Marco Manoppo is Head of Research at Digital Asset Research (DAR), where he vets hundreds of digital asset exchanges and digital assets as a part of DAR FTSE's Digital Asset Indices methodology research process.
Russ Alan Prince: In a volatile market environment, is this a time to be cautious about crypto or is there a place for digital assets in client portfolios?
Marco Manoppo: Crypto is a nascent asset class that’s still maturing from its technological and regulatory perspective. As such, it’s often considered a risk-on asset. In the current macro market environment, investors need to be cautious when approaching risk-on assets. There will be an enormous opportunity for risk-on assets when the macro economy turns, but risk management and position sizing needs to be adjusted accordingly based on a personal portfolio outlook and time horizon.
The volatility that the digital asset market introduces and the interdisciplinary nature of the tokens themselves required a much more robust approach and understanding when it comes to portfolio construction. There’s definitely a place for digital assets in a client portfolio, but it needs to be done thoughtfully. Like other emerging technology assets in a well-diversified portfolio, there can be a place for crypto, but it should be considered on a case-by-case basis.
While the crypto winter of 2018 and 2019 was a long dry spell for crypto investors, there is much evidence that this crypto winter is different. There is a long pattern in crypto of winters leading to bright springs, as the continued investments build and start showing more fruit. The best timing for any investment is hard to predict, but the patient investor will almost certainly see benefits with a well-managed approach.
Activities in the crypto industry have shown tremendous growth in the past few years. Institutional involvement and continued technological innovation have enabled the creation of new sectors within the crypto industry such as DeFi and NFT. Legacy companies, both large financial institutions, and tech giants have also become much more involved with crypto – further proving the staying power of digital assets.
Prince: Many RIA's have promoted Bitcoin as the only crypto asset worth considering. What sort of risks does that bring and how should advisors think about managing that risk?
Manoppo: While Bitcoin is the largest digital asset market by capitalization, the technological growth that catalyzed the momentum of the crypto market’s growth in the past few years was primarily driven by other digital assets. For instance, technological advancements surrounding smart contracts scalability have enabled a thriving DeFi market that reached $200 billion+ in Total Value Locked at its peak; and the growth of NFT infrastructure enabled artists and musicians to monetize their work and intellectual property in a digitally native way.
Bitcoin’s narrative and market treatment historically has also been a lot closer to that of a macro asset, moving alongside gold and central bank policy decisions. Whereas other digital assets that have shown their technological capability have been treated more like tech equities or venture investments. This fact alone indicates that there are multiple ways for advisors to think about the risks associated with different digital assets.
As such, it’s crucial to understand the value offering of other digital assets, and how they might be different from Bitcoin. A proper understanding of the codebase construction, maintenance, community engagement, security practices, market liquidity, and regulatory compliance are important to help advisors think about the different risk vectors that exist in the crypto market. The interdisciplinary nature of these tokens and the complexities of having a fully digital, 24/7 global market introduced both risks and opportunities. For advisors, it’s critical to understand all of the different dimensions of a digital asset, before deciding how to manage the risks.
Prince: Ethereum has undergone a switch from Proof of Work to Proof of Stake. Instead of crypto miners getting rewards for settling transactions, ETH holders can earn rewards through staking. What role does yield play in crypto portfolios?
Manoppo: Yield in digital assets has existed for quite some time. The sources of these yields vary from blockchain network staking yield to liquidity mining and borrowing-lending yield. That said, one of the crypto-native ways of earning yield is via staking. Unlike other yield sources which are derived from financial mechanisms, staking is a way to earn yield by participating in the underlying blockchain network.
Stakers receive yield by allocating and locking their tokens for a certain period of time to help the underlying blockchain network process transactions and achieve consensus. In a Proof-of-Stake—PoS—a type of blockchain network, the existence of stakers are crucial for the integrity and functionality of the network.
As the number of blockchain networks that implement a PoS consensus mechanism increased in the past couple of years, staking yield has slowly become more popular. However, the majority of digital assets that have staking yield have been relatively lower in market capitalization, limiting institutional investors’ ability to participate due to liquidity constraints. That is until Ethereum transitioned to PoS.
As the second largest digital asset by market capitalization, Ethereum’s move to PoS is a big deal because it is also the largest blockchain network by the number of applications that have been built on top of it, as well as the value that it holds across its DeFi ecosystem. Alas, institutional investors now have a way to meaningfully participate in a staking yield strategy for their crypto portfolio. Compounded throughout the years, the additional single-digit, and sometimes low double-digit percentage yield that crypto staking provides will significantly shift investors’ portfolio return.
Digital Asset Research (DAR) is a specialized provider of ‘clean’ digital asset data, insights, and research for institutional clients. Since 2017, DAR leads by rigorously vetting out noisy inputs for flagship clients such as Bloomberg, FTSE Russell, and Wilshire. Each day, DAR processes 250+ million trades to price 7,000+ institutional quality digital asset prices and deliver a range of product solutions to navigate the cryptoverse.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.