How will the cryptocurrency sea change in the next decade?

What transformations lie ahead for the world of cryptocurrency in the next decade?

Written by: 0XKYLE

Compiled by: Shenchao TechFlow

After Howard Marks introduced the concept of “Sea Change,” I had to contemplate an interesting cognitive dissonance phenomenon that seems to be prevalent in the minds of investors. As Marks wisely pointed out, “self-deception keeps people holding onto their views long after the evidence contradicting them has arrived.”

Over the past six months, a persistent unease has taken root in my mind, particularly regarding the future of cryptocurrency. I’ve been immersed in Crypto Twitter, caught up in the optimism – being someone who is forced to remain loyal to the industry due to work or the environment. This situation distorts our perception and imbues the information we consume daily with bias.

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Take Arthur Hayes, for example. He has written many great articles about the macroeconomic conditions, but his narrative inevitably climaxes with reverence for the great “Satoshi Nakamoto.” Why not, right? Someone who founded a cryptocurrency exchange and now manages a family office fund investing in “decentralization of everything” must hold a bullish view on crypto, right?

That’s where the dissonance lies. The restlessness in my chest prompted me to take a step back and ask myself: What’s different this time?

Howard Marks calls this a Sea Change. Today, as we move towards an uncertain geopolitical future and a more turbulent economic environment, I believe it is prudent – even necessary – to reevaluate our beliefs about the crypto market.

As investors, and more importantly, as people who have a significant stake in the future of crypto, we must constantly question what we believe. We cannot and should not be complacent, thinking that “the next halving will give us momentum.”

Therefore, this article serves as my thinking notes on how the future of crypto may unfold.

Let’s start with some simple but high-probability facts.

1. It is highly likely that the future will be a non-zero interest rate era

In line with Howard Marks’ insightful observation in the “Sea Change,” the possibility of the Federal Reserve returning to a zero interest rate era seems increasingly slim. For over 40 years, we have been beneficiaries of declining interest rates. The argument for maintaining “neutral rates” appears more reasonable, neither stimulating nor constraining the economy. This stance will provide the Federal Reserve with some flexibility in its future economic stimulus measures, a concept it seems eager to retain.

The future path may involve a shift from the current interest rate status quo. The question lies in the extent of the decline – I lean towards a trajectory of 0-2% rather than the range of 2-4%.

2. Therefore, a bull market like 2020-2021 will not be repeated

This point is important because as investors, we must adjust our expectations.

2020-21 was not just a phenomenon of zero interest rates; it was a combination of multiple factors: the influx of venture capital, the emergence of billion-dollar exchanges, algorithmic stablecoins, and high-leverage hedge funds.

Every corner you turn, every café you enter – people are talking about crypto. Even if we see a return to zero interest rates, a bull market of equal scale and speed seems unlikely.

3. Returns will decrease, but the selling point of crypto will still be its outstanding performance

This does not mean that we won’t experience a bull market. Adjusting expectations is a prudent approach. Expected returns will be more concentrated and less sustained.

This does not negate the inherent appeal of the cryptocurrency market. The overall market capitalization of the crypto industry is still 23 times lower than that of Apple. With substantial room for growth, its value proposition should not be underestimated – an entire industry whose technological applications are still in their early stages, priced at only the equivalent of a FAANG company.

Furthermore, with Bitcoin’s performance outperforming almost all other assets so far this year, it is difficult for investors to ignore its argument. This trend has prompted asset managers to seriously consider introducing clients to the Bitcoin investment field under the premise of regulatory compliance.

Digital assets have emerged as a new asset class, similar to commodities in the 1990s – both face significant skepticism in terms of investment suitability.

4. Traditional finance wants to be part of this game

Therefore, I believe that it has become the norm for portfolios to increasingly adopt digital assets. In a high-interest rate environment, the benchmark becomes the 2-year government bond yield, and the crypto market offers higher excess returns and manageable risks compared to other assets – as shown, a 4% Bitcoin portfolio allocation does not substantially increase the maximum drawdown relative to other assets, while its annualized returns are close to double.

Specifically, Coinshare’s report shows:

• Bitcoin’s smaller weight compared to other alternative assets has a significant positive impact on the Sharpe ratio;
• Bitcoin’s smaller weight compared to other alternative assets also has a significant positive impact on diversification;

Anyone who has been involved in cryptocurrencies locally for a long time has come across the idea of “traditional finance is coming” and has expressed skepticism about it. After all, this phrase is repeated in every cycle.

But I truly believe that the coming decade will be a gradual and sustained inflow of capital into traditional financial institutions as regulatory frameworks and supporting infrastructure begin to take shape. Indeed, we can see that investors in a survey cited regulation as the biggest obstacle to investing in digital assets.

I believe the green light they are waiting for is the approval of a Bitcoin ETF – a catalyst that depends not only on its submission but also on the reputation of the proposing entity. The involvement of financial giants like Blackstone in such approvals is significant. It signals the growing confidence of traditional financial institutions in the digital asset space.

5. With the advent of TradFi, the narrative shifts

Bitcoin has had two major narratives so far:

1. In its growth phase, Bitcoin was like a tech stock;
2. In its mature phase, Bitcoin’s performance resembled a store of value.

I believe in the coming years, as the turbulent economic climate unfolds, the second narrative will prevail. With Bitcoin’s maturity, this is also fitting – the decrease in volatility adds weight to the claim of it being a “store of value.”

Narratives play a pivotal role in the crypto space and are often driven by price dynamics. However, an evolving environment requires openness and adaptability to change.

6. Many tokens will gravitate towards their intrinsic value

This will be a consequence of Bitcoin’s maturity as an asset class and the entire industry. As the aforementioned survey shows, many of them are not very interested in altcoins.

The involvement of traditional finance will bring about more typical valuation models from the traditional financial world. This shift may prompt a reassessment of the intrinsic value of digital assets and may reveal that many governance tokens are indeed worthless.

Other Unreliable Ideas

The 5 facts I listed form the solid foundation and cornerstone for what I believe will be the next decade’s digital assets. It is from these foundations that I derive the following predictions – predictions that are obviously more prone to error, but I still include them.

The Future is Permissionless and Private

Large financial institutions are in great need of private blockchains to meet their clients’ needs and cannot rely too much on existing blockchains, where even a small mistake can result in millions of dollars in value loss.

De-Fi emerging as a “category” of assets that is different from traditional digital assets

But I do believe that De-Fi is unlikely to be unregulated – but traditional finance is simply prohibited from doing business with them.

Smaller nations adopting Bitcoin in sovereign wealth funds

Bitcoin as a narrative of store of value is a self-fulfilling prophecy, and I wouldn’t be surprised if certain countries start buying Bitcoin as a substitute for the US dollar/gold.

RWA tokenization, AI x Crypto, Energy x Blockchain becoming core

I believe these three narratives have the potential to become the biggest narratives of the next decade. Specifically, the energy market has seen some interesting innovations in terms of carbon credits (such as KlimaDAO), and I believe there is innovation potential in this area.

Validators as a source of income

I believe this is most likely for Ethereum, where customers who want to gain income from digital asset investments can purchase an “LSD-style” product portfolio denominated in ETH, while providing ETH as collateral with APY.

That wraps up my summary of the next decade. The next ten years will be a pivotal moment for digital assets to take center stage, and I look forward to seeing my ideas come to fruition one by one.

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