Volatility drives innovation and the current market conditions are creating both risk and opportunity for investors. The next bull market in risk assets should see digital assets outperform, but meanwhile, drawdowns in assets globally have also given investors space to lay strong foundations for a sound investment strategy in this area.
Volatility drives innovation and the current market conditions are creating both risk and opportunity for investors. The next bull market in risk assets should see digital assets outperform, but meanwhile, drawdowns in assets globally have also given investors space to lay strong foundations for a sound investment strategy in this area.
“The institutional adoption of digital assets will offer hypergrowth in the entire lifecycle of investing in this asset. That means significant growth in infrastructure: service providers across execution, content, settlement, data providers, etc. Every service that is consumed in the investment process for Equities and Fixed Income will need to be re-created for digital assets,” notes Eric Rose, Head of Execution at Cowen Digital.
As current macro and geo-political events have driven volatility higher, digital assets, having a higher beta by nature, have been getting hit harder, although there are some signs of correlations beginning to diverge. “It’s in these times that our services beyond execution, into research and content, are helping clients to navigate,” says Eric Rose.
In volatile times, Rose believes people are forced to focus more on how to manage difficult environments and to be more in-tune to customer needs: “Volatility generally creates both risk and opportunity, depending on the asset class and customer positioning. Bull markets generally breed intellectual laziness in market analysis, and volatile markets bring participants back into focus.”
Cowen has seen an uptick in client engagement in its digital offering and thought leadership with the focus on inflation hedges and alternative assets.
Considering the opportunities available, Rose outlines: “In the near term, adoption of utility tokens (BTC, ETH) from institutional investors will eventually create significant waves of buying across the space. As initial scepticism transitions to widespread adoption, the need for massive infrastructure growth to service the industry as well as more tokens (a larger universe to trade) will bring hypergrowth in tech development.”
Rose goes on to explain how concerns regarding the appeal of these assets tend to revolve around widespread misinformation: “If people don’t understand the utility of a token, then they won’t understand the investment thesis. An example, ETH is a utility token that is used as the underlying base technology for dApps that are built on it. Every time there is a transaction, there is value generated within the network. The longer-term area of growth will be in regulated security tokens, and this will be the larger opportunity going forward.”
Further, the “tokenization” of society will unlock tremendous amounts of value that are currently locked in illiquid structures. Rose comments: “Real estate and infrastructure assets globally, are in the trillions, and are mostly illiquid. Bringing these assets on-chain will create significant efficiencies in pricing and liquidity. Since these tokenized assets would be classified as securities, the potential regulatory risk should be lower, compared to utility tokens.”
The misinformation Rose refers to also spreads to the way digital assets tally with the concept of sustainable investing: “Proof of Work protocols, like BTC, do consume computing power and thus actual power, but much of the negativity of BTC power usage is analysed in a vacuum. Every company uses energy, and many of them inefficiently. If you look at where BTC miners are getting their power from, many are trying to adapt to ESG by building out their systems using excess power sources. The power usage by BTC mining hasn’t come close to some of the dire predictions. Once you move to Proof of Stake (PoS) protocols, which most blockchains are at this point, energy usage is much lower.”
One vital aspect of ESG or sustainable investing is disclosure and transparency. In view of this, Rose points out that clients can choose to receive energy usage statistics as Cowen covers several of the public BTC miners, which can provide granular data.
