OPPORTUNITIES IN the CRYPTO ECOSYSTEM
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CRYPTOCURRENCY INVESTING
looking beyond cryptocurrencies
Savvy long-term investors willing to look beyond the breathless hype are likely to find enduring investment opportunities around real-world applications of distributed ledger technology. These ventures are likely to generate attractive risk-adjusted returns – even if crypto-mania itself fizzles.
$500 Bn
Annual revenue of the
metaverse in 2021
“
The most powerful applications of blockchain may be unrelated to cryptocurrencies.”
The crypto ecosystem
Cryptocurrencies are part of a broader ecosystem that extends well beyond digital tokens to the underlying blockchains as well as the necessary infrastructure to support mining and storage. It also includes cryptocurrency exchanges and applications built on blockchains such as non-fungible tokens and cross-border payment networks. Additionally, it encompasses the constellation of compliance, risk management and security tools.
Source: PGIM Thematic Research.
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EXPLORE
Bitcoin: Not quite a currency
OPPORTUNITIES IN the
CRYPTO ECOSYSTEM
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Private blockchains & smart contracts
Key blockchain enablers
Security & Fraud Prevention
Tokenization
Private blockchains & smart contracts
Key blockchain enablers
Security & Fraud Prevention
Tokenization
Permissioned blockchains offer efficiencies in the origination, servicing and trading of assets, especially those (like real estate) with many different participants across the value chain and incompatible legacy systems. Private blockchains can be easily scaled because of the centralized authority verifying users and will likely have the largest near-term impact on financial services firms.
When partnered with self-executing smart contracts, distributed ledger technology offers enhanced efficiency in the clearing and settlement of securities. In fact, private blockchains and smart contracts are already handling trades with almost no need for humans to verify counterparties, confirm trade instructions or settle transactions.
The landscape for innovation in blockchain infrastructure is wide open and there is tremendous potential for key enablers to reduce current challenges and barriers, such as:
Given the complicated regulatory environment for cryptocurrencies and concerns raised by decentralized and anonymous transactions, there is a growing field of AML risk assessment and management providing services such as:
Tokenization entails fractionalized ownership of real assets into digital tokens on a distributed ledger. This could substantially reduce frictional costs from transactions and servicing.
long-term investment themes
Considering Bitcoin for an Institutional Portfolio
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CRYPTOCURRENCY INVESTING
*CoinMarketCap, as of May 9, 2022. < www.coinmarketcap.com >
UNDERSTANDING THE CRYPTO CURRENCY ECOSYSTEM
the metaverse
* Carson, Brant, Romanelli, Giulio, Walsh, Patricia and Zhumaev, Askhat, “Blockchain Beyond the Hype: What Is the Strategic Business Value?” McKinsey Digital, June 19, 2018. < https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value >
the metaverse
*Parikh, Harsh, “Institutional Gold!” PGIM Institutional Advisory & Solutions, November 2019. < https://www.pgim.com/white-paper/institutional-gold >
The metaverse is big and will get bigger. The total annual revenue from the metaverse generated today is $500 billion and as large as the "real-world" global sports industry.
Applications in the metaverse may start leading to tangible improvements in real-world industries especially in education, training, healthcare and e-commerce, as well as the VR/AR hardware field. New uses of metaverse platforms are spawning innovative technologies, including holographic displays and speech recognition.
Cryptocurrencies and digital tokens are the currency in the metaverse. This is a world where crypto natives have chosen to adopt digital currencies and tokens as the sole medium of exchange and unit of account to trade NFTs and buy digital assets.
Institutional investors should track new technologies, companies and platforms in the metaverse for three primary reasons:
1.
2.
3.
Lack of clear regulatory, legal and tax guidelines leads to compliance uncertainties.
Further refinement is needed to work across private assets and at an efficient scale under real-world conditions.
Challenges:
For asset owners, it increases liquidity, simplifies transactions and allows more granular portfolio construction.
Shorter and more flexible lock-up periods for investors.
The ability for blockchains to “talk” and transact with each other seamlessly is referred to as interoperability. This innovation could make interoperable smart contracts possible for record and document management.
Layer 2 technologies that enhance performance and scalability on popular platforms like Ethereum.
Software companies that support the development of decentralized applications, or dApps.
1.
2.
3.
Benefits:
Private blockchains & smart contracts
Key blockchain enablers
Security & Fraud Prevention
Tokenization
the metaverse
Store of Value
Medium of Exchange
Unit of Account
SECURITY
Store of Value
Medium of Exchange
Unit of Account
SECURITY
Preserving value, at least over short periods of time, is an important function of currency. Fiat currencies can be eroded over time by price inflation. However, outside of extremely rare hyperinflationary environments, they have been an efficient store of short- and medium-term value. In contrast, the wild price gyrations of many cryptocurrencies make them highly unattractive as a store of value – even in the very short term.
While a growing number of companies accept bitcoin as a payment option, this situation is unlikely to expand to the same degree as fiat currencies. This is due to:
Bitcoin’s maximum transaction speed of 7 transactions per second (TPS) pales in comparison to the speed of conventional payment networks, which average 1,700 TPS.
Bitcoin’s fees have been as high as $50 for a single transaction, making it impractical for everyday, small-scale purchases.
1.
2.
Fiat currencies serve as a common yardstick to measure value across the range of daily economic transactions. Outside of the deep digital realm, however, cryptocurrencies are only rarely used to price products or services. Virtually no business fixes the price of their product in bitcoin and then converts it into fiat currencies.
Security refers to the rigor associated with verifying transactions on the blockchain. The degree of rigor determines the ability of the blockchain to function as expected while defending itself from fraud, cyberattacks, hackers, bugs and other malicious ware.
Crypto exchanges have been hacked repeatedly, but the bitcoin blockchain itself has never been successfully compromissed.
Do Cryptocurrencies Meet the requirements of a currency?
Due diligence and risk assessment for customers
Hacking and fraud prevention solutions
Tools for AML and other risk management
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The tokenization of financial assets has the potential to transform financial services. Tokenization creates an immutable digital representation of a real-world asset, which can then be settled and cleared on a distributed ledger and traded in whole or fractional parts. If most financial and real assets were recorded on a blockchain, it could disrupt virtually all aspects of investing – from clearing and settlement, to how assets are custodied, accounted for and serviced, to even how they are bought and sold.
THE TOKENIZATION OF REAL ESTATE
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