Original title: "Washington Awakens: This Is What Alpha Looks Like"
Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by: Chris, Techub News
Outside of the cryptocurrency bubble, few seem to be paying attention to Washington’s changing attitude toward cryptocurrencies. That could mean something for Alpha.
Alpha is the rarest commodity in the world.
Investopedia defines Alpha as “the ability of an investment strategy to outperform the market” or its “edge”. Alpha is rare because the market is highly competitive. To get Alpha, you need to know something that the market doesn’t know.
It’s not easy. Hedge funds, institutions, and high-frequency trading firms have deep experience and billions of dollars in resources, and they are the opponents you need to outperform in your search for alpha.
This is why index investing is so popular, and most active managers struggle to outperform the market. According to Standard & Poor's, nearly 90% of active managers have underperformed the market over the past 10 years.
I am a big supporter of index investing. I help manage the world’s largest cryptocurrency index fund and wrote the foreword for Eric Balchunas’ The Bogle Effect, a book about Jack Bogle, founder of the Vanguard Group, who is widely considered the “father of index investing.”
But sometimes, I find that there is alpha in the market, and nothing is more exciting than that. Now is such an exciting time.
Gunfire that can't be heard anywhere else in the world
As readers know, Washington’s attitude toward cryptocurrencies has changed significantly over the past month.
Over the past few years, the topic of cryptocurrency has been politically complicated by partisan differences, with Republicans generally supporting cryptocurrencies and Democrats mostly opposing them.
A clear example is Senator Elizabeth Warren’s plan to “build an anti-cryptocurrency alliance” announced last March, showing the Democratic Party’s hostility towards cryptocurrencies.
However, cryptocurrencies have been gaining political influence in recent years, including forming one of the top 10 political action committees in Washington. These efforts are starting to bear fruit. The shift began on May 8, when 21 Democrats in the House voted in favor of repealing SAB 121, a ridiculous rule created by the SEC that effectively prevents large banks from custodying crypto assets. A few days later, 10 Senate Democrats (including Senate Majority Leader Chuck Schumer) joined Republicans in voting in favor of repealing the bill. This was the first positive legislative action against cryptocurrencies in U.S. history.
Then, on May 20, 71 Democrats joined 208 Republicans in voting in favor of FIT21, a sweeping cryptocurrency legislation that would give the U.S. Commodity Futures Trading Commission (CFTC) primary regulatory authority over cryptocurrencies.
Even more unexpectedly, Democratic-appointed U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler approved the listing application for an Ethereum spot ETF.
To be clear: Cryptocurrency still has a long way to go politically speaking. On Friday, President Biden vetoed a bill to repeal SAB 121, in defiance of his growing bipartisan majorities in both chambers of Congress.
Even so, this is only a minor setback. We have been sailing against the wind in the cryptocurrency space for the past decade, and now the wind is starting to change.
Why is this Alpha?
The reason I think this is Alpha is that people are indifferent to other things besides the cryptocurrency bubble.
I’ve been traveling to conferences over the past few weeks, and try as I might, this story just doesn’t resonate. I’ve talked about the voting results, Warren’s anti-crypto alliance, and the unexpected development of an Ethereum ETF, but people are not moved.
The story is too complicated and the impact is too far-reaching. After all, Washington policy has not really changed yet. The repeal of SAB 121 was rejected; FIT21 is unlikely to pass the Senate before the election; and the Ethereum ETF has not yet been officially launched.
Although the tide is already in its direction, it will take time for the tide to rise. If people understand the impact of Washington’s shift, the cryptocurrency market will reach new all-time highs.
Let me give you an example.
Financial advisors in the U.S. manage an estimated $20 trillion in wealth. Every year for the past six years, we’ve asked these advisors what’s holding them back from adding more cryptocurrency to their portfolios. Five years in a row, the answer has remained consistent: regulatory uncertainty. In our most recent survey, this remains the top issue for 64% of advisors.
Imagine, then, how much of that $20 trillion will flow into the cryptocurrency market when the biggest hurdle is removed.
Take Wall Street, for example. In recent years, some of the largest banks have either given up on cryptocurrencies or cautiously entered the space for the same reasons. For example, Bank of New York, Nasdaq, and State Street have all announced plans to launch cryptocurrency custody services in the past two years, but those initiatives were ultimately shelved due to regulatory uncertainty.
If you think BlackRock's entry into the cryptocurrency space has a positive impact on the market, imagine the unstoppable torrent that would be created if all of Wall Street accepted cryptocurrency as an integral part of the industry.
The market will realize that we are in a new era for cryptocurrencies, which will propel the entire industry to ride the wave and move towards new all-time highs.
