Trends Watch: Crypto Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.

This week, Elana talks with Taylor Pasanello and Jeff Stroud, Fund Managers, CryptoByte Capital.

What is your outlook for crypto investing?

We have been trading cryptocurrency for more than 12 years now, and we believe that 2024, especially with the advent of the U.S. Bitcoin ETFs, has solidified cryptocurrency as an asset class. If you speak with most investors, the consensus is that the most popular cryptocurrencies such as Bitcoin and Ether are here to stay. This was not the case until very recently.

Younger investors (Gen Z and Millennials) are much more likely to own cryptocurrencies than older generations, but we expect a gradual influx of capital from more seasoned investors -- primarily into Bitcoin and Ether. We also expect capital inflows from institutions and governments to increase. In addition to further pulling the price of Bitcoin and Ether up, these investors may help temper volatility in those assets.

Speaking of which, cryptocurrency is notoriously volatile, and although we anticipate volatility declining over time, it is at no risk of becoming “boring!” Traders and investors who want to take riskier positions will continue to purchase smaller, lesser known, and more speculative digital assets. Many of these projects will ultimately fail, but the few that do succeed will make early investors very wealthy. We do not anticipate any singular cryptocurrency becoming so dominant that all others disappear.

Despite the speculative nature of riskier projects and the abundance of outright scams (that investors will need to remain vigilant about), the main ideas of decentralized blockchains, digital sovereignty, digital ownership of currencies/tokens and unique digital items (NFTs), etc., are solid. The cryptocurrency industry has evolved through several iterations over the past 15 years (since the inception of Bitcoin), and it will be exciting to watch how it continues to change over the years to come!

Where do you see the greatest opportunities and why?

Cryptocurrency has created a new rail system for the storage of value, transfer of value and security of data.

With respect to the first, it is difficult to overstate the success of Bitcoin, and we expect it to continue to gain acceptance as a global store of wealth. This benefit is most pronounced in countries currently suffering under oppressive political regimes and/or suffering from rampant inflation.

Speaking on the transfer of value, our current, global financial system has yet to see a true technology revolution. If you send money across the globe via an intermediary, there is a lot happening on the backend to facilitate the movement and settlement of the transaction from point A to point B. The friction of these back-end transfers makes these payments costly and time-consuming. If cryptocurrency becomes more seamlessly integrated, much of this cost can be eliminated. There are many second-layer protocols and cryptocurrencies that stand to benefit if more people start to use cryptocurrency for transactions.

Data usage and security is another important application of cryptocurrency that is not discussed enough. Large technology companies are constantly collecting data about us from our devices. There has been some success integrating cryptocurrency into this process, essentially forcing companies to pay consumers for their data. Basic Attention Token is one of the first examples of this, where internet users are paid for the ads they see while browsing the internet. Users can opt to turn all ads off, but they will not receive any cryptocurrency if they do so. More importantly, in a world with more sophisticated computer hackers, cryptocurrency can be used to store sensitive information such as medical data. In these projects, encrypted data can be stored on a decentralized blockchain, where only the individual has the key to access (decrypt) that data. Using cryptographic proofs, the data can be verified to be accurate without seeing the actual data.

What are the greatest challenges you face and why?

As a cryptocurrency hedge fund, arguably the greatest challenges are negating incorrect viewpoints of the industry, gaining trust that not all things "crypto-related" are fraudulent, and solidifying that this is a powerful new technology class worth investigating.

The crypto market tends to grow exponentially every bull market cycle until something breaks (i.e., bad actors are exposed, fraudulent projects crash, etc.), and this tends to leave a very bad taste in investor's mouths and crushes confidence in the industry. We believe in keeping our strategy “simple” in that we are not chasing these newest fads to try and get rich immediately. Many new cryptocurrency investors rush to the seemingly riskiest things right away hoping to 10x their investment overnight, and then end up losing it all. Fraudulent projects and huge losses on risky bets are much more exciting to read about than safer projects and safer investment strategies, so they dominate the news cycle.

What keeps you up at night?

Honestly, not much!

We prefer taking positions that we hold for at least a couple weeks, as well as holding positions for 12 months or longer, so we are not doing much intraday trading. There are more volatile moments where we monitor the market and may place trades during the night, but it is not common. We like to think that we are seasoned veterans when it comes to trading/investing in this market, so we sleep better these days than we did five or ten years ago!

Regulations – one of the main dangers with investing in cryptocurrencies is the shifting regulatory environment. A court opinion on a cryptocurrency case or a statement by the SEC can send the market up or down in an instant. Fortunately, Bitcoin is under much less scrutiny in the U.S. now that the SEC has deemed it a “non-security commodity.” However, it seems that there are many politicians who wish to over-regulate the industry.

Looking towards the future, quantum computing is also a risk factor, but we are not losing sleep over it right now! Bitcoin has some built-in quantum resistance, in that only addresses that have sent bitcoin are susceptible to quantum attacks. This is why using change addresses are the standard recommendation. Vitalik Buterin, founder of Ethereum, has also recently put forth ideas for protecting Ethereum from quantum attacks.

One thing that is constantly on our minds though is combing the market for opportunities to gain alpha for the betterment of our investors. We are obsessed with creating the best cryptocurrency investment vehicle for our investors, and that mission is always on the forefront of our minds. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.