I am not a crypto native. I was not an early adopter. I don’t share the same views with many of the people who think that Bitcoin will replace the dollar and all of that jazz. I have, however, been bullish on crypto assets for the past few years.
My view was rooted in the very simple belief that demand would outstrip supply. It’s never been more complicated than that for me. That thesis is currently playing out with the price of Bitcoin at the highest levels since December 2021.
Roughly 70% of Bitcoin supply still hasn’t moved in at least a year while ETFs are seeing $500mm of inflows a day
Don’t need to be an economics PHD to know what’s set up to happen next
— Will (@WClementeIII) February 14, 2024
For crypto investors to sustain their current enthusiasm, it has to do more than number go up. There needs to be some real-world application beyond what currently exists.
The most natural use case for blockchains are in financial services, and one giant institution, I know there are others, appears to be dipping its toes.
Citi has a new paper out called Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets. In it, they lay out a potentially bright future for the technology:
Across financial services, there is a growing recognition that the use of distributed ledger technology (“DLT”) presents a significant opportunity to re-architect capital markets. Against an increasingly complex and competitive environment with persistent margin pressures, backed by a history of technological innovation spurring developments like ETFs or direct indexing, financial institutions are now exploring opportunities provided by DLT.
The potential benefits range from solving infrastructural issues in traditional operating models to the possibility of new investment product and servicing capabilities enabled by DLT features, such as programmability and composability. This could represent a step-change in how private assets are held and transacted.
The vision is an end-state of digitally native investment products that are created, traded, and administered entirely on DLT infrastructure. Digitally native products have the potential to enable better distribution, unlock new product capabilities, and deliver operational efficiencies. The transactions are also fully traceable and auditable with the potential to exist on a shared infrastructure resulting in reduced reconciliation overhead.
In such an end-state, regardless of whether asset allocation and personalization are driven by emerging technologies like artificial intelligence (AI) or by an advisor, DLT can be the complementary execution layer that a range of assets – including efficient public market assets like ETFs and equities – live and transact on. Leveraging the power of smart contracts with ownership recorded on DLT, these assets can be automatically allocated, fractionalized, and rebalanced by intelligent applications supported with instant implementation. The future of wealth management for the average self-directed investor would likely see AI-assisted personalized model portfolio allocation with DLT-based implementation.
Crypto skeptics have been waiting for a practical use case for normies before becoming open-minded to the possibilities that this technology is not just for money launderers and criminals. It’s possible, dare I say probably, that a business use case gets here before a consumer one.
We discussed this and much more on The Compound and Friends with Rich Bernstein.
