The Sweet Spot

“Should I Still Give a Damn about Crypto?” – That was the title* of a panel I recently spoke on and is the question some investors are asking after a brutal 2022 for crypto/web3. These investors may have been surprised by my main message during this panel, which was:   

After close to a decade of investing in crypto, I believe there has never been a better time to invest in the space.

Better than 2013? 2016/2017? 2019/2020? Yes, on an ex-ante basis, better than any other time. A confluence of factors makes web3 uniquely attractive at this moment.

Those factors are: 

  • Web3 is a fundamental technological innovation

  • Adoption of this technology is accelerating across many industries

  • Valuations are becoming attractive

Breaking down each of these factors: 

  • Fundamental Technological Innovation: Investors seek to invest in innovative technologies and products. The most innovative technologies do not provide marginal improvements to existing experiences but rather unlock fundamentally new experiences. For example, the internet was a fundamental technology as it unlocked global, open-network information transfer for the first time. Similarly, web3 has enabled true digital ownership and global open-network value transfer for the first time. 

  • Accelerating Adoption: Today, web3 technology has been deployed across many industries and use cases, and these deployments continue to accelerate. This differs from previous crypto hype cycles, such as the 2013 cycle when bitcoin was the only significant crypto-asset and the 2017 cycle when ICO projects published whitepapers but had yet to launch products. During those cycles, crypto-assets gained prominence as investment instruments primarily used by short-term speculators, and to a lesser extent, by forward-thinking investors in diversified portfolios. Today, crypto has firmly established itself as an investable asset class. More significantly, web3 technology is being deployed and achieving significant adoption for non-investment-related use cases. In particular, web3 technology is gaining considerable traction for payments and digital goods. Expanding on these use cases:

    • Investable Asset Class: Despite the momentary apprehension noted above, investors have generally accepted crypto-assets as an investable asset class, and most are allocating to the space. In the 2022 Fidelity survey of 1,052 institutional investors, 58% reported investments in digital assets, and 74% said they planned to invest. In a BONY survey in the second half of 2022, 88% of institutional investor respondents said they plan to move forward with current plans around digital assets despite the market downturn. 

    • Digital Goods for Brands, Tech Platforms, and Game Studios: The widespread adoption of web3 digital goods (NFTs) across various industries has been breathtaking. This includes Reddit opening over 7 million wallets for their users to hold collectible avatars, Nike generating close to $200mm in revenue from NFTs, Facebook & Instagram launching NFT support, the Apple app store and Epic game store both supporting NFT sales, Unity adding 13 crypto integrations to their game development platform, and Starbucks launching their Odyssey NFT-based loyalty program. Amazon is also reportedly on the cusp of launching an NFT marketplace. Notably, the downturn in crypto-asset prices has little impact on brands, tech platforms, and game studios’ utilization of digital goods, as their usage of these items to offer net new customer experiences is not dependent on price appreciation.  

    • Stablecoin Payments: Stablecoins settled close to $8 trillion in on-chain volume in 2022, representing 600%+ growth in 2 years. Meanwhile, Visa, the largest card network in the world, processed $11.6 trillion in 2022, with a 2-year total growth rate of 32%. Based on their respective trajectories, we expect stablecoin on-chain settlement volumes to exceed Visa’s in 2023. Even more notably, on-chain settlement volumes now represent ~13% of ACH volumes and 1% of Fedwire volumes. Stablecoins are eating payments, and they are starting to take a bite out of the world's largest and most important payment systems. This adoption of stablecoins is also not concentrated with just a few prominent players. Instead, it is widespread to smaller users, as demonstrated by around 20 million wallets holding less than $100 in USDT or USDC. 

  • Attractive Valuations: While this significant cross-industry adoption of web3 technology has been accelerating over the last ~3 years, valuations were also significantly inflated during much of that period. That has changed over the previous year, with valuations coming down significantly. Following a ~3,000% increase in the overall crypto market cap this cycle, the aggregate publicly traded crypto market capitalization fell ~75% from peak to trough, roughly in-line with previous cycle drawdowns of ~85% in 2014 and 2018. During this time, private market valuation expectations for venture companies also fell significantly, and anecdotally we have seen 50%-80%+ declines from peak prices for some companies. Valuation expectations for venture rounds have now largely fallen to pre-pandemic / pre-hype cycle levels (for companies/projects at similar development stages at that time).   

Due to the confluence of these three factors, I have never been more excited to be investing in web3. Does this mean it is up only from here? Of course not. Web3 still has a plethora of challenges to overcome. However, I believe we are entering the sweet spot for what has the potential to be the golden age of web3 investing. So yes, you should give a damn about crypto.  

By Peter Johnson, Co-Head of Venture, Brevan Howard Digital

The commentary contained in this document represents the personal views of its authors and does not constitute the formal view of Brevan Howard. It does not constitute investment research and should not be viewed as independent from the trading interests of the Brevan Howard funds. The views expressed in the document are not intended to be and should not be viewed as investment advice. This document does not constitute an invitation, recommendation, solicitation or offer to subscribe for or purchase any securities, investments, products or services, or any investment fund managed by Brevan Howard or any of their affiliates. Unless expressly stated otherwise, the opinions are expressed as at the date published and are subject to change. The authors and Brevan Howard may have taken positions in the assets and companies discussed in the commentary.  No obligation is undertaken to update any information, data or material contained herein.

*Actual title had slightly more colorful language.

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