As Mainstream Retirement Vehicles Continue to Offer Cryptocurrencies, Valuations Will Explode
Each and every week we see more headlines across various media outlets about mainstream retirement funds like Vanguard and Fidelity offering cryptocurrency trusts. These products are marketed under names like CryptoIRA or BitcoinIRA or Grayscale Ethereum Trust. US investors currently have over $22.5 trillion tied up in IRAs and 401(k)s, and financial advisers have had an increasing uptick in clients inquiring about how to get in on the potential incredible returns (and losses!) cryptocurrency can provide.
Currently  less than 1.5% of the world’s population invests or transacts in cryptocurrency, with the total valuation of all cryptocurrencies sitting at $1.4 trillion. If you regularly want to check market caps of the different coins, check out coingecko.com’s homepage. Remember- the individual price of a coin isn’t nearly as important as that coin’s market capitalization- the total value of all coins of that crypto combined. After looking at the market cap number you can ask yourself- does this coin provide that kind of economic value to the world? Is Dogecoin really worth tens of billions of dollars? If Ethereum and Cardano can deploy smart contracts and bring decentralized finance to billions, what is that worth? For comparison, Apple- the world’s most valuable company, has a valuation of over $2 trillion. Is Apple worth that? Probably- it provides a hardware and software product (the iPhone) to the wealthiest 1 billion people in the world, among other things. Back to blockchain -if we treated crypto as an asset class, it’s value ($1.4 trillion) is dwarfed by the US Stock Market ($80 trillion), gold ($10 trillion), the largest 100 companies in the UK’s stock market (FTSE 100) ($2 trillion), and the total value of all real estate in Switzerland ($8 trillion). $1.4 trillion may seem like a lofty valuation for cryptocurrency, but compared to other asset classes, we’re the scrawny new kids on the block trying to prove ourselves. Imagine what the prices of BTC, ETH, DOT, or XRP would look like if that market cap expanded to $5 trillion or $10 trillion! Within a few years, you won’t have to imagine anymore.
Pay the most attention to the market cap figure on the right.
In a 2021 survey of over 500 financial advisors, 14% of the advisers said they use or recommend cryptocurrency to their clients, up from just 1% in 2019. In the same survey, financial advisers said 49% of their clients are inquiring about crypto in 2021, compared to just 17% in 2020. Increasingly, investors are believing the fact that digital assets can solve a lot of the problems facing the world today, including banking the unbanked, issuing cheap remittances, and executing faster transactions. Everyday investors with Charles Schwab and Fidelity accounts cannot directly purchase cryptocurrency- but can invest in trusts that invest in them. After all, holding a cryptocurrency coin means either storing it in a hardware wallet or holding it on an exchange like Coinbase or Binance. The downside to these trusts is that the price of shares can significantly deviate from the value of the underlying crypto asset, due to supply and demand dynamics for the shares. It’s far better to hold actual cryptocurrencies on a hardware wallet or exchanges, but the value-add here is that people can invest in cryptocurrencies in tax-advantaged accounts like the IRA and 401(k). Imagine that instead of paying taxes on your paycheck you’re now able to defer that money into an asset that has had and will continue to have growth that outperforms most every other asset class! This same phenomena of using retirement accounts to invest in crypto is happening across much of the world. These trusts, just like the exchanges, carry fees- often because they do the purchasing of coins and then have to hold them (since they are “custodial” assets) in hardware storage.
I believe that blockchain/crypto is being held back by a few things- first, there is a widespread lack of understanding of what cryptocurrency is. Even after writing about it a good deal, I still have a tough go of explaining how it works to my extended family when I see them over the holidays. If you’re reading this blog, chances are you know more about crypto than 99% of the population, but there’s still a good likelihood that you know less than 50% about how crypto actually works, what the code looks like, or actual rates of adoption for transactions and financing worldwide. The field is moving at such a blistering pace that it’s tough for anyone to keep up with all of the different technologies of the coins and platforms. It’s great to be interested in such an exciting field- we’re entering the golden age of crypto adoption, much like how the golden age of aerospace engineering took the Wright brothers from their first flight in 1903 to Buzz Aldrin and Neil Armstrong setting foot on the moon in 1969, a mere 66 years later.
Second is fear, uncertainty, and doubt (FUD) around the space. News of regulatory crackdown seems to be incessant, whether it’s China banning Bitcoin mining or the UK expelling Binance. Lack of regulation can actually lead to less investment in something. Just like the old American wild west, the frontier outpaces the law- and cryptocurrency is no exception. There’s also a theory in finance that says even negative headlines could benefit the asset class, because now we know just how bad a government is going to act against a technology like Bitcoin- the uncertainty is removed, the other shoe has dropped. Cryptocurrencies can more or less be in direct competition with state-issued fiat currencies, giving wrinkly government officials impetus to try and strangle the infant in the cradle before it becomes an 800-pound gorilla. But given the wealthy’s outsized influence on public policy, the more whales and institutional investors come to get in on the crypto action, the harder time public officials will have trying to place restrictions on or ban blockchain technology.
The final item holding the asset class back is the topic of this article- lack of easily accessible platforms to purchase crypto. I remember in the early 2010’s hearing about the wild price swings of Bitcoin, and I was semi-interested in getting into it (I wish I had!), but at the time there wasn’t really a non-sketchy trading platform to obtain coins. Back to the present day- while we do have Coinbase, Kraken, Binance, and others, each has a relatively painstaking process of Know Your Customer (KYC) where you’re uploading docs of your license, passport, confirming where you live, and submitting to a facial recognition screen shot, which feels a little too 1984 for me (is Binance going to turn around and give all that info to the Chinese government just like Tik Tok?) The lion’s share of investors worldwide use traditional institutions like Credit Suisse, Charles Schwab, Barclay, etc. to invest. We’re seeing small drops in the bucket of progress with these big institutions, but we’re still only halfway through the first quarter of the game. And we’ve got Lebron.
I believe the more this trend of mainstream retirement platforms adopting cryptocurrency continues, it will help with the other two factors holding the asset class back- obscurity and uncertainty. This type of transformation from fringe to mainstream in finance isn’t new- mortgage-backed securities emerged in the early 1980s, then became mainstream within 10 or so years (and then blew up the world economy in 2008). Don’t underestimate the power of new things and crazy ideas to become breakthroughs and parts of everyday life.
Source: Wall Street Journal, 27 June 2021