Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by: Luffy, Foresight News
Alpha, defined by Investopedia as “the ability of an investment strategy to outperform the market.” Alpha is rare because the market is highly competitive. To unlock Alpha, you need to know something that the market doesn’t know.
It’s hard. Hedge funds, institutions, and HFT firms have a lot of experience and billions of dollars to invest, and they are the ones you need to beat in your quest for Alpha. Good luck!
That’s why index investing is so popular, but it’s also why most active managers fail to beat the market. Nearly 90% of active managers have underperformed the market over the past decade, according to Standard & Poor’s.
I’m a big believer in index investing. I help manage the world’s largest cryptocurrency index fund and wrote the foreword for Eric Balchunas’ book The Bogle Effect, about Jack Bogle, founder of the Vanguard Group, who is widely considered the “father of index investing.”
But every once in a while I find alpha in the market, and nothing is more exciting than that. And right now is one of those exciting times.
The sound of gunfire that is unique in the world
As readers know, Washington’s attitude toward cryptocurrencies has changed significantly over the past month.
Cryptocurrency has been largely polarized along partisan lines over the past few years, with Republicans generally supportive of cryptocurrencies and large swaths of the Democratic Party hostile.
One piece of evidence of the Democratic Party’s hostility to cryptocurrencies is Senator Elizabeth Warren’s plan to “build an anti-cryptocurrency alliance” announced last March.
But in recent years, cryptocurrencies have been strengthening their political influence, including forming one of the top 10 political action committees in Washington.
Those efforts have paid off. The shift began on May 8, when 21 Democrats in the House voted to repeal SAB 121, a ridiculous rule created by the SEC to prevent large banks from custodying crypto assets. A few days later, 10 Senate Democrats (including Senate Majority Leader Chuck Schumer) joined Republicans in voting to repeal the rule. It was the first aggressive legislative action against cryptocurrencies in U.S. history.
Then, on May 20, a staggering 71 Democrats joined 208 Republicans in voting in favor of FIT21, a sweeping crypto legislation that would grant the crypto-friendly Commodity Futures Trading Commission (CFTC) primary oversight authority over cryptocurrencies.
More critically, the U.S. Securities and Exchange Commission (SEC), led by Democratic appointee Gary Gensler, approved the listing application of an Ethereum spot ETF, something few expected.
To be clear: Cryptocurrency still has a long way to go from a political perspective. On Friday, President Biden vetoed the SAB 121 repeal bill.
But even that is just a minor setback. We have been riding high in crypto for a decade. Finally, the tide is turning.
Why is this Alpha
The reason I think this is alpha is that people don’t care about anything except the bubble in crypto.
I’ve been on the road for the past few weeks attending conferences, and try as I might, this story just doesn’t resonate with people. I talk about the voting results, Warren’s anti-crypto alliance, and the unexpected development of an Ethereum ETF, and people are stunned.
The story is too complicated and the impact is too far-reaching. After all, Washington policy has not really changed. The repeal of SAB 121 was rejected; FIT21 is unlikely to pass the Senate before the election; and the Ethereum ETF has not really been launched.
Although the tide is clearly 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.
U.S. financial advisors manage an estimated $20 trillion in wealth. Every year for the past six years, we’ve asked these advisors to share what’s holding them back from investing more in crypto in their portfolios. Five years in a row, the answer has remained consistent: regulatory uncertainty. In our most recent poll, this was the top issue for 64% of advisors.
Imagine, then, how much of that $20 trillion will go into crypto 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 moves were ultimately halted due to regulatory uncertainty.
If you think BlackRock's foray into cryptocurrencies has had a positive impact on the market, imagine the unstoppable flow that would follow if all of Wall Street embraced cryptocurrencies 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.
