Hi readers, In today's newsletter, Andy Baehr of CoinDesk Indices offers 3 predictions for the months ahead on the heels of bitcoin's "champagne moment."
Then, Lucas Schweiger of Sygnum Bank looks beyond market dynamics to the political factors potentially transforming the institutional landscape of digital assets.
Thanks for joining us. |
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Bitcoin Celebrates a "Champagne Moment" — What Lies Ahead? |
It has been a whirlwind. Bitcoin surpassing $100,000 may have been the champagne moment, but the digital asset class has had much to cheer about and digest since the Fed's easing cycle began on September 18, and even more since the U.S. election. New incoming leadership at the SEC and other regulatory agencies, blockchain-savvy cabinet appointees, a new "AI and Crypto Czar," and frequent mentions of bitcoin and crypto by the President-elect all point towards more support for the industry from the U.S. government. The availability and early success of bitcoin ETF and ETF index options offer risk management tools that individuals and institutions can access through brokerage accounts. This not only invites investors with more sophisticated risk management needs, but also provides another venue for bitcoin liquidity. Record spot and derivatives volumes on digital asset exchanges, topping $10 trillion in November, remind us that it's not all about U.S. ETF inflows and outflows — there are giant crypto global markets out there and they like what they see. |
Medium- and long-term optimism may be well-placed here, given the tailwinds of regulatory expectations (better, stronger, easier to navigate), the macroeconomic state (an easing cycle, but with the possibility of inflation), industry health (oceans of talent, global competition, a hiccup-free 2024), and green shoots of institutional adoption (over $100 billion in bitcoin and ether ETFs, MSTR's balance sheet). While timing — whether in markets, regulation or macro — is never easy, here are a few predictions for the months and quarters ahead in digital assets. Prediction 1: bitcoin adoption momentum will persist Among digital assets, bitcoin's regulatory support is the most "complete" today. In the United States, you can get exposure to bitcoin natively or via futures, ETFs, asset management products, or options. Bitcoin stands to gain the least from more prescriptive digital asset regulation in the U.S. However, bitcoin's adoption momentum is strong, with plenty of room to run. With a fixed ultimate supply of 21 million bitcoins, a known and hard-coded "monetary policy," and a better-understood narrative and context for investment allocation, we expect more integration of bitcoin into individual, advised, and institutional portfolios. Adoption momentum will be bitcoin's long-term price driver, with macro factors affecting short- and medium-term fluctuations. Every time we see a bitcoin-skeptical article, we know that adoption momentum will persist. Prediction 2: lower bitcoin volatility lies ahead The growing population of bitcoin holders and the broader array of financial instruments to provide exposure to bitcoin's price will continue to dampen bitcoin's volatility, bringing it closer, on average, to equities (or, at least some equities). Options on bitcoin ETFs in the U.S. will permit more sophisticated and accessible risk management strategies. This has two implications. First, investors with institutional-grade risk management requirements — and steadier hands — may be able to own bitcoin given the availability of options. Second, investors may use the protection properties of options to avoid selling positions in a weak market, which would otherwise exacerbate drawdowns. We also believe retail investors will sell bitcoin call options against long ETF positions, a yield strategy permitted in retirement accounts, which will depress options prices and volatility. Prediction 3: greater sustained breadth will spotlight the "5%-er conundrum" In the month since the U.S. election, the broad-based CoinDesk 20 Index nearly doubled, outpacing bitcoin's strong performance. The CD20/bitcoin ratio also rose sharply, reversing Ethereum and other blockchain assets sprang to life on the promise of more dedicated and usable digital asset regulation in the U.S. with the incoming administration in 2025. We expect this to continue, with CD20's exposure to top digital assets reflecting the growth-side of crypto alongside that of bitcoin's "store of value" appeal. This presents a conundrum for "5%-ers," those investors who want to allocate to digital assets (beyond bitcoin) but won't have the time to become experts in sectors, pick names, or think about timing. In traditional asset classes, this is a classic application of indexing to provide access, diversification, and automatic rebalancing. We predict (and hope!) that regulatory authorities will permit investors to avail themselves of these benefits in easy-to-access wrappers. |
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Opening Doors for Banks Under a Trump Administration |
One of the most significant factors for the crypto industry lies not in market dynamics, but in the political arena. Trump's pro-crypto rhetoric certainly grabbed headlines, but the real catalyst for banks and other financial intermediaries is likely a Republican sweep in Congress, given that most of his pledges would require legislative approval. With strong Republican backing and bipartisan support also showing momentum, crypto-friendly legalisation would be far more likely to pass. Two developments are central to this shift: dismantling the SEC's SAB 121 (which has kept much of the financial sector sidelined) and the Bitcoin Act 2024 (which proposes a national bitcoin stockpile). Revocation of SAB 121 SAB 121 is a contentious accounting bulletin that has created a compliance burden, discouraging banks from offering services like crypto custody — despite the rising demand from customers (and likely from the banks themselves). Dismantling SAB 121 would remove a major chokehold on banks, allowing them to offer crypto custody services and further diversify their product offerings into staking and other yield-bearing products. This mirrors what we have seen in the ETF market, where institutional involvement fundamentally changes market dynamics. It would also allow banks to defend their assets under management, retain clients, and increase their share of wallet among existing clients interested in crypto, while attracting a younger generation of crypto-native customers. This is likely the route towards mainstream adoption as banks could offer retail customers simplified or "all-in-one" financial services. Bitcoin Act 2024 Trump also promised to push the Bitcoin Act 2024, which aims to establish a strategic bitcoin stockpile as part of U.S. Treasury reserves. Similar initiatives are already underway in Brazil, and U.S. states like Pennsylvania have already introduced their own bitcoin reserve bill. If adopted, bitcoin's safe haven status would be fully legitimised, and the market implications could be substantial by fundamentally changing how central banks and corporate treasurers approach their allocation strategies. We have already seen how the involvement of TradFi heavyweights and institutional ETF flows can impact the market, and central bank purchases could amplify these effects dramatically. Political figures like Senator Cynthia Lummis even suggest the Federal Reserve should reallocate some of its gold reserves to bitcoin, opening up the possibility of bitcoin narrowing its gap with gold's $17.7 trillion market cap — more than 9x bitcoin's $1.9 trillion. Additional pledges Trump's broader agenda also targets the shutting down of banking restrictions tied to Operation Choke Point 2.0, a measure alleged to have debanked over 70 crypto firms, according to a16z's Marc Andreessen. Meanwhile, Trump's opposition to a Fed-issued central bank digital currency (CBDC) aligns with Republican efforts to protect privacy through measures like the CBDC Anti-Surveillance Act, which would ban the Fed from using a CBDC without congressional approvals. Whether the U.S. transitions from a regulatory laggard to a legislative leader remains to be seen. But the opportunity is clear: the U.S. is the world's largest financial market with the potential to bring substantial change and traction to the crypto economy. |
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