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- Digital asset ecosystem has attracted significant attention and accelerating investment.
- Increased adoption and new blockchain-enabled applications such as DeFi and NFTs fuel market growth.
- Risk: regulatory rules globally likely to affect every part of ecosystem, impacting growth and valuations.
Digital asset sector too large to ignore; not just bitcoin, so much more
With a $2tn+ market value and 200mn+ users, the digital asset universe is too large to ignore. We believe crypto-based digital assets could form an entirely new asset class. Bitcoin is important with a market value of ~$900bn, but the digital asset ecosystem is so much more: tokens that act like operating systems, decentralized applications (DApps) without middlemen, stablecoins pegged to fiat currencies, central bank digital currencies (CBDCs) to replace national currencies, and non-fungible tokens (NFTs) enabling connections between creators and fans. Venture Capital digital asset/blockchain investments were $17bn+ in 1H/2021, dwarfing last year's $5.5bn. This creates a new generation of companies for digital assets trading, offerings and new applications across industries, including finance, supply chain, gaming and social media.
Welcome to the token economy
Bitcoin was designed as money, but is increasingly viewed as "digital gold." Ethereum created a generalized platform powered by smart contracts, enabling the development of hundreds of applications that could transform finance, insurance, legal, real estate and many other industries. Digital assets that enable applications to be built, like the Apple iPhone did with its App Store, are gaining the most value. Our view is that there could be more opportunity than skeptics expect. In the near future, you may use blockchain technology to unlock your phone; buy a stock, house or fraction of a Ferrari; receive a dividend; borrow, loan or save money; or even pay for gas or pizza.
DApps and NFTs: the most innovation
Decentralized Finance (DeFi) is an ecosystem that allows users to utilize financial products and services, such as lending, borrowing, insurance and trading, without relying on a traditional financial institution. DApps may bring financial services to many of the 1.7bn unbanked globally through a simple smartphone app. NFTs are changing the way creators connect with fans and receive compensation (and Gen Y & Z along with a few boomers are snapping them up). NFT sales were $3bn+ in August, up from $250mn in all of 2020, led by demand from celebrities, corporations and individuals (Beeple's digital artwork NFT sale at Christie's for $69mn was certainly a catalyst, for example).
Risk: regulation coming to the Crypto Wild West
Increased adoption of cryptocurrencies, new blockchain-based applications and stablecoins that could be used as money are drawing attention globally. Some governments, such China's and India's, have banned bitcoin trading. Governments are working to develop policies and, as the SEC said recently, the digital asset industry's future lies "in the public policy framework." CBDCs appear inevitable, but fiat digital assets, such as bitcoin, may be targeted if central banks see risk to the payments system or credit flow disruption. DeFi applications with security-like features may draw SEC attention, likely pressuring near-term usage. Regulatory uncertainty is the largest near-term risk in our view, but regulation may drive increased investor participation over the long term once the "rules of the road" for digital assets are established.