Blockchain: From institutionalization to mass-institutionalization

Allocation preferences

Understanding Blockchain & Digital Assets

The Blockchain & Digital Assets strategy provides exposure to listed companies related to the blockchain ecosystem, allowing investors to capitalize on the transformative growth of blockchain technology. The investment universe includes crypto miners and validators, crypto exchanges, specialized hardware providers, and financial institutions bridging traditional and digital finance.

We focus on companies whose revenue and earnings depend directly or indirectly on the price evolution of digital assets. As a result, the strategy exhibits a high correlation to Bitcoin (0.7 in 1-year correlation) while maintaining a low correlation to traditional indices (0.5 versus the MSCI ACWI).

Macro environment and positioning evolution

2024 was a pivotal year for the blockchain ecosystem. The SEC's approval of Bitcoin and Ethereum ETFs legitimized cryptocurrencies as a mainstream asset class, driving institutional adoption. While Bitcoin benefited from robust inflows, Ethereum underperformed expectations, highlighting a perception gap among U.S. investors. On the macroeconomic front, the Federal Reserve's liquidity expansion policy provided further tailwinds for digital assets.

The convergence of a new asset class, monetary easing, and Trump’s election propelled Bitcoin to new highs. In response to these shifts, our strategy was dynamically adjusted. MicroStrategy ($MSTR), which employs a leveraged Bitcoin acquisition strategy, remained our top position throughout 2024. We also increased our allocation to crypto exchanges as trading volumes – and, by extension, revenue – historically rise during cryptocurrency rallies.

Conversely, our exposure to Bitcoin miners remained steady. After an exceptional 2023, during which many miners narrowly escaped bankruptcy, 2024 proved more challenging. The combination of Bitcoin's halving and capital-intensive hardware upgrades, often funded through shareholder dilution, created headwinds for the sector. Some miners decided to diversify their revenue streams by offering their infrastructure and cheap access to electricity to AI data centers. While this strategy helps stabilize earnings and mitigate volatility, it introduces execution risks and limits the upside potential in the event of a prolonged Bitcoin rally. 

Hot topics

Regulatory developments

With the most pro-crypto Congress in U.S. history, the regulatory landscape is set to encourage further institutionalization. Trump, beyond his personal interests in the crypto world, wants the United States to be the “crypto capital of the planet.” The SEC's “regulation-by-enforcement” approach will likely be replaced by a more constructive stance. Federal-level "right-to-mine" policies and stablecoin standards will likely be adopted swiftly.

While discussions around a strategic Bitcoin reserve (akin to gold reserves) will continue, sustained inflows into digital assets are anticipated. As regulations clarify, the industry is set to transition from the “institutionalization phase” to the “mass-institutionalization phase.” Bitcoin ETFs have accumulated >$32bn in net new money this year. This remains a drop in the ocean, if we compare the net flows to the retirement assets in the United States ($40tn).

Ethereum developments

We remain convinced that Ethereum should play an important role in tomorrow’s internet infrastructure, where users will have better control over their data. The next upgrade, named Pectra, is expected to reduce transaction fees and improve the user experience when interacting with smart contract applications. This upgrade is scheduled for the first half of 2025. It could catalyze a new app creation and adoption wave, benefiting the entire ecosystem.

What about Bitcoin’s 4-year cycle?

Bitcoin and its peers have historically exhibited a four-year cycle characterized by phases of accumulation, growth, bubble, and crash (the so-called crypto winter). If history serves as a guide, the next crash might occur in 2025, although we have not seen all signs of market excess (like a significant price appreciation of altcoins) yet.

Will this time be different? The increasing institutionalization of digital assets will likely dampen volatility and reduce the magnitude of drawdowns. Institutional investors are expected to “buy the dip,” stabilizing prices. At the same time, the massive rally phases seen in Bitcoin’s early years (+9300% between mid-2012 and mid-2013) are unlikely to reoccur.

That said, we cannot rule out profit-taking by investors who successfully navigated the rallies of 2023 and 2024. In such a scenario, companies less sensitive to cryptocurrency price movements are expected to outperform. 

Catalysts

• Supportive U.S. regulations. The most pro-crypto Congress in history is poised to introduce constructive regulatory measures, catalyzing institutional adoption and driving sustained inflows into the digital asset ecosystem.

• Killer app. While the blockchain ecosystem has matured, it still lacks a globally transformative application used by billions. User experience is still not intuitive. Could Ethereum's upcoming upgrade pave the way for such a revolutionary app, unlocking blockchain's full potential?

• Approval of additional ETFs. New securitized solutions should be offered to U.S. institutional investors. Filings for ETFs on Solana, Ripple, and Litecoin have already been sent to the SEC. Will the next SEC chair, expected to be more crypto-friendly, approve them?

Risks

• The 4-year Bitcoin cycle. History does not repeat itself, but it often rhymes. If past trends are any indication, the second half of 2025 could usher in another crypto winter characterized by a sharp correction in digital asset valuations. 

• Miner’s profitability. In the race to computing power, miners must now balance operational costs, self-financing activities, and shareholders’ returns. Risks of tariffs on imported chips could also increase future capex.

• Fed policy. While Fed officials anticipate additional rate cuts in 2025, resurgent inflation could challenge this outlook, forcing the Fed to pivot. Such a scenario would put risky assets, including cryptocurrencies, under pressure.