Author: 0XKYLE

Compiled by: Deep Tide TechFlow

After Howard Marks' concept of "Sea Change," I couldn't help but reflect on the interesting phenomenon of cognitive dissonance that seems prevalent in the minds of investors. As Marks wisely pointed out, "Self-deception allows people to hold on to their views long after information contrary to their beliefs has arrived."

Over the past six months, a persistent unease has taken root in my thoughts, particularly regarding the future of cryptocurrency. I have immersed myself in crypto Twitter, surrounded by optimism—people who are compelled by the nature of their work or environment to remain loyal to the industry. This situation distorts our perceptions and imbues the information we consume daily with inherent biases.

Take Arthur Hayes, for example. He has written many great articles about the macroeconomic situation, but his narrative inevitably always culminates in reverence for the great "Satoshi." Why not? A person who once founded a crypto exchange and now runs a family office fund investing in "everything decentralized" must hold a bullish view on crypto, right?

Herein lies the dissonance. The restless feeling in my chest prompts me to step back and ask myself: What is different this time?

Howard Marks calls this a Sea Change. Today, as we move toward an uncertain geopolitical future and a more turbulent economic environment, I believe it is prudent—even necessary—to reassess our beliefs about the crypto market.

As investors, and more importantly, as people who have staked a significant part of their future on crypto, we must continuously question what we believe. We cannot and should not be complacent, thinking that "the next halving will drive us forward."

Thus, this article serves as my notes of contemplation on how the future of crypto will shape up.

Let’s start with some simple but highly probable facts.

1. It is likely that the future is a non-zero interest rate era

Consistent with Howard Marks' insightful observations in "Sea Change," the likelihood of the Federal Reserve returning to a zero interest rate era seems to be diminishing. For over 40 years, we have been beneficiaries of declining interest rates. The argument for maintaining a "neutral rate" appears more reasonable, one that neither stimulates nor restricts the economy. This stance would provide some flexibility for the Fed's future economic stimulus measures, which also seems to be a concept it is eager to retain.

The future path may involve a shift in the current interest rate status quo. The question is the degree of decline—I lean more towards a trajectory of 0-2% rather than a range of 2-4%.

2. Therefore, bull markets like those of 2020-2021 will not be repeated

This is important because, as investors, we must adjust our expectations.

The years 2020-21 were not just a phenomenon of zero interest rates; they were a combination of various factors: inflows of venture capital, the emergence of billion-dollar exchanges, algorithmic stablecoins, and highly leveraged hedge funds.

Every corner you turned, every café you entered—people were talking about crypto. Even if we see a return to zero interest rates, a bull market of the same scale and speed seems unlikely.

3. Returns will diminish, but crypto's selling point will still be its superior performance

This is not to say we won't experience bull markets. Adjusting expectations is a prudent approach. Expected returns will be more concentrated and less sustainable.

This does not negate the inherent appeal of the cryptocurrency market. The overall market capitalization of the crypto industry is still 23 times lower than that of Apple. With considerable room for growth, its value proposition should not be underestimated—a whole industry whose technological applications are still in their infancy, priced only at the level of a FAANG company.

Moreover, Bitcoin's performance so far this year has outpaced almost all other assets, making it hard for investors to ignore its argument. This trend is prompting asset managers to seriously consider introducing clients to Bitcoin investments under the premise of regulatory compliance.

Digital assets have emerged as a brand new asset class, bearing similarities to commodities in the 1990s—both face significant skepticism regarding their investment applicability.

4. Traditional finance wants to join the game

Thus, I believe the increasing adoption of digital assets in portfolios has become the norm. In a high-interest-rate environment, the benchmark becomes the 2-year Treasury yield, and the crypto market offers excess returns above other assets with manageable risks—as shown above, a 4% Bitcoin portfolio weight would not substantially increase the maximum drawdown relative to other assets, while its annualized return approaches double.

Specifically, a report from Coinshare shows:

• A smaller weight of Bitcoin relative to other alternative assets has a huge positive impact on the Sharpe ratio;

• A smaller weight of Bitcoin relative to other alternative assets also has a significant positive impact on diversification;

Any crypto native has long been exposed to the idea that "traditional finance is coming" and has been skeptical of it. After all, this phrase is repeated in every cycle.

But I truly believe that the coming decade will be one of gradual and sustained capital inflow into traditional financial institutions as regulatory frameworks and supporting infrastructures begin to take shape. Indeed, we can see that investors in a survey cited regulation as the biggest obstacle to purchasing digital assets.

I think the green light they are waiting for is the approval of a Bitcoin ETF—a catalyst that depends not only on its submission but also on the reputation of the proposing entity. The involvement of financial giants like BlackRock in such approvals is significant. It signals an increased confidence of traditional financial institutions in the digital asset space.

5. With the arrival of TradFi, the narrative shifts

Bitcoin has had two main narratives so far:

1. In its growth phase, Bitcoin behaves like a tech stock;

2. In its maturity phase, Bitcoin's performance resembles that of a store of value.

I believe that in the coming years, as the turbulent economic climate unfolds, the second narrative will dominate. As Bitcoin matures, this also suits it well—the reduction in volatility adds weight to its claim as a "store of value."

Narratives play a pivotal role in the crypto space, often driven by price dynamics. However, the evolving environment requires openness and adaptability to change.

6. Many tokens will trend towards their fundamental value

This will be a consequence of Bitcoin and the entire industry maturing as an asset class. As indicated in the aforementioned survey, many of them show less interest in altcoins.

The involvement of traditional finance will bring about more typical valuation models from the traditional financial world. This shift may prompt a reassessment of the fundamental value of digital assets, potentially revealing that many governance structures are indeed worthless.

Other less reliable ideas

The five facts I listed constitute what I believe will be solid foundational pillars as digital assets enter the next decade. It is from these foundations that I derive the following predictions—these predictions are clearly more prone to error, but I will include them nonetheless.

The future is permissionless and private

Large financial institutions have a strong need for private blockchains to meet their clients' needs and may not be able to rely too heavily on existing blockchains, where a small error could lead to millions of dollars in value loss.

De-Fi emerges as a distinct "asset class" different from the set of assets allowed by traditional digital assets

But I do believe that the likelihood of De-Fi being unregulated is low—traditional finance is simply prohibited from doing business with them.

Smaller countries will adopt Bitcoin in their sovereign wealth funds

The narrative of Bitcoin as a store of value is a self-fulfilling prophecy, and I wouldn't be surprised if certain countries start buying Bitcoin as a substitute for the dollar/gold.

RWA tokenization, AI x crypto, energy x blockchain will become core

I believe these three narratives have the potential to become the biggest narratives in the next decade. In particular, the energy market has seen some interesting innovations in carbon credits (like KlimaDAO), and I think there is innovative potential in this area.

Validators as a source of yield

I think this is most likely for Ethereum, where clients looking for digital asset investments with yield can purchase an "LSD-style" portfolio, priced in ETH, while providing APY on staked ETH.

This summarizes my view of the next decade. The coming decade will be a critical moment for digital assets to take center stage, and I look forward to seeing my thoughts come to fruition.