pitch can sound too nebulous and risky to tolerate. In moments of disaster, it’s easy to deride people who bought into what seems to be baseless hype — and then pat yourself on the back for not following their example.

“If a traditional investor analyzed DeFi like a country’s financial sector, some fundamental questions would be very hard to answer; e.g., what is the base level of interest rates and the country’s risk premium?”, one writer for CryptoDaily pointed out last fall. “In simple terms, 6 percent on your USD savings account in the US is huge, but how adequate is it for your stablecoin deposit?”

Investors can often limited by a lack of informed foresight. Sailors don’t sail across the sea without navigational skills and charts, or Sat Nav these days. The sector is taking steps to provide such analytical resources. In November 2021, Polygon announced that it had partnered with Overnight, the protocol that fuels the interest-bearing stablecoin USD+, to develop an interest rate benchmark for decentralized finance.

As explained in an article announcing the venture, “PoLybor is inspired by the commonly accepted Libor Overnight rate. Just like Libor is the rate at which most reliable banks could fund each other, PoLybor Overnight is the average interest rate at which one can deploy (1) a basket of mainstream stablecoins into (2) multiple reliable protocols.”

This tool is expected to give investors a greater ability to assess stablecoin liquidity, better perspective on yield-framing performance, and greater visibility into arbitrage opportunities. It, and other efforts like it, offer a means of empowering investors to do proper diligence, make informed decisions, and gain an accurate understanding of their investment prospects. It also appears that Overnight’s USD+ is proving itself to be an alternative to UST after the recent crash.

Of course, context can only help so much when potential investors are so concerned by volatility that they won’t even entertain the idea of crypto investment.

Volatility stigma presents a significant but solvable problem

Cryptocurrency has a reputation for being volatile. Skeptics paint all cryptocurrencies with the same derisive brush. In the coming months and years, proponents will need to rescue low-risk assets and investment approaches from bitcoin’s shadow if they want to encourage widespread adoption; otherwise, the latter’s reputation will continue to undermine cryptocurrency validity.

Some industry players have already begun this work. Earlier this year, Credit Suisse veteran CK Zheng partnered with two well-known DeFi architects, Felix Xu and Yemu Xu, to launch a risk-aware crypto hedge fund, ZX Squared Capital. The fund leverages quantitative strategies with options and futures to mitigate risk and has a current volatility of less than 40 percent — a dramatic improvement over bitcoin’s 80 percent to 100 percent volatility.

As described by the Block, “ZX Squared Capital is designed for TradFi and crypto-native investors that want exposure to crypto but don’t want to stomach the asset class’s volatility.”

The offering is innovative in its way. Proponents often present crypto as the ultimate do-it-yourself asset, which isn’t surprising, given the dogma at the heart of decentralized finance focusing on disintermediated financial empowerment to the individual.

This focus on individuality has also intensified the challenge for investors who don’t have the skills, knowledge, or confidence to on-ramp into crypto – intermediation is alive in the cryptocurrency market in the forum of education, advice, and active management.

By providing a clear path into investment paved by partners who understand the industry and how to navigate it, ZX Squared is normalizing the idea that reduced-risk crypto investing isn’t something investors need to take on alone. The hedge fund isn’t the only entity to do this.

Zignaly, a social trading platform for cryptocurrencies, has championed such collaboration since its debut in 2019. Today, professional and retail investors alike can peruse the platform’s extensive talent marketplace for experienced traders who can provide investment guidance. Having such support for inexperienced investors who want to gain experience in crypto without inadvertently taking on excessive risk can be assuring.

More hands-off, independently-minded solutions have come to the fore, too., for example, facilitates similar investment support via an AI-supported, flow-based trading platform. With Kryll, crypto investors can build their trading strategies via a simple drag-and-drop tool, adding buy targets and stop-losses. Here, support comes in the form of a safety net — investors can maintain their independence while reducing the odds of sudden loss.

Of course, none of these offerings are entirely without risk — what investment is? They do, however, go some way to addressing investor concerns and reducing some of the volatility that investors take on when investing in crypto. These types of investor solutions are better positioning to answer crypto skepticism and rhetoric with analytically-backed rationale and risk adjusted strategies and look to be taking some of the magic out of crypto, and in doing so achieving something far greater: legitimacy.