4 CRYPTO INVESTING IMPACTS YOU NEED TO NAVIGATE
‘Beyond-the-basics’ blockchain-driven assets under management strategies to spur financial management firm AUM growth
The proliferation of cryptocurrency investment products continues at a rapid pace, encouraged by burgeoning sector acceptance and adoption—seemingly in spite of this category’s famed volatility. Since the inception of cryptocurrency in 1990, the number of decentralized digital currencies has skyrocketed to more than 12,000—with more than 1,600 listed on major, middle-sized and specialist exchanges.
Today, crypto investment funds reportedly boast a staggering $30.2 billion collective total Assets Under Management (AUM), with international digital asset managers now holding $19.3 billion worth of Bitcoin and around $7 billion in Ethereum assets. While the fund manager market continues to lean on Bitcoin and Ethereum to drive sector stability, other coin types are capturing the minds, hearts and wallets of diversification-minded investors—individuals, businesses and governments, alike. This as the professional asset management community increasingly turns to lesser-known crypto options in search of sustainable DeFi opportunities that will resonate with both traditional and progressive investor sensibilities.
Given AUM represents the overall market value of investments overseen by a fund manager on behalf of their clients, it’s key for investors to understand the daily fluctuation nuances of this metric as it pertains valuation, flow, price and more. This kind of knowledge can fortify the investor mindset and resolve to stay the course in tumultuous sectors, in particular. This is why understanding AUM dynamics is especially important for more turbulent alternative investments like cryptocurrencies.
According to Devon Drew, CIMA, Founder and CEO of DFD Partners—a data driven distribution platform with ambitions to parlay crypto and other alternative investment strategies to accelerate diverse and smaller fund manager AUM by $1 trillion by 2030: “ Alternative asset managers gaining a more in-depth understanding of crypto-sector AUM impacts can spur both short term and sustained individual and collective portfolio growth. There are a number of ‘beyond-the-basics’ AUM strategies that can help spur this alternative asset manager growth. This is especially critical since AUM is often a key consideration for firm fee calculations, with some using a fixed percentage factor tied directly thereto.”
Here are Drew’s expert insights on four areas he feels are especially impactful:
Patent Trends
As asset managers and other financial industry professionals attempt to educate themselves on crypto dynamics, as well as that for the underlying blockchain technology, those “in the know” are leaning on the many-use cases for insights and inspiration. In 2016, there were just three blockchain patents—a number that was nearing 10,000, according to one 2022 report, and the applications just keep coming. IBM is reported to leads the pack with 345 blockchain patent applications and with both Bank of America and Capital One Services among the top 10. As more banking and finance companies substantiate crypto and blockchain use cases, category adoption will continue to escalate ... boding decidedly well for crypto VC fund AUM growth. Uncovering and leveraging patent trends can also encourage maximized “first mover” advantage—a competitive edge that can prove mission critical for a developing crypto business and those who invest in them.
Macro Sentiment
The macro sentiment for crypto is arguably at its lowest point since 2018. All too many crypto-driven projects and smaller blockchain-oriented asset managers have run out of capital and marketing budgets have dried up in kind, causing many to close shop. But, as the old Warren Buffet saying goes, “... be greedy when those are fearful.” That philosophy might be prudent for those with a mid-to-long term mindset and can financially and emotionally weather the short-term storms. Amid the sector strife, now could be a very attractive entry point for investing in crypto funds. Institutions have already started providing access to crypto investment options, as evidenced by the partnership between BlackRock and Coinbase. Asset managers should still remain mindful of crypto sentiment indicators and keep close tabs, so portfolio allocations can be throttled in kind.
Emerging Tech
The top trending emerging tech that will help attract future investments in crypto is Blockchain-as-a-Service ( BaaS). Companies like Microsoft and Amazon have already implemented BaaS, which will act as a third party cloud hosting service enabling even smaller companies entities with limited IT resources to more easily create digital products using blockchain fundamentals. TrustRadius.com points out that, “Similar to software-as-a-service, blockchain-as-a-service lets businesses get applications up and running with minimal hassle. This allows higher agility and quicker blockchain adoption.”
Inflation Impacts
Similar to gold, which is often regarded as an “alternative currency,” crypto was similarly thought to be an inflation hedge. Results throughout 2022 have proved that assumption to be incorrect as crypto got crushed along with all other high-risk assets. On the flip side, with the Consumer Price Index (CPI) at a 40-year high and inflation still sky high, investors are increasingly seeking “out-of-the-box” ways to drive risk adjusted returns that outpace inflation. Given the depths that the crypto market has fallen of late, and will likely continue to do so amid macroeconomic concerns, crypto investment funds can capitalize on the pricing opportunity to create well-diversified portfolios to add stability and serve as a foil against inflation when it’s predominantly caused by factors like monetary expansion. In fact, amid the release of the Federal Reserve’s July meeting minutes citing inflation as still "unacceptably high" and indicating it would continue to raise interest rates to stem inflation, prices for both Bitcoin and Ethereum dropped 2.4% and 2%, respectively, for that day.
Drew certainly has front-line perspective on how to drive AUM, given his own impressive track record in financial services. This includes becoming one of the Vanguard Group's most successful executives in their financial advisor services business, having raised more than $20 billion from wealth managers, raising assets in Vanguard's ETF and active mutual fund categories. During his earlier tenure at American Century Investments and Alger, he raised over $2 billion from institutional and intermediary investors. Prior to that, at JP Morgan Chase and Merrill Lynch, he managed the financial well-being of his clients and received exposure to traditional investment products, including alternatives such as private equity, hedge and real estate funds.
Now as the Founder and CEO of DFD Partners, the company’s SaaS platform is allowing smaller asset management firms to effectively scale by leveraging data, automation and machine learning tools that allow them to more effectively compete—both with larger firms and in the global marketplace at large. In many cases, the managers who are part of this platform identify as diverse in gender, background asset type and generation.
The management of crypto assets is distinct from other forms of financial management because these are digital assets that are tokenized via a blockchain and must be tracked, bought and sold based on real-time data to ensure successful portfolio performance. While cryptocurrency remains volatile and isn’t appropriate for every investor, the class does offer diversification and other wealth building and protection benefits. A truth that’s driving the fund management community to take on DeFi in droves.
Sources:
https://www.financemagnates.com/cryptocurrency/news/global-crypto-aum-drops-to-30-billion
https://www.trustradius.com/blockchain-as-a-service-baas
https://www.investopedia.com/terms/s/sentimentindicator.asp
https://www.jdsupra.com/legalnews/top-holders-of-blockchain-patents-3642403/
https://www.federalreserve.gov/monetarypolicy/files/monetary20220727a1.pdf
