One of our core crypto investment theses is that “tokenization” is accelerating the connection between the digital world and the physical world. BlackRock CEO Larry Fink recently reaffirmed this perspective by stating that Bitcoin is “digitizing gold” and that “if we can create more tokenization of assets and securities” this could “revolutionize finance.”
This tokenization trend is the first of three pillars for our investment case for Ethereum, alongside its infrastructure developments and a broader generational shift. The tokenization of real-world assets (RWAs) involves converting the value of a physical asset, such as a house or piece of art, into digital tokens available on a blockchain. Each token represents the ownership of the underlying asset, enabling liquid, secure, and transparent transactions that do not rely on banks or other traditional intermediaries.
A recent Bank of America report suggested that traditional asset tokenization could exceed $16 trillion over the next 5-15 years, a number that helps understand why major global financial institutions are actively exploring financial asset tokenization. And a report from Digital Asset Research this month cites the potential for tokenized RWAs to “access a total addressable market equivalent to the largest financial markets,” a sign of the potential scope of tokenization.
Source: Adapted from Bank of America Global Research, “Beyond Crypto: Tokenization,” June 29, 2023
Tokenization will lay the foundation for a new wave of adoption of Decentralized Finance (DeFi) applications based on RWAs and create fully digital capital markets. The greater the usage of tokenization technology, and the necessity for interoperability using borderless programmable networks—such as Ethereum and other smart contract platforms—the greater the demand for block space in these platforms and, thus, for their native currencies (ETH, DOT, SOL, etc.).
The second pillar in our current Ethereum investment thesis is infrastructure developments, including the scalability solutions being developed. The scalability roadmap for Ethereum and other smart contract platforms is becoming clearer, similar to the "broadband phase" of the internet in the early 2000s. Within borders of nation states, we're seeing the rise of national smart contract networks such as China's BSN and Brazil's Real Digital Pilot, which is a Ethereum-based permissioned blockchain for tokenization of Brazilian securities that will be the base of Brazil's CBDC and a foundation for a local tokenized economy. This progress in infrastructure will likely drive massive adoption of smart contract platforms and their applications in the coming years similar to how broadband impacted the internet two decades ago.
The third pillar is something I believe is not discussed enough and maybe even discounted by many investors—the generational shift that is helping drive the adoption of Ethereum and crypto more broadly. What I mean by this is that a younger generation that intuitively understands the digitalization of their lives is slowly gaining more economic influence. This, of course, is not anything new or specific to crypto. In fact, it hasn’t been uncommon for visionaries, regardless of their industry, to have trouble comprehending a future that might completely disrupt what they’ve known to be true over the course of their careers. At the turn of the twentieth century, US railroad pioneer George H. Daniels emphatically stated, “It is scarcely possible that the twentieth century will witness improvements in transportation that will be as great as those of the nineteenth century.” Only a few years later, the Wright brothers made history with the world’s first powered flight.
This quote doesn’t suggest Daniels was ignorant or uninformed. Rather, it’s a reminder that even the most experienced industry veterans can miss the innovation happening underneath their noses. Warren Buffett may think crypto is “rat poison,” but ultimately, a younger generation decides the future and even a technology’s harshest critics have to come around if their customers are demanding that technology.
In crypto, we are seeing some of the impact of the younger generations in public policy toward this asset class. UK Prime Minister Rishi Sunak (43), US House Financial Services Committee chair Patrick McHenry (47), and the Brazilian Central Bank Chairman Roberto Campos Neto (54) are Gen X’ers embracing crypto and tokenization while the loudest voices in opposition, including SEC Chairman Gary Gensler (65), European Central Bank President Christine Lagarde (67), and US Senator Elizabeth Warren (74), are Baby Boomers. This perspective isn’t surprising and is supported by a 2022 Charles Schwab survey that found that only 4% of Baby Boomers had crypto as part of their 401(k), while 47% of Millennials and 43% of Gen Z’ers had crypto exposure. If you factor this in with how much purchasing power the younger generations will have as they inherit $72 trillion over the next two decades and their asset allocation preferences shape the investment landscape, the potential impact to the current market cap of crypto is tremendous.
Source: Charles Schwab, 2022 401(k) Participant Study - Genz Z/Millennial Focus, October 2022.
Of course, age is not the definitive factor regarding someone's views on crypto, but it’s important to recognize that certain biases toward new innovation may exist with older generations that do not exist with younger generations. And it’s important to remember that the generational shift with regards to crypto will only accelerate as younger generations that have been living in a digitized world their whole lives advance in their careers and gain larger sums of assets to invest for retirement or other purposes.
This shift is critical to understanding the value of the Ethereum ecosystem in particular given its role as the dominant platform for bringing blockchain-based technologies to the masses. We believe that smart contracts have the potential to help power nearly every corner of a tokenized economy in the future, and the scalability, accessibility, and utility of Ethereum will only make the network more powerful and its token ether more valuable.
A generational opportunity
The Hashdex research team recently wrote a report on how secular and cyclical factors in the crypto market are currently combining to create a potentially once-in-a-generation investment opportunity. One of the strongest secular trends is that major networks are on their way to reaching billions of users. The tokenization of traditional assets, spurred by Ethereum and other smart contract platforms, is helping to grow this user base and create more value for crypto assets. We continue to believe that investors focused on the long-term fundamentals of these assets have an unprecedented opportunity to get exposure to these networks.
The saying goes there are two certainties in life—taxes and death. While there isn’t much certainty in the crypto markets, there does exist two inevitable realities in this space as well—tokenization is happening and a younger generation will continue to drive this change.
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