- Ben McMillan is the investing chief at the $650 million crypto asset manager IDX Digital Assets.
- He thinks the current crypto volatility, largely driven by regulation, could grow this year.
- He shares 4 altcoins that are gaining more institutional interest and could stand out in 2022.
The sharp drawdowns were hardly surprising to Ben McMillan, who had been sounding the alarm on rising volatility in the crypto and traditional markets for the better part of last year.
“The one thing I do have high conviction is that volatility is here to stay,” McMillan, the chief investment officer of the $650 million IDX Digital Assets, said in an interview last week.
McMillan still thinks that the structural bull case for the two largest cryptocurrencies is still intact. In his view, the advancement of bitcoin’s lightning network and activation of its taproot upgrade in 2021 helped accelerate its use case beyond just a store of value or inflation-hedging instrument. Fueled by the explosion in lucrative decentralized-finance and nonfungible token activities on its network, ethereum has grown exponentially and could deliver even better performance after its transition to proof of stake from proof of work.
“Of course, one would expect that to translate into higher prices. But again, the important caveat is it’s very likely going to come with extremely high volatility,” he said. “So I wouldn’t be the least bit surprised if bitcoin hit $100,000 this year. I also wouldn’t be the least bit surprised if it came with another 50% drawdown at some point during the year.”
Fed and regulation weigh on crypto
The surging volatility in financial markets worldwide comes at a time when global central banks prepare to wind down their pandemic-era stimulus programs.
In the US, the Federal Reserve has signaled that it is ready to shrink its almost $9 trillion bond portfolio in addition to potentially raising interest rates at a faster-than-expected pace. Meanwhile, Goldman Sachs’ Chief Economist Jan Hatzius said that he now expects the central bank to hike rates four times this year and start reducing its balance sheet in July or even earlier.
Historically, a full percentage-point rate increase might not be of significance to traditional bitcoin ‘hodlers‘ who buy and hold the digital currency in their hard wallets. Yet as bitcoin continues to gain mainstream adoption, it has attracted users and investors who behave differently from the early adopters, which in turn has influenced how bitcoin trades as an asset.
“These new entrants into bitcoin are financial advisors, wealth managers, or fiduciaries. They are constructing portfolios with digital-asset exposure in it,” McMillan said. “So they are much more sensitive to how bitcoin plays with other asset classes, what its sensitivity is to things like interest rates, macroeconomic risks, and inflation expectations.”
The continued mainstream recognition of bitcoin and crypto overall also means that the industry is now on regulators’ radar. In November, President Joe Biden’s working group on financial markets released a report asking Congress to regulate stablecoins, including who can issue them. In December, executives from Coinbase, FTX, Circle, and other crypto firms, who have been calling for a comprehensive and clear regulatory framework, testified before Congress.
“I think a key theme in 2022 is going to be what does that regulation look like, what are the regulatory agencies that have purviews, and where does it end,” McMillan said. “And I think that’s part of what we are seeing reflected in the trading activity right now, the bitcoin market is starting to digest that.”
4 altcoins gaining institutional interest
IDX Digital Assets primarily works with institutional investors and other asset managers, who have increasingly started to distinguish among crypto protocols instead of focusing solely on bitcoin and ethereum, McMillan said.
“The investor market is a lot more sophisticated than it was just a couple of years ago as it relates to digital assets,” he said. “I think we are going to continue to see an even further decoupling of the different parts of the digital-asset spectrum.”
Specifically, he noted that institutional investors have been demonstrating a growing interest in and knowledge of decentralized-finance applications, which provide borrowing, lending, trading, insurance, and asset-management services that are automated via software.
One of the DeFi protocols that have seen increasing institutional interest is the decentralized exchange bancor (BNT), which rose 91% in the past year but fell 14% over the past two weeks, according to CoinGecko pricing.
“We’ve liked them because, from day one, they proved to be very institutional. The way they constructed their DAO was very thoughtful,” he said, using the acronym for decentralized autonomous organization. “The protocol itself is very impressive, and they have big upgrades coming in Q1.”
McMillan added that bancor’s version 3 is a catalyst that could turbocharge the token’s performance this year because the upgrades are set to improve upon many features that it pioneered like single-sided staking without impermanent loss.
Another one is chainlink (LINK), which provides oracle services for other DeFi platforms, meaning it sends real-world data to blockchain networks. The token, which jumped 57% over the past year, is up 49% and 27% in the past month and week, respectively, CoinGecko data shows.
“That’s another one that looks like it’s been relatively undervalued versus some of these other protocols in 2021,” McMillan said. “I wouldn’t be surprised to see that one perform well this year just based purely on fundamentals.”
Smaller protocols are also starting to attract institutional attention. For instance, the proof-of-stake blockchain near (NEAR) has been garnering both developers’ and big investors’ interest. The token soared 746% in the past year and rose 49% over the last month, according to CoinGecko data.
As the demand for lower transaction fees and faster speeds on the ethereum network continues to surge, McMillan thinks that layer-two scaling solutions could get a lot more eyeballs in 2022. One such protocol flying under the radar is loopring (LRC), whose token surged 280% in the past year but plunged 30% in the past week, according to CoinGecko.
“2021 is when we saw these so-called layer-one protocols like avalanche and solana really having an outsized year,” he said. “A lot of that will hinge on how successful the ETH 2.0 merge is in addressing the gas fees and the scalability issues of ethereum. I think that will be a key determinant of what the continued demand for these alternative layer-ones and these layer-two solutions look like in 2022.”