Those concerned after Bitcoin and many altcoins lost more than 50% of their value in the late spring and early summer months have their eyes on the wrong bird, said Jahon Jamali, chief marketing officer for Sarson Funds, a crypto asset manager and educational resource for financial advisors.
“I don’t think you can look at the cryptocurrency space in terms of what is happening now after so much price rise, because what we’re seeing independent of price is a continued, massive growth of the network,” said Jamali. “That is ultimately what digital assets are. They are a network.”
More Than Meets the Eye
Cryptocurrencies can be valued based on the size of the network, said Jamali, not on the independent price action for tokens in the marketplace.
Like the often-tenuous connection between price, earnings and book value among stocks, the market price of tokens like Bitcoin do not tell the entire story.
“They aren’t a stock,” he said. “What we’re witnessing is more like the growth of the internet, or the expansion of telecommunications. A stock independent of stock splits, is a fixed amount of ownership in a company. There’s a cap, a fixed amount of people can be participants. The fixed amount of people who can be participants in a Bitcoin network are the entire earth. It’s a coefficient of the number of people there are.”
As networks grow, they become more valuable and more efficient simultaneously, said Jamali, using the example of the telephone.
The world’s first telephone had no value, Jamali said, because there were no other phones for it to connect to. It was also likely very expensive to make. The value of telephones increased as more people adopted the technology.
“Similarly, the value of the network underlying Bitcoin goes up at an exponential rate with every new node and connection,” he said. “The value of the network is proportional to the square of participants, that is called Metcalf’s law. So, if I add two phones to the network, its value increases by a factor of four. If I add three phones, it’s value increased by a factor of nine. This is why you see social media platforms with such high valuations, the value is within the community and network. And that’s how it is with crypto, the value is really in the community and the network, not so much the independent price action.”
The current run of Bitcoin and many altcoins over the past four months fell into a pattern of increasing network value with decreasing price action, said Jamali.
That’s partially due to a run of difficult headlines in the cryptocurrency space, not the least of which was China’s decision to crack down on cryptocurrency mining and banking.
At the same time, media scrutiny has increased, said Jamali, as critics accused Bitcoin as being bad for the environment—a charge that is no longer as true now as it was in the past.
Despite a brief dip below the crucial $30,000 mark, Jamali said that Bitcoin prices, along with many prominent altcoins, have been fairly resilient.
“Cryptocurrencies have absorbed these various punches,” he said. “They absorbed China’s crackdown on Bitcoin mining and regulatory efforts in several other countries. Malaysia, for example, conducted a dramatic government crackdown and took a steamroller to a bunch of Bitcoin miners and made it difficult for their citizens to access Bitcoin.”
Cryptocurrencies’ ability to survive a run of bad market news shows that they are beginning to mature as an asset class, Jamali said.
Jamali also believes cryptocurrencies and digital assets are about to get another big boost due to the entry of large institutions into the cryptocurrency space. This boost could exponentially swell the size and stability of their networks, further enriching their value.
“It was announced that BNY Mellon is making a push into the cryptospace, earlier in the month they made an agreement with Grayscale to handle accounting and reporting for Grayscale,” said Jamali. “While the cryptocurrency space would welcome additional clarity, firms like Digital Currency Group and Grayscale have seized the opportunity with their understanding of existing regulations to create products that complement those rules and regulations. That’s why we’ve seen the foundational success around groups like them.”
In fact, Jamali believes that firms like Gemini and Grayscale are finding success where others have failed because they are able to offer institutions a compliant path to cryptocurrency adoption
Here Come The Advisors
But it’s not just institutions that are moving into cryptocurrencies.
Jamali referenced a survey of financial advisors sponsored by the Financial Planning Association, the Journal of Financial Planning and Onramp Investing.
In 2021, 49% of the advisors in the survey reported that clients were inquiring about investing in cryptocurrencies, said Jamali, up from 17% in 2020.
“On top of that the percentage of advisors that expect to increase their use of cryptocurrencies in the next 12 months is now over 25%,” he said. “It was close to zero in 2020.”
But Bitcoin and other crypto tokens are likely to remain volatile investments for some time to come, so advisors need to be careful when recommending cryptocurrencies to clients.
Jamali said that an allocation to cryptocurrency must be made in reasonable proportion to other asset classes within a client portfolio, with consideration for the client’s goals and risk tolerance. Jamali and Sarson Funds believe that advisors need to learn cryptocurrencies for this reason. No one is better able to responsibly recommend this asset class to the end investor.
In the meantime, clients are going to invest in cryptocurrencies, said Jamali, and many will find a place for the asset class within their retirement savings via self-directed IRAs from firms like Kingdom Trust and Alto IRA.
Advisors, on the other hand, are just now starting to get access to the asset class itself as more custodians, like BNY Mellon, begin to move into the space.
“I don’t think we’re there yet with advisor technology, but we’re getting there,” said Jamali. “It’s important to keep an eye on how Fidelity and State Street are starting to build out framework to support digital asset trading. The more progress they show, the closer we’ll get to having more institutional access.”
That would seem to play right into Sarson Funds’ hands.
“What I think is still missing, what is becoming apparent to me, is that there is a monumental increasing thirst and demand for education on Wall Street and among financial advisors,” said Jamali. “This is very good timing for us. We’ve spent the last three years building an educational foundation designed to help advisors answer all of these questions.”