Digital Assets: The Future of Alternative Investments
By Nicole Civitello
When I was studying to become a Chartered Alternative Investment Analyst, I remember making flashcards to help memorize the range of assets that fell under the “alternative investment” category. Real estate, commodities, collectibles, private equity, private debt, structured products. From rare art to venture capital, each had its own complexities, its own risks and returns.
At the time, I knew I wanted to work with hedge funds, where everything was still so early and dynamic, becoming a newly regulated space and moving from an early stage of participation by mostly wealthy individuals to what it is today. Little did I know then that alternative investments would come to define my career. Nor could I (or anyone) anticipated the emergence of a new class of alternative investments, which would not only see trillions of dollars in trading volume, but would modernize our financial system with once unimaginable improvements and efficiencies. If I had had that kind of foresight, I would have created one more memory card: digital assets. (For emphasis, it would be underlined in large and bold Sharpie.)
A new alternative
The most common form of digital asset is cryptocurrency. Anchorage Digital, where I currently work, helps institutions expand their investment portfolios to include cryptocurrencies like Bitcoin, Ethereum, and Litecoin, to name a few. From sovereign wealth funds and university endowments to family offices and foundations, we’re seeing some of the world’s most risk-aware investors adding crypto to their holdings due to the outsized opportunities in this emerging asset class. . It is clear that institutions see the durability of crypto and want to have a stake in the digital future.
Last month, Anchorage Digital, which made history last year as the first federally chartered digital asset bank in the United States, further bolstered this new class of alternative investments by announcing its membership in AIMA, the Alternative Investment Management Association. Throughout my career, I have seen the “alternative investment” category evolve over time. But the emergence of digital assets has moved at a pace that even crypto insiders could not have predicted – and industry groups like AIMA are helping institutional investors stay informed.
Historically, these assets shared a number of static qualities: they were not regulated by the SEC, could not be easily sold or cashed in (illiquid), and their value had little correlation with traditional assets or the performance of financial markets. . But whether these traits apply perfectly to crypto remains to be seen. Many regulators have started regulating these assets or sparked debate by suggesting that at least some forms of crypto should fall under their jurisdictions. Some forms of crypto, namely stablecoins, are remarkably liquid. And there is a (seemingly endless) attempt in the analyst community to correlate the value of bitcoin with Somethingwhether it’s S&P performance or the price of gold.
But the reality is that, like technology itself, the financial and regulatory landscapes are changing rapidly. That’s why, to help add new clarity to the space, Anchorage Digital and AIMA worked together to create the group’s first-ever digital asset custody guide, which was just released this week.
Digital assets are new, and so is the way we store them, especially for large institutions, where security is absolutely paramount. At Anchorage, we use a combination of robust controls and technologies to create an impenetrable firewall between our customers’ digital assets and outside interference. To help imagine what that looks like: it’s comparable to the safeguards used to protect US nuclear codes.
But I strongly believe that being a “qualified custodian” of cryptocurrency should mean more than a cutting edge line of defense. In order to establish a basis of trust between institutional investors, being a qualified the guardian must also indicate that you are a regulated guardian. This is not self-serving bias; it is best for the future of digital assets, the crypto industry as a whole, and the investors we serve.
The increasingly alternative future
Going forward, “digital assets” (the asset class) and “crypto” (the digital asset we know today) will become less and less interchangeable. 2021 has seen the rise of NFTs, or non-fungible tokens; Anchorage made history when we served as custodians for Visa when the company purchased a CryptoPunk. This trend continues into 2022, with almost $7 billion in trading volume across crypto markets in January of this year alone, breaking records.
And the most exciting thing about the emerging ecosystem of digital assets is that we don’t know what new alternative investments are still waiting. From real estate sales in the metaverse to unique digital identities and beyond, the future of digital assets – and alternative investments as a whole – is fueled by innovation and brimming with potential.
It’s not just about scribbling another memory card; it’s rewriting the textbook of alternative investments as we know it. And I, for one, can’t wait to see what tomorrow has in store for us.
Nicholas Civitello is relationship manager at Anchorage Digital, home to the first federally chartered digital asset bank in the USA.