Julius Baer believes the structural outlook is positive for digital assets, especially cryptocurrencies that provide a platform for decentralized finance protocols.
Despite ongoing volatility in crypto markets, Julius Baer believes that the structural outlook is positive for the nascent digital asset class. The bank is particularly positive on decentralized finance (DeFi) tokens, noting that although there are risks involved, they could also result in «very appealing long-term returns».
«[O]ur team sees a lot of optionality for those coins and tokens that provide a platform for DeFi protocols. In our view, these platforms and protocols are set to become a new generation of productive assets, comparable to equities,» said Esteban Polidura, Julius Baer’s Americas head of advisory and products, in a recent podcast by the bank.
«We are witnessing an increasing number of retail and institutional investors who are considering digital assets as part of a portfolio. While it is impossible to tell how big the asset class will eventually become, we expect it to grow over time as the market comes to appreciate the potentially disruptive power of blockchain technology more and more.»
Varied Market Adoption
While every wave of technological advancement results in some obsolescence, Julius Baer believes there are many areas in DeFi that could be integrated into existing financial services rather than completely replacing them, especially as more firms realize the benefits of technology.
But adoption will not be uniform across markets, especially in ones that lack the conditions needed for regulatory support.
«[W]e believe that countries with weak institutions, weak and volatile currencies, as well as structurally high levels of inflation are much more likely to enact outright bans rather than provide a regulatory framework that allows digital assets to be used in an economy,» said Julius Baer’s next generation research analyst Sipho Arntzen.
Not Ready
While the long-term outlook might be promising, Julius Baer believes it may still be too early for investors to add any meaningful crypto allocations. In addition to high volatility and correlations between tokens, the market has also demonstrated limited safe haven characteristics.
«From a portfolio perspective, digital assets provide some diversification benefits, but not to the extent that many may believe. They often suffer more strongly than equities in times of risk aversion,» Polidura added.
Julius Baer's model portfolio currently has around 5 percent allocated to alternatives with no investments in digital assets.
