Our Research Analyst Michael Cyprys joins Wealth
Management Strategist Denny Galindo to discuss how and why
cryptocurrencies are transitioning from niche speculation to
portfolio staples.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Cyprys: Welcome to Thoughts on the
Market. I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and
Exchanges for Morgan Stanley Research.
Denny Galindo: And I'm Denny Galindo, Investment
Strategist for Morgan Stanley Wealth Management.
Michael Cyprys: Today we break down the forces
making crypto more accessible and what this shift means for
investors everywhere.
It's Tuesday, November 11th at 10am in New York.
We've seen cryptocurrencies move from the fringes of finance to
being considered a legitimate part of mainstream asset
allocation. Financial platforms, especially those serving
institutional clients, are starting to integrate crypto more than
ever.
Denny, you've written extensively about the crypto market for
some time now among your many jobs here at Morgan Stanley. So,
from your perspective in wealth management, what are you hearing
from retail clients about their growing interest in crypto?
Denny Galindo: Yeah, we actually started writing
about crypto back in 2017. We had our first explainer deck, and
we started writing extensive educational reports in 2021. So,
we've covered it for a while.
Advisors who dabble in crypto typically had this one client. He
asked a lot of questions about when they could do more. We also
had some clients who were curious, maybe their neighbor made a
lot of money, bought a new boat and they were like wondering, you
know, what is this Bitcoin thing?
Now, this year we've seen a sea change. I think it was the
election really started it; the Genius Act, and some of the
legislation also kind of added to it. Almost all this interest is
really on Bitcoin only, although we also have gotten a decent
amount of interest about stablecoins and how those might impact
things. But it's really just the beginning and I think it's an
area that's; it's not going to go away.
Mike, on the institutional side, what trends are you seeing among
asset managers and brokers in terms of crypto adoption
integration?
Michael Cyprys: So, we've seen a big move into
the ETF space as large money managers make crypto easier to
access for both retail and institutional investors. Now this
comes on the back of the SEC approving the first spot Bitcoin and
Ethereum ETFs back in 2024. And since then, we've seen firms from
BlackRock to Fidelity, Franklin, Invesco, and many others,
including crypto native firms having launched spot Bitcoin ETFs
and spot Ethereum ETFs. And these steps in the minds of many
investors have legitimized crypto as an investible asset class.
Most recently, we've seen the SEC adopt generic ETF listing
standards for crypto ETFs that can make it easier to accelerate
ETF launches in reduced regulatory frictions. And today the
crypto ETF space is about $200 billion of assets under management
and saw inflows of over [$]40 billion last year, over [$]45
billion so far this year – despite some of the near-term
volatility. And most of the asset class today is in Bitcoin,
single token ETFs, with BlackRock and Fidelity managing the
largest ETFs in the space.
Speaking of products, what types of crypto are retail investors
most curious about? And why do those particular ones make
sense for their portfolios?
Denny Galindo: Yeah, I think you hit the nail on
the head. The most popular products are really the Bitcoin
products. We as a firm allowed solicitation in Bitcoin ETPs more
than a year ago in brokerage accounts. We just expanded them to
allow them in Advisory in October. So, we're still early days
here. There really hasn't been that much interest in the other
crypto products.
Now when people think about this, there's three buckets here.
There are some people that think of it like digital gold. And
they're worried about inflation. They're worried about government
deficits. And that's kind of the angle that they're approaching
crypto from. A second group think of it like a venture capital,
like a disruptive innovation in tech that's going after this big
addressable market. And, you know, hopefully the penetration will
rise in the future. And then the third bucket is really thinking
[of it] out it as a diversifier. So, they're saying, ‘Hey, this
thing is volatile. It doesn't match stocks, bonds, other assets.
And so, I kind of want to use it for diversification.’
Now, Mike, when you have these discussions with institutional
clients, how do they view the risk and potential of these
different cryptocurrencies?
Michael Cyprys: What's interesting with the
crypto space is adoption started on the retail side with
institutions now slowly beginning to explore allocations. And
that's the opposite of what we've seen historically with
institutions leaning in ahead of retail in areas, whether it's
commodities or private markets. But it's still early days.
On the institutional side, we're starting to see some pensions,
endowments, foundations begin to make some small allocations to
Bitcoin as a long-term inflation hedge. But keep in mind,
institutions tend to make investments in the context of strategic
asset allocations, often with a broader macro framework.
Denny, you've written quite a bit about the four-year crypto
cycle. Could you explain what that is and where you think we are
in the current crypto cycle?
Denny Galindo: Yeah, if you look at the data,
you see a pretty clear trend of a four-year cycle. So, there's
three up years and one down year, and it's been like clockwork,
since Bitcoin was invented.
Now when you see something like that, you always try to explain
like: why is this happening? So, there's two kind of dominant
explanations that we've seen. So, one's macro, one's micro. Now
the macro version for crypto is really the M2 cycle. So, we see
that M2 to that global M2 money supply has kind of
accelerated and decelerated in four-year cycles, and Bitcoin
tends to really match that cycle. It tends to accelerate when
M2's accelerating and it tends to decline when it's decelerating
or declining.
But there's also this bottoms-up way of looking at it, and
commodities are really the place we go to for that analysis. So,
a lot of commodities, you know, could be coffee, could be oil –
if something disrupts supply, you tend to get the shortage, you
get the price moving up.
Then you get commodity speculators piling in, adding leverage.
And it'll just kind of go parabolic. At some point something pops
the bubble, usually more supply, and then you get like a great
depression. You get like an 80 percent draw down. All the
leverage comes out and the whole thing crashes. So crypto has
also followed that.
Now, we break the four-year cycle into four seasons: spring,
summer, fall, and winter. And each season has a different
characteristic about which parts of the market work, which don't
work, what things look like. We are in the fall season right now.
And that tends to last about a year. We wrote a note last year on
this. Fall is the time for harvest. So, it's the time you want to
take your gains.
But the debate is, you know, how long will this fall last? When
will the next winter start? Or maybe this pattern won't even hold
in the future. And so, this is the big debate in the crypto
circles these days.
And Mike, given the volatility, given the great depressions we
talked about in Bitcoin with these, you know, 70-80 percent
drawdowns, how do you see it fitting into institutional
portfolios compared to other cryptocurrencies?
Michael Cyprys: Compared to other
cryptocurrencies, Bitcoin is still viewed as the flagship asset
within the crypto space – just given higher adoption, greater
liquidity, the sheer market value. It has longer history and
better regulatory clarity as compared to other tokens. But given
the volatility as you mentioned, and the early days nature of
cryptocurrencies, adoption is still quite nascent amongst
institutional investors.
Some institutional investors view Bitcoin as digital gold or
macro hedge against inflation and monetary debasement. It's also
sometimes viewed as a low correlation diversifier within
multi-asset portfolios. But even that's also been a debate in the
marketplace too.
As we look forward from here, crypto adoption within
institutional portfolios could potentially expand as regulatory
clarity establishes a clear framework for digital assets, right?
We had the Genius Act recently that focused on stablecoins. Next
up is market structure. There's a bill working its way through
Congress.
We've also had developments on the ETF side that lower[s]
barriers for institutions to gain exposure there. Not only is it
more accessible within traditional portfolios, but the ETF fits
nicely into day-to-day workflow.
So, bottom line is institutional views on Bitcoin and crypto are
evolving, and how firms view Bitcoin – we think will depend upon
the institution's objectives, their risk tolerance and portfolio
context. And keep in mind that institutional allocations don't
turn on a dime. They tend to be slower moving.
Denny, do retail clients take a similar approach or are they more
likely to take bigger bets?
Denny Galindo: Our clients struggle with this
question. And so, we get a lot of questions like, ‘Okay, I don't
want to miss this. I'm a little nervous about it. What allocation
should I use here?’ And so, we go back to our three, kind of,
typical investors when we try to answer this question. We really
try and help people figure out where is equal weight.
So, we wrote a note in February called “Are you Underweight
Bitcoin?” And we have three different answers depending on how
you're thinking of it. And, you know, there's a big debate.
There's no clear answer. And that's not really where we want our
clients. We want them to be smaller where they can have some
exposure if they want it. Not everyone wants it, but if you do
want it, you can have it. And it won't really dominate the
volatility of the portfolio.
Now, on another note, Mike, are you seeing legacy platforms start
to offer crypto as well?
Michael Cyprys: So crypto ETFs are generally
available in self-directed brokerage accounts across the industry
today. Schwab, for example, commented that their customers hold
$25 billion in crypto ETFs, which is about, call it 20 percent
share of the ETF space. But access to these crypto ETFs is a bit
more restricted within the Advisor-led channel. But we're
starting to see that broaden out for ETFs and eventually might
see model portfolios with allocations toward crypto ETFs.
But when you look at spot crypto trading, though, that generally
remains out of reach of most legacy platforms. The key hurdle for
that has been regulatory clarity and with a more crypto friendly
administration that is changing here.
So, Schwab, for example, acknowledged that they have the
regulatory clarity needed and they're working towards launching
their spot crypto trading platform in the first half of next
year.
On that topic, Denny, how do you view the merits of holding
crypto directly versus through an exchange-traded product like
ETFs?
Denny Galindo: Yeah, I mean, our clients are
mostly not day trading this product and kind of moving it back
and forth.
So, the ETPs have been a pretty good answer for them. The one
issue is liquidity. And so, we're not used to thinking of this
in; the U.S. equity markets are the most liquid markets. But in
crypto, the crypto markets, the spot markets are actually more
liquid than the equity markets.
So, you get a lot of liquidity even after hours, even 24x7. And
as other markets around the world kind of take the lead. But most
of our investors aren't treating it that way. They're not day
trading it, and they're really keeping it more like that digital
gold allocation. And so, they just need to adjust the position
size, you know, once a month, once a year maybe; just kind of buy
and hold.
But I wonder, you know, as more people get more comfortable, it
could become more important in the future. So, it's an open
question, but for now, the ETPs have been a pretty good answer
here.
Michael Cyprys: Fascinating space. Denny, thanks
so much for taking the time to talk.
Denny Galindo: It was great speaking with you,
Mike.
Michael Cyprys: And thanks for listening. If you
enjoy Thoughts on the Market, please leave us a review wherever
you listen and share the podcast with a friend or colleague
today.
No investment recommendation is made with respect to any of the
ETFs referenced herein. Investors should not rely on the
information included in making investment decisions with respect
to those funds.
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