It really has been an evolution and is growing towards a multi blockchain future.  In the very early days of digital assets, participants often had no choice but to use non-custodial solutions to hold their bitcoin.  First generation non-custodial wallet technology really had little to no safeguards for the end-user, had limited functionality and were more tailored for a sophisticated audience. For example, if you accidentally sent bitcoin to a non-bitcoin  address, there was no warning and funds could be lost forever.

The rapid growth and adoption of cryptocurrencies quickly prompted the emergence of custodial wallet solutions, which provided more convenient access to and storage of cryptocurrencies—customers don’t need to manage their private keys as this is managed for them by a third party.   These wallets were typically provided by unregulated cryptocurrency exchanges like Mt. Gox—which provided simpler storage and transfer of bitcoin but left customers vulnerable to any security gaps with the third party.  There are many stories in which customers lost their assets due to hacking or other scandals with these early custodial wallets.  It’s no surprise that even today, most enthusiasts still prefer non-custodial wallet solutions, following the famous saying of “not your keys, not your coins”.

But the industry keeps improving itself.  Today there are fully regulated cryptocurrency exchanges and custodial wallet solutions, which have the appropriate safeguards, audits, and blockchain forensics tools to ensure that client funds are safe. Fund managers such as 3iQ rely on these providers to house the digital assets inside their ETFs and funds.

One can make the assumption that during the early days of crypto, a large percentage base of the investors were savvy individuals whereas now you are starting to see more institutional based investment – why is this?

Couple reasons for this:

The pandemic has played a part as it has  been disrupting the global economy since 2020. We saw inflation rates rise in both the developed economies and the developing countries. Given the after-effects of federal government stimulus and ultra-low interest rate environments, investors have been  seeking alternative stores-of-value to hedge against inflation and  economic policies that sparked wariness of local currencies. And this is where bitcoin, ether and other cryptoassets have shown real value. 

Additionally, 2021 was a year filled with massive infrastructure developments for the digital asset space. More and more service providers including traditional asset managers and banks entered the digital world to offer custodial services, investment products, and trading venues.

So, the proliferation of more credible service providers in the crypto space coupled with the global economic factors were key catalysts for institutional interest and investment in  in cryptoassets.

The big bang came with the regulated custodial exchanges.  This drove many of the original investment strategies we see today.  In addition, robust price discovery mechanisms– which allow for transparent setting of the spot price of crypto assets– have been enabled by growth in both custodial and non-custodial solutions over the last several years.

 However, this space continues to evolve as we see market participants are increasingly favouring decentralized alternatives in search of higher yield and permissionless, more transparent access to blockchain technology. In addition, robust price discovery mechanisms have been enabled by growth in both custodial and non-custodial solutions over the last several years.  This means that investment strategies will continue to diversify across more DeFi-centred projects, especially as the DeFi ecosystem continues to mature and live up to its potential to outperform traditional finance.

We are excited about the next opportunities in the digital asset space.  We are currently entering Web 3.0, where blockchain and digital assets drive the next phase of network evolution and create new business models and innovative applications based on the “Internet of Value”.  Going back to the theme of evolution– unlike the “Read-Only” Web 1.0 era and the “Read-Write” Web 2.0 era,  ownership is a key feature of Web 3.0.  This  means network participants have full ownership of their content, data, and digital assets. Value is created as an incentive to the participants and property rights are well preserved by distributed ledgers.

The traditional financial markets will gradually evolve to converge with this digital asset economy. The blockchain operating system, decentralized apps (Dapps), decentralized finance (DeFi) protocols, token-to-token exchanges, decentralized content delivery networks, blockchain bridges, and stablecoins will form seven verticals of the web 3.0 based digital asset economy.

Specific to tokens… outside of bitcoin and ether, we believe there may be fast developments in some altcoins like  Avalanche, Algorand, Solana, and Cardano in 2022.

NFTs are certainly in a unique spot for digital asset investors due to their independent supply and demand economies. Most notably, investors are keen on NFTs issued on the Bitcoin and Ethereum networks, as these blockchains feature the immutability and finality that investors expect, especially if they are looking to invest over long time horizons. Many investors choose NFTs from certain development teams, such as Larva Labs (CryptoPunks), Yuga Labs (Bored Ape Yacht Club), and Ponderware (Mooncats) as they in some way have pioneered a technological breakthrough, or achieved critical mass due to their projects’ design or utility, whether that be in the real world, or in the Metaverse.

We see great opportunity for digital investments in the Middle East. There already exist economic free zones in the various countries in the region, which act as a catalyst for growth and innovation – these regions are well positioned to spur the growth of digital assets. The governments in the region are positively inclined to grow digital assets, the most recent example is the announcement in December by the Dubai World Trade Centre (DWTC) that it plans to become a comprehensive zone and regulator of cryptocurrencies, products, operators and exchanges. The DWTC initiative builds on the creation in late 2021 by the government of the city of Dubai of EmCash, Dubai’s first official cryptocurrency.

The Middle East is full of great energy around digital asset initiatives. The launch of The Bitcoin Fund (QBTC) on Nasdaq Dubai was greeted with tremendous fanfare in the region and there has been a growing recognition of our fund since.  It’s seen as a viable option to owning bitcoin, in a regulated and listed form. We continue to explore possibilities of expanding our presence in the region

Looking into the future… I think there are a few key developments. As I mentioned earlier, the crypto asset world will continue to evolve and diversify beyond bitcoin and ether.  Key drivers of this will be interoperability between different digital assets and blockchains over the next decade. We should see interesting developments related to bridging technology—the ability to connect blockchains and send crypto currency from one chain to another–which may employ both custodial and non-custodial counterparties and applicable smart contracts to satisfy digital asset collateral over the internet.

We believe that positive, constructive regulation from world governments will help enable a multi-blockchain future for everyone. There are many positive developments already happening between the Bitcoin and Ethereum networks.  And with this change will come more opportunities for further evolution of the cryptoasset space and investments based on cryptoassets.

Author 3IQ

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