The Next Frontiers

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Widely scoffed at before, Bitcoin and the greater crypto ecosystem recently surpassed a market capitalization of two trillion dollars making up considerable fractions of the currency and precious metal markets. Even former skeptical traditional financiers and central bankers have conceded some of these points while offering their own critiques as the market has gotten to the point these assets can no longer be ignored.

Crypto has successfully sunk its young teeth into the precious metals and foreign exchange markets but the truth is, the usefulness of crypto-assets stretches past the market for currencies, commodity stores of value, and payments. Traditional investors have wealth tied up in precious metals and government currencies but most of their wealth is tied up in real estate, bonds, and equity. With healthy crypto services emerging and maturing, proof of stake gaining legitimacy, and DAOs earning income through highly transparent on-chain cash flows, traditional investors will find more and more reasons to store their wealth and earn yield in crypto-assets.

Over the last decade, Bitcoin and the greater cryptocurrency industry went from 0 to a formidable fraction of the currency and precious metals market. And in the decade to come, crypto-based assets could make up a respectable portion of all global assets.

Real Estate

Real estate is the world’s largest asset class and can often make up the largest part of someone’s portfolio. At the end of 2020 global real estate, which includes residential real estate and commercial real estate, was valued at 280 trillion USD. Real estate is a necessary and highly useful asset class that a crypto-asset cannot fully replace, however, a sizable portion of the value parked in real estate is not there due to necessity but rather is there to store value and produce yield. In essence, real estate has a monetary premium that exceeds its inherent usefulness that can be competed for. Real estate for personal use will undoubtedly be valued by almost everyone for reasons beyond yield but the portions of the residential real estate market and commercial real estate market have pockets of value that could flow out of real estate and into crypto assets.

Owning real estate includes costly general upkeep as well as tax costs that eat away at yield while also lacking the liquidity that other assets can offer. Crypto-assets, in comparison, have no upkeep, have global liquid markets that are always open, and have no analogous property tax for merely holding. And now with the maturation of crypto institutions and protocols, holders of crypto-assets can earn yield by “renting” out their holdings to these services and protocols turning crypto-assets into productive assets.

With the logic of commercial real estate valuation coming under stress from the digitization of a lot of white-collar work, residential valuations hitting global all-time highs, and crypto-assets becoming institutionalized we shouldn’t be surprised if some of the more risk-taking real estate investors, make small allocations into crypto-assets. If just 1% of the value held up in real estate found its way into crypto-assets that would be 2.8 trillion USD rolling into crypto-assets. 

And in the not too distant future, we could see real estate ownership itself become tokenized. Projects like Aspencoin show a possible future where investors who were once shut out of the property market can own equity in commercial property and gain use access of the property. In crypto, users and owners overlap heavily and tokenization allows other industries like real estate to construct tokens that straddle a few different categories simultaneously.

Bonds

Fixed income is the next largest asset class with a market capitalization of nearly 253 trillion USD, with 87 trillion USD worth of government bonds and 40 trillion USD worth of corporate bonds. About 18 trillion of the 87 trillion government bonds are negative-yielding bonds, much of the rest barely yields above inflation, and higher yielding household debt carries substantially more default risk than the rest.

The vast majority of bond market trading takes place between large institutional investors and state-sanctioned brokers in over-the-counter markets. These markets are nearly impossible for the average investor to access and lack the transparency and efficiency institutional crypto investors are already accustomed to and institutional investors have yet to experience.

With the spectre of increasing inflation on the horizon and interest rates on bonds at all-time lows, we shouldn’t be surprised if a portion of those assets gets rolled into more institutionalized crypto products that might offer some yield or even seek out some of the high yield seen on crypto-assets like bitcoin, ethereum, and stablecoins in the emergent DeFi ecosystem.

“Personally, I’d rather have Bitcoin than a bond”

Ray Dalio, CIO of Bridgewater Associates

And with crypto debt markets maturing like Compound & Aave, fixed fate lending protocols emerging like Notional & Horizon, and new tranched debt products like Saffron Finance launching, debt investors will have a growing number of options to seek out transparent yield that will preserve and even compound their capital.

Just 1% of the wealth stored in global bond markets migrating over to crypto-assets would add an additional 2.53 trillion USD worth of fresh capital to the crypto ecosystem. 

Equity

Global stock markets currently have a total market capitalization of close to ~90 trillion USD. Warren Buffett described the stock market capitalization-to-GDP ratio as “the best single measure of where valuations stand at any given moment.” As of February 2021, the stock market capitalization to global GDP ratio is measured at 228%, higher than even the peak of the dot-com bubble in early 2000. This suggests that equity investors are paying more and more for less and less potential earnings that the underlying economy can produce.

Modern equity investing isn’t that far off from what is available in crypto markets today. Many of the most valuable companies don’t return earnings to investors and some aren’t profitable. So, investors allocating a portion of this asset class to high growth, speculative, non-productive crypto-assets is not that far of a jump from what many equity investors are already doing. In addition, many crypto custodians and emerging protocols offer yield on assets like bitcoin and many crypto-assets include some form of staking which is financially comparable to holding publicly traded equity that pays a regular dividend. When staking a crypto-asset like Tezos (XTZ), the underlying capital floats against fiat and stakers earn a yield on their holdings. Lenders of crypto-assets and holders of a staked position in a crypto network like Tezos or, Ethereum when it implements staking, can earn capital appreciation and yield much like they do with a successful dividend-paying stock. And lastly, there are a growing number of applications like MakerDao, Badger DAO, Index Coop, and Yearn finance on Ethereum that earn on-chain cash flows, producing income for the token holders of the application.

Instead of financial institutions with a CEO, a board of directors, and public equity holders crypto-networks have financial applications that operate with no formal executive, no board, and no headquarters. What we have are global groups of developers, users, and token holders who coordinate to create, manage, improve, and use crypto-native financial applications. The governance tokens of these protocols are eligible to vote on proposals to change these applications and distribute fees much like equity holders of public companies can vote in shareholder meetings and are eligible to earn dividends.

With interest on crypto assets offered by crypto-banks, proof of stake protocols gaining legitimacy, and on-chain DAOs showing early signs of profitability equity holders will find plenty of reasons to allocate some of their portfolio out of historically expensive equity and into an emerging asset class that has only recently been valued in the trillions of dollars. If just 1% of the wealth held in traditional equities flowed into crypto-assets, that would amount to an additional 900 billion USD windfall for the crypto-market.

Coda

The vast majority of global wealth is stored in real estate, bonds, and equities within the traditional system. Investors rely on many counter-parties including governments, as well as legacy legal and financial institutions to work effectively, efficiently, and truthfully. Compared to crypto-assets, traditional asset returns are paltry, the transparency is lacking, access is limited, and self-custody is often out of the question. 

Attracting just 1% of the collective value locked in global real estate, bonds, and equity markets brings approximately ~6.23 trillion USD into crypto markets. This flow of wealth into crypto-networks would have multiplicative effects on valuations past the raw amount of wealth entering the market. The subsequent increase in valuations wouldn’t increase 1:1 with the amount of wealth pouring in. If we see 6 trillion USD worth of capital flows into the crypto ecosystem we should expect the total market capitalization to increase by more than 6 trillion USD. 

The next frontiers are very much with-in our line of sight. Assuming only a conservative fraction of that wealth flows into the crypto ecosystem over the next decade, crypto-assets are poised to be valued collectively in the double digit trillions. And from there, triple digit trillions will be in our line of sight.

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