The Future of Crypto Asset Management

Transcript

This is a unique opportunity to give which is given to you to get a glimpse into how Bitcoin Swiss thinks about digital assets investing into crypto assets especially when looking into implications for the asset management. So it's my honor to welcome on stage Dennis Overman, investment strategist from Bitcoin Swiss. Please put your hands together. Dennis, >> thank you. Beautiful. Thank you very much for the kind introduction.

As announced, of course, crypto asset management stemming from investment strategies, but also how to approach markets, how to navigate markets. Uh, Bitcoin itself came now over more than one decade basically from sort of a niche asset always shunted upon by mainstream media to now really mainstream asset. We just had quite a few gentlemen on stage also showcasing structured products on it. So adoption and offering certainly the allocation to crypto is not really the issue anymore or the question of crypto asset management in the future. It's rather how to govern and define the volatility and how to structurally navigate that to understand that zooming out a little bit initially in terms of where is crypto

actually heading uh the majority of the adoption road or rally is still ahead of us but then also basically why can we not really take the framework from tre five from traditional asset management and really one-on-one applied for crypto assets leading of course to us answering how to really navigate and thrive in crypto asset management. In terms of where we are, zooming out of course, what can be compared crypto to and one comparison really strikes quite frequently and that is really the comparison to internet to other exponential technologies and how they were also adopted in the past and what we can see is already while crypto came quite far uh I mean from some crypto punks you might say back in the days really performing and transacting on the

crypto networks to now even some presidents launching the memecoins crypto came definitely a far way in the markets. But comparing it to one of the more recent exponential technologies, namely the internet, we see in terms of user amounts and market penetration, we're actually just at a state of barely the 2000s. Comparing the internet as of today, media, internet being present everywhere, the 2000s where there was no MySpace, no YouTube for example, seems still quite far-fetched and showcases also how far is there still ahead in terms of the rally of the crypto market adoption in general.

That is only one trend. There's also another big secondary order effect taking place in the meantime, and that is certainly big wealth transfers occurring. Currently, anyone in the room, I don't see anyone in the room really older than 60, I believe, but anyone 60 or older is part of the baby boomers in the United States. And that cohort actually makes up more than half of all wealth that's being held currently. Most importantly, however, most of these people in that wealth cohort will retire in the next 20 years. And meaning, of course, that millennials and the younger generations will more than three-fold their wealth by inheritance.

That is quite important because if we look who is actually as of today owning crypto 94% of those holding crypto as of today are younger than 40 years old. So definitely a phenomenon of the younger generations. Looking however at who's going to inherit the wealth especially of the baby boomers over the next two decades only we see if we read that statement in the top crosswise the red part 94% of today's crypto holders will inherit more than 38 38 trillion US in wealth in the next two decades only. So a very big wealth effect and wealth transfer is occurring and that is certainly also occurring in favor of crypto assets.

That trend has not reached too far into Wall Street yet. You don't see it in the source there. But as of the Bank of America's fund manager survey, which they do quite frequently, asking money managers in the United States, where are they allocated, where are they invested, and how much do they allocate, we can see that the average smart money or institutional allocation to crypto assets is only 0.4% of the AUM. Conversely, for example, for gold, we see that that trend is pretty much flipped upside down. It's way stronger. average gold allocation by fund managers in the US 2.4% and we also see the amount that actually did not allocate is way smaller than it is for crypto where for example 2/3 uh or roughly 3/4 uh

still did not allocate to crypto. That is quite striking because if we just model the average traditional portfolio, so anything from money market funds, global equities, global bonds, uh even a little bit of gold potentially, we see that gradually adding that crypto exposure to the portfolio would enhance not only absolute returns, which is quite straightforward, but risk adjusted returns. We also know benefits certainly from increased crypto allocations. So the question is of course how do we go about crypto asset management knowing the facts play out the narratives plays out and also on the performance side we know we should invest into crypto assets. Most importantly this is a very famous chart in the crypto space

actually done by onchain analyst uh Willy Wu and he modeled how does the average crypto asset or you might think the average for equities the average micro cap maybe perform over time versus the market leader which is Bitcoin. And we can see there's of course some fading narratives. There is upside, there's outperformance in a lot of sectors. But over time most of that performance versus Bitcoin actually fades towards zero. Meaning there is strong underperformance. There is strong cyclicality and the adoption narrative for example of the last cycle NFTTS we had DeFi etc. But most of those protocols fail to survive because the innovation pace is very very high. It's very fast and the dynamics simply shift very quickly in the crypto regime.

That matters because it also implies the simple index approach making just S&P 500 or even a top 100 index for crypto assets is somewhat of a futile approach. There will be high turnover. It will tend to underperform the average market because those that see high growth, they're usually not reflected in an index just yet. Furthermore, if we look for example at how topheavy is also the crypto market. But giving a comparison to for example the NASDAQ and the Mac 7 which everyone knows about, we know that for example outside of the top 10, so going slightly beyond the Mac 7 in the NASDAQ in the tech index. We know that only onethird of all market cap is actually situated outside of the top 10, which is quite

topheavy. But in crypto that is even more extreme. meaning 80% of the crypto market is centered just in uh in the top 10 for example and that is excluding Bitcoin most importantly. So if we actually look at anything non- Bitcoin in the crypto market the top heaviness is very strong but if we now look at Bitcoin, Ethereum and the remainder of the top 10 we can say less than 7 and a half% is actually situated outside of those assets. also underpinning of course that index approaches in crypto do not make too much sense and rather potentially a focused approach on a few core assets.

Lastly, what also is very important to sort of separate is how do we go about asset management and traditional assets in equities. How do we measure value? How do we measure overvalued, undervalued? We can see a lot of common denominators PE ratio EPS uh enterprise value to IITA etc to really define and gauge is now an equity overvalued or undervalued that luxury we somewhat have and don't have in crypto assets we have of course onchain metrics meaning 247 we can go about and look at the blockchain look at who's transacting who is buying who is selling and define based on that of

course what is the underlying economic activity And is now a certain crypto asset or bitcoin overvalued or undervalued based on fundamental activity. If we apply that in a framework basically looking at onchain activity looking at certain metrics defining high activity low activity what the end result is and I'm going to go into very granular detail behind this is of course a nice chart where we can see in coherence basically is now risk high is risk low are people transacting on the network or is fundamentally maybe the network too detached from what it should be worth and trading at how does it look behind the scenes. I already mentioned a few things. Uh in

general, of course, we can also measure that not only based on price or adoption, for example, looking at the exponential trend of Bitcoin, but just to pinpoint a few names or a few metrics, right? We could look, for example, at something that's called metal's law, meaning how many users does a network have and how much would a network be worth based on each user. We can look at other scores, market value to realized value. So what is the true liquidity price of Bitcoin that has actually been defined or backed up by actual money flows into Bitcoin? We can look at is a network profitable or nonprofitable. And to give you one example to really pinpoint why this matters and also how it works or that it is actually fairly accurate to look at

these onchain dynamics. If you just look at a normal equilibrium in the market, meaning checking how many of the addresses on Bitcoin are currently holding Bitcoin at a profit versus at a loss, meaning of course, is it becoming unsustainable? Everyone's at a profit or everyone's at a loss. We could, for example, say with one simple onchain metric, once there's equilibrium as a example of an onchain metric, we know for example that uh the the valuation parameters are healthy or not healthy. And taking such onchain metrics from transaction count, activity on the network, aggregating many of these fundamental factors that actually matter for crypto assets and the valuation, we can then pinpoint down to one metric

basically meaning is risk high or is risk low. Are the dynamics of the network supporting the price and the valuations are they not? If we now were to go about a simple rudimentary asset management approach, right? saying when are we actually allocating to the market or divesting from the market and setting certain risk thresholds. We can then apply that and say well how would we scale in or scale out of the market right and you can already see exposure goes up gradually as risk declines we start to reallocate into the market fundamentals and valuation converge closer and closer together. Therefore investments and managing that asset accordingly in terms of higher exposure do make sense.

The portfolio dynamics behind it looks a little bit chaotic, but it's rather simplistic. We have in green the cash and then orange the Bitcoin stack. But just to showcase basically how would you scale in or scale out of a market based on such risk parameters and such dynamics based on onchain activity and the result red versus blue. Of course, we can see very simplistically that overall not only allocating to volatility but also governing the risk and the volatility does make sense over the cycles as comparing for example a spot buy and hold versus a dynamically managed risk and onchain uh approach would outperform the market.

incoherence. That is then of course the end result you get looking at onchain dynamics looking what the underlying activity is in crypto assets and we can for example if you now look at more recent data right Bitcoin is uh definitely in the media in a bad way not as gold I mean the guys prior mentioned it they have a dynamic gold and bitcoin product but here we could for example then say well would it not make sense to shift back to bitcoin as we can say currently based on onchain dynamics on risk dynamics we can observe We are certainly trading already in the lower quartile of risks historically observed. Meaning the onchain dynamics we historically saw are way closer to true fundamental value than they were for example a couple of months just ago.

If you now were to visually represent what for example these onchain dynamics or also the risk parameters derived from that would imply in a visual perspective of where price can be or where price should trade within. We can then also see that these models historically held uh held quite well. Meaning looking of course what the fair value derived based on onchain activity and true network adoption is on average would tell where the bitcoin price is not today maybe not tomorrow but usually on average we would know that the price would get there again. And we can of course play the odds as shown in the portfolio model just a few slides back.

In a nutshell, what are now the implications for an asset manager or even crypto asset managers that are already navigating the cycles? Most importantly, of course, is it's not really possible to navigate or approach crypto markets with a simple passive index approach. That does not work for crypto assets based on the dynamics just shown. Nevertheless, it's also important that the volatility should not be avoided. It should be actively managed. Meaning crypto asset management in that regard is also as I said initially not defined only by having the access or avoiding the access but by actively navigating it with risk frameworks onchain metrics and making sure that uh we really deploy the metrics that define

the crypto cycles natively onchain metrics. Last up, uh, of course what I said, the overarching catalysts are also quite important to not avoid crypto asset management. Meaning, of course, we know there's not only structural adoption from wealth funds, um, government pension funds or any other major crypto or Trefi investor that's recently been allocating into crypto assets. But we also know today's crypto investors, they will be even wealthier in the future, hopefully based on crypto. But predominantly what I showed based on actual wealth transfer or intergenerational wealth transfers happening meaning there will be more wealth in the hands of crypto investors

in the future. Importantly of course we know that crypto does perform well in the portfolio context but therefore it's actually more important to not just sit out that volatility. We recently saw it for example in the market with Bitcoin down roughly 50% again but to really rely on risk models and native models that actually deploy crypto metrics crypto parameters because those help to govern and navigate the crypto cycles and volatility more successful. So in a nutshell as I open this as I already said the future of crypto asset management how to really navigate that it doesn't depend by just allocating or by offering the spot allocations to crypto that is already solved now for a

long time but how to really govern in a consistent framework volatility and the cycles of crypto. Thank you very much.