Hunter Horsley is the co-founder and CEO of Bitwise Asset Management, a cryptocurrency specialist asset manager which launched the first cryptocurrency index fund earlier this year.
The following article is an exclusive contribution to CoinDesk's 2017 in Review.
2017 has been a watershed year for crypto assets.
The combined market cap rocketed from $15 billion in January to over $600 billion by year's end. And in doing so, crypto assets crossed another kind of threshold, transforming from something easily dismissed to something hard to ignore.
The multiple-thousand percent price appreciation has been accompanied by trade volumes well over $1 billion since May, continued low correlations to other assets and sharpe ratios that compare favorably despite high volatility. Unsurprisingly, this is now attracting the interest of new market participants, retail and institutional alike.
The spectrum of new investors ranges broadly — tech-savvy teenagers, busy mothers thinking about how to invest their savings, individuals disenchanted by central institutions, high-net worth professionals, nimble family offices, financial advisors on behalf of clients, and even sophisticated hedge funds and institutions. People are taking note of the returns, headlines in the media and stories of new millionaires being minted overnight.
But they are also emboldened by low correlations, bitcoin’s eight-year track record of security, technical developments around protocols and an emerging ecosystem of companies working on crypto assets.
To be sure, crypto assets are still in an early, immature, evolving stage of their existence.
But this year was a milestone. As we head into the new year and take stock of 2017, I think we’ll regard it as the year that crypto assets officially became a new mainstream asset class, one with a distinct set of opportunities and challenges.
Fragmentation
As this new set of stakeholders contemplates investing, it has drawn into focus the challenges to accessing the market today. 2017 has been a year of tremendous growth for crypto assets, but also of increasing complexity and fragmentation.
The fragmentation is a big deal. Since its introduction in 2009, bitcoin had always been 85% of the total market cap of all crypto assets, that is until this year. As of May, bitcoin’s proportion has dropped to around 50%. Not because it’s lost value —it's up over 1,000% on the year— but rather because a number of other assets have appreciated to significant sizes.
There are now over 10 crypto assets with a total supply valued upwards of $5 billion. Some are competing with bitcoin, while others are endeavoring to do different things, each with their own communities, contributors, advocates and critics.
The implication for investors is that there’s a lot more research that needs to be done to understand the landscape.
Prior to this year, an investor who wanted to invest in the crypto assets as an asset class might feasibly just buy bitcoin. But today, to bet on the asset class rather than picking winners you’d need to buy a portfolio and actively manage it as things change. Both of which are increasingly hard.
What assets should an investor hold, in what allocations, where can you buy them, and what information do they need to monitor? All are new and pertinent questions for those seeking exposure to the space.
Complexity
This brings us to the second point, which is that the complexity of the space is immense and has increased tremendously this year.
Different coins are tackling different use cases: some coins are focused on storing value like gold, some on private transactions, some on fast transactions, some on allocating resources like computation, etc. Methods for fundamental analysis to value assets are not yet agreed upon or well developed, and the approaches that do exist vary depending on the type of crypto asset.
You have to consider the trustworthiness of counterparties like exchanges, public figures in the media, informational sites and wallets.
And there are frequent, relatively abrupt events you have to work to stay abreast of: hard forks, airdrops, regulatory developments (domestic and international), partnerships, new listings on exchanges, changes to algorithms and security vulnerabilities.
Navigating all of this is incredibly laborious and risky.
While many enthusiasts navigate these details either professionally or as a passion, it's a huge barrier to most. If you’re looking to make a 1 to 5 percent allocation of your portfolio into crypto, as many new to the space now are, it’s just not feasible.
Returns
That's not to say there aren't solutions. In response to this combination of interest and obstacles, 2017 has been an unparalleled year of new investment vehicles and services seeking to abstract away the complexities.
New vehicles have spanned the gamut: actively managed crypto asset hedge funds, futures, single coin investment trusts, passive index funds, funds of funds and dozens of applications for exchange-traded products. Several custodians are working to help non-crypto asset-only funds buy and store crypto assets. And many wallets and exchanges are now offering the ability to trade additional coins.
Above all else, though, 2017 was the year of new actively managed crypto asset hedge funds.
Morgan Stanley Research estimates there were over 84 new funds formed this year, up from 11 in 2016, managing an estimated $2 billion in capital. Some crypto asset hedge funds are focused on ICOs, some on active trading, some on picking the best long positions. At a high level, all are focused on delivering exposure to crypto assets and abstracting away the complexities of participating directly.
According to the HFR Cryptocurrency Index, which tracks the performance of active crypto asset hedge funds, these funds averaged over 1,600% return on the year as of November, before fees. This compares to over 850% for bitcoin, over 6,500% for ether and over 1,200% for the HOLD 10 Index, our product that offers exposure to the 10 largest coins over the same period.
Looking ahead to 2018, if demand sustains itself, we will continue to see growth in the number and variety of vehicles and services seeking to provide exposure to crypto assets while handling the complexities for investors.
That will mean both more of the vehicles and services we’ve seen already, as well as new approaches.
Think a certain crypto asset is bound for success in 2018? CoinDesk is accepting submissions for its 2017 in Review. Email news@coindesk.com to learn more.
