Ecosystem Growth, Not Prices, Tells the Real Crypto Story

Investors should look at project innovation, not the red lines.

AccessTimeIconOct 20, 2022 at 12:45 p.m. UTC

Amid the current crypto winter, I have called and chatted with participants in the digital assets industry and heard the same narratives scores of times:

  • More investors are interested in crypto than ever before.
  • Institutional interest in crypto continues to increase.
  • The tools and products to include digital assets into portfolios continue to proliferate.
  • Pending regulations will help create the kind of clarity that helps even more people become comfortable investing in crypto.

Yet the price of tokens like bitcoin and ether remain subdued – if there is all this momentum behind digital assets, it’s not showing up in the kind of price increases that signal investor enthusiasm.

Part of the reason for the stubbornly lower prices is an economic one – crypto did not show itself to be a hedge against inflation or equity volatility early in the market downturn, so investors haven’t seen digital assets as a haven while inflation remains high and interest rates climb.

New retail investor money has been slow to move back into the digital asset space because many of those investors are being squeezed by inflation. People who have been active in crypto investing are largely out of dry powder – and Wall Street investors have shifted towards a more risk-off posture.

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Adoption becomes contagion

Another reason for lower prices is the contagion of failures in speculative assets.

"It’s both the best time and the worst time in crypto,” said John Sarson, CEO of Sarson Funds, a crypto asset manager and education resource for financial advisors. “Adoption was going gangbusters. Everyone with speculative assets was deploying them in crypto, and then they saw them evaporate over the course of failures at Iron Finance, Olympus DAO, Three Arrows Capital, LUNA and USDT, or found that capital trapped permanently in Celsius [Network] or Voyager [Digital].”

Even firms that were doing robust due diligence were impacted. Some of Sarson’s investors have found themselves down 75%-80%.

Good news turns sour

Let’s not ignore that there has been plenty of good news in the digital assets space.

For example, just this week Google and Coinbase signed an agreement to enable cloud payments with crypto. Also, BNY Mellon announced that it will custody crypto and Betterment announced that it will offer crypto allocations within its robo-advisor platform.

Yet, in the current environment even good news is met with pessimism.

Take Nova Labs, the company behind crypto-powered wireless network Helium, as an example. Nova Labs is creating a decentralized wireless network using blockchain technology. Earlier this year it had a successful fundraising round from the likes of Tiger Global and Andreessen Horowitz, and it recently announced a partnership with T-Mobile to handle the “last mile” of its communications network.

Despite a novel idea and a lot of promising news, Helium’s HNT token price has actually declined 90% from its peak.

“Everyone who would be allocating capital to these projects because they are in the know [don’t] have any cash to deploy,” Sarson said. “There’s no one left to speculate or recognize that some of these projects are making amazing achievements.”

So the big, “smart” money in the digital assets space is constrained and the market cannot find fair value in many tokens and projects.

Another example is Ethereum, which successfully merged to become a proof-of-stake blockchain last month, a move that should increase its energy efficiency by more than 99% and that gives ether holders the ability to stake their tokens in exchange for yield.

“The risk-reward profile for [ether] has improved, but the price is not going up,” Sarson said. “The market isn’t differentiating between the baby and the bathwater right now.”

What crypto needs to turn around

So when does the market turn the corner?

Increasing regulatory clarity may help to bring some institutional money from the sidelines, as would having capital locked up in the Celsius and Voyager bankruptcies released back to investors.

Otherwise, the next major shift could come when investors move more towards a risk-on stance.

“What advisors need to understand is that this year’s failures mainly negatively impacted crypto speculators,” Sarson said. “The people who really lost a lot of the money are the founders, early adopters and speculative investors who were driving the initial growth of this ecosystem. Without them, the ecosystem continues to grow at a rapid pace but asset prices are dislocated and by many measures remarkably low. It’s a fabulous opportunity.”

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Christopher Robbins

Christopher Robbins is a nationally recognized journalist who has been featured as a speaker and panelist on topics including investing, personal finance and wealth management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.