- Over the next year, James Malcolm believes that regulation will play a huge role in cryptos.
- He says that investors will become increasingly exposed to cryptos, willingly or unwillingly.
- Malcolm also believes that relative value analysis between coins will become a deciding factor.
After years of frosty wariness towards cryptocurrencies, many institutional and retail investors alike are now dipping their toes into the asset class..
According to the Pew Research Center, 16% of US adults have personally traded or invested in a cryptocurrency. The number of global crypto users reached over 200 million in July, doubling since January, reported Crypto.com.
“One can now assert with considerable confidence that private digital currencies are here to stay and constitute a nascent asset class,” James Malcolm, a top currency strategist at UBS, penned in a markets outlook report published on November 8.
From the perspective of asset management, crypto has the potential to diversify an investor’s portfolio by offering new ways to unlock alpha and beta, Malcolm told Insider in a recent interview. However, even with mainstream adoption, he still believes that cryptocurrencies will be a niche, alternative asset class that will have a fairly light weighting in portfolios.
In his investment research report, Malcolm highlighted the three main trends that he believes will shape the overall crypto market.
The double-edged sword of regulation
Regulation has been a heated topic in the crypto industry lately, but Malcolm believes that investors should be optimistic because, ultimately, "resolution is likely to be positive, paving the way for widespread adoption and broader participation."
Not all players in the space are happy about the idea of increased scrutiny. While US authorities have finally begun to create a regulatory framework, Malcolm says that people aren't paying sufficient attention at the moment.
"That framework is pretty clear and it's somewhat unappealing to a lot of players in the space, and so it's being downplayed at the moment," he elaborated. "But it's pretty clear that stable coin providers, crypto wallets, DeFi exchanges, and so on, according to most of the US regulators, will be regulated more like traditional financial market participants."
On the flip side, Malcolm believes that regulation is the key to legitimizing cryptos as a mainstream asset class and facilitating conventional participation in the market, especially from institutional investors.
Crypto's influence will swell
"Whether you like crypto or you don't like crypto, whether you want to be involved or you don't want to be involved, it's actually going to be very difficult to avoid," Malcolm told Insider. He points to the recent IPO of trading app Robinhood as an example of what he means.
Besides stock trading, Malcolm says that Robinhood also generates a lot of revenue through crypto transactions. And as the company's stock becomes part of various MSCI indexes, investors will indirectly begin taking on increasingly more crypto exposure, willingly or unwillingly.
Malcolm says that the number of crypto IPOs will only increase as players keep rising in the market. Besides crypto-focused firms, he also thinks that established firms will begin exposing themselves to cryptocurrencies.
"We're at the stage where a lot of mainstream companies are becoming more interested in crypto and are going to be doing more things in crypto," he said, citing Meta — formerly known as Facebook — as an example. The company recently announced a name change in line with its future focused expansion into the metaverse.
Crypto's growing influence, he says, will force traditional investment managers to figure out how the asset class fits into existing mandates.
Fundamentals will matter
Finally, Malcolm says that as the market matures, relative value analysis between coins will become increasingly important as the deciding factor for investing.
The big theme that blockchain focused on this year was scaling, or processing more transactions quickly and cheaply. Malcolm predicts that "the next big thing" in 2022 will be the idea of blockchain interoperability, which will begin to "break down the remarkably linear relationship that exists between blockchain activity and token prices."
Because blockchain interoperability heightens blockchain substitutability, Malcolm says that it should also "allow more direct comparisons between different coins rather than each coin trading on its own story," shifting some focus to differing factors like coin supply and ownership structures.
Currently, Malcolm says that there's about 13,000 different coins in the market, estimating bitcoin's market share at 45% and ethereum's at 20%. This heavy domination by a few coins, he predicts, will slowly disappear as blockchains become more interoperable. When this happens, the crypto market will flip from being driven by demand-side elements to supply-side elements.
"At the moment, the game in crypto is primarily just about whether it goes up or it goes down, and whether you can guess on the back of news the coins that go up more than others," he said. "In the future, this should be much more about relative value — playing alpha within the space, as opposed to just the beta of what's going up and down with the overall market."