Five market forecasts for digital assets for 2022


    After a significant 2021, another promising year lies ahead as the digital asset ecosystem races towards institutional adoption. The industry is at a crucial turning point and is poised to build on notable milestones that defined 2021. The rapid growth in fundamentals has been driven by the myriad of applications using blockchain technology across all industries. Formerly skeptical institutional investors have seen an emerging ecosystem accelerate into a vibrant economy. In 2022, I expect the following topics to be at the forefront of the market narrative.

    1. Legacy terminology will die a quick death

    Terms like AltCoins, which is used to literally describe anything that is not Bitcoin, will fall by the wayside as more sophisticated capital hits the market. While I believe Bitcoin will continue to grow and appreciate against the dollar, real institutional investors view this exposure not as a macro or beta game, but as an asset allocation to a growing technology spanning a wide range of sectors and industries. This will lead to the adoption of terminology and taxonomies that fit into our existing investment landscape.

    Classification systems, like the one developed by Arca, will educate investors on the intricacies of investing in digital assets, as well as stimulating institutional strategies beyond that categorizing investments as “yes, I do” or “no, I have no exposure to digital assets”. Investors are already exploring how digital assets can fit into their existing framework, and this trend will accelerate in 2022. Investors may not dive deep into the various sectors of the ecosystem right away, but they will top binary engagement.

    2. RIAs and financial advisors will catch up

    The majority of financial advisors have been slow to present their clients with an elaborate digital asset allocation strategy. While those at the wirehouses are likely to continue to lag behind, with more flexibility in their managerial models, asset managers will add active management strategies – including both liquid and venture capital – to their clients’ asset allocations. This will continue to put pressure on banks and the slow moving RIA custodians.

    Wirehouses and larger banks are always slow to adopt changes and new technologies. Adding to the complexity of digital assets is the fact that they are not considered securities and cannot be held in custody by traditional broker-dealers. Regulation of the asset class is inevitable and will ultimately fuel this rising tide further. However, this current period offers a significant opportunity for RIAs and multi-family offices with a more open investment architecture.

    3. Institutional capital will come to market quickly

    Over the past year we’ve seen headlines pointing to investors buying the most famous digital assets – Bitcoin or Ethereum – and that was a nice story. Behind the scenes, the institutions that manage the vast majority of global investable assets have moved from disinterested to exploratory and, more recently, to a phase of deeper due diligence. We will see the culmination of this diligence as billions of dollars of new capital pour into the digital asset market.

    Annuities are already testing the waters of digital assets. While Texas Association of Public Employee Retirement System-with more than $ 32 billion in AUM – hosted several crypto expert panels at its newest educational forum, the Houston Firefighters’ Relief and Retirement Fund made an initial $ 25 million investment in digital assets. This is the beginning of a rampant trend for 2022. Compared to $ 122 Trillions and $ 327 Trillion market caps for global stocks or real estate, digital assets – with a current market capitalization of 2 trillion US dollars – are only in their infancy.

    4. The bull run in digital assets will continue and intensify

    The next year will serve as further evidence that digital assets are part of a secular change, not a short-term trade. The industry has introduced new, rapidly growing sectors like DeFi, gaming, sports, NFTs, and Web 3.0 – all of which have completely different factors and token economies that add to their returns. Identifying digital assets with real revenues, real cash flows, and real fundamental economic value will raise token prices and increase multipliers to the point that institutional capital will increase its collective consciousness in a rush.

    The familiarity of professional investors with the different options available for digital assets will help them understand how the specific value can be calculated. While a method of valuing digital assets is nowhere near widely accepted, there are many ways to fundamentally value an investment. The assumption that valuing digital assets is impossible will dissolve. Investors will begin to ask detailed questions about business models, sources of income, and risks. As institutional capital enters the market exponentially, the marginal buyer will far outnumber the marginal seller.

    5. Bitcoin’s volatility will decrease

    As more capital flows into the asset class and reliable exchanges pool larger supply and demand flows, Bitcoin’s price volatility will decrease. As institutions start dipping their toes in, the largest and most established digital asset, Bitcoin, is likely to see a disproportionate share of these inflows – at least initially.

    In addition, the derivatives market is for digital assets now exceeds the value of the spot market. Arbitrage relationships between these two markets mean that liquidity is introduced via the futures market in order to reduce the volatility of the spot market. In addition, closing arbitrage opportunities on the various exchanges will also help create a more uniform market and reduce volatility. A significant inflow of wealth combined with an increasingly unified market will help reduce bitcoin volatility in the future.

    Peter Hans is the managing director at Arca.

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