As the New York-based CIO of digital assets at the Forest Road Co., an asset manager with institutional clients, Chris Solarz is an admitted crypto bull. But Mr. Solarz concedes that a number of conditions need to take place before this sector can gain true acceptance among investors.
"There are currently over 300 million crypto users globally, and the three things we need to see before we add the next 300 million users are increased regulatory clarity, more user-friendly front-end interfaces for trading digital assets, and more security," Mr. Solarz said. "The number of hacks and frozen accounts have adversely affected the trust users place in the security of the overall crypto ecosystem, and trust will ultimately be restored through increased security."
Speculation about the future of digital assets comes at a time when investment sentiment regarding this sector has been decidedly bearish. After jumping more than tenfold in market value in a three-year period to an all-time high of over $68,000 last November, bitcoin has since fallen by more than 70%. Even a more diversified crypto play, the actively managed Amplify Transformation Data Sharing ETF, has also fallen by close to 70% since its November high. By contrast, the Invesco QQQ Trust, a proxy for tech stocks, has fallen by 28% from its all-time-high reached in late December.
As prices of digital assets have fallen, the criticism of these investments has accelerated. Once lauded for being relatively uncorrelated to the U.S. stock and bond markets, crypto investments like bitcoin and even stocks like crypto-trading platform Coinbase Global Inc. have become more closely correlated with speculative technology stocks. Even the process by which units of bitcoin are created has come under attack by environmentalists and sustainable investing advocates because of added demand on fossil fuels used in the electricity that powers "mining" efforts.
All these concerns make it easy for most public pension funds to sit on the sidelines — at least for now.
"For pension funds to commit to an asset class, they would need more of a track record of performance and a greater level of assurance about future performance," said Keith Brainard, the Georgetown, Texas-based research director for the National Association of State Retirement Administrators.
Crypto naysayers, however, may be missing an opportunity to gain exposure to technology that transforms the way business and finance is conducted, said Joe Marenda, San Francisco-based partner and global head of digital assets investing at investment consultant Cambridge Associates LLC.
Mr. Marenda has a simple counterargument to the criticism that crypto investing has become highly correlated with the speculative technology stocks.
"Blockchain is a disruptive technology and if you have that view, you never bought into the uncorrelated asset argument in the first place," he said. He also contends that environmental arguments against crypto mining will subside over time as the process becomes more energy efficient, thanks to the increasing use of renewable sources such as wind, solar and hydroelectric power.
Mr. Marenda said most crypto-related investments are best suited for investors that have the patience to watch a new financial-system paradigm play out over the next decade or longer. "Like the internet, this is a transformation that will take many years to come to full fruition," he said. "We're still early in the second inning."