Crypto AUM: Four Growth Factors

Crypto investment funds reportedly boast a staggering $30.2 billion in total assets under management (AUM), including $19.3 billion worth of Bitcoin and $7 billion in Ethereum. While the fund manager market leans on Bitcoin and Ethereum, other coin types are capturing the minds, hearts and wallets of diversification-minded individuals, businesses and governments alike.

Given AUM represents the overall market value of investments overseen by fund managers on behalf of their clients, it’s key for investors to understand the daily fluctuation nuances of this metric as it pertains to valuation, flow, price and more. This knowledge can fortify the investor mindset and resolve to stay the course. This is why understanding AUM dynamics is especially important for more turbulent alternative investments like cryptocurrencies.

Devon Drew, DFD Partners

As blockchain burgeons around the globe, it’s imperative for alternative asset managers to gain a more in-depth understanding of crypto-sector AUM impacts, which can spur both short-term and sustained individual and collective portfolio growth.

There are a number of beyond-the-basics strategies. Turning attention here is especially critical since AUM is often a key consideration for firm fee calculations, with some using a fixed percentage factor tied directly thereto.

Here are four areas that can be especially impactful.

Macro Sentiment

The macro sentiment for crypto is arguably at its lowest point since 2018. All too many crypto-driven projects and smaller blockchain-oriented asset managers have run out of capital, and marketing budgets have dried up in kind, causing many to close shop. But, as the old Warren Buffett saying goes, “Be greedy when others are fearful.” That philosophy might be prudent for those with a mid- to long-term mindset and can financially and emotionally weather the short-term storms.

Amid the sector strife, now could be a very attractive entry point for investing in crypto funds. Institutions have already started providing access to crypto investment options, as evidenced by the partnership between BlackRock and Coinbase. Asset managers should still remain mindful of crypto sentiment indicators and keep close tabs, so portfolio allocations can be throttled in kind.

Emerging Tech

The top-trending emerging tech that will help attract future investments in crypto is blockchain-as-a-service (BaaS). Companies like Microsoft and Amazon have already implemented BaaS, which will act as a third-party cloud hosting service enabling smaller entities with limited IT resources to more easily create digital products using blockchain fundamentals. TrustRadius.com points out, “Similar to software-as-a-service (SaaS), blockchain-as-a-service lets businesses get applications up and running with minimal hassle. This allows higher agility and quicker blockchain adoption.”

Patent Trends

As asset managers and other financial industry professionals attempt to educate themselves on crypto dynamics, as well as the underlying blockchain technology, those “in the know” are leaning on the many use cases for insights and inspiration. In 2016, there were just three blockchain patents. By early 2022, the number was nearing 10,000, according to Mathys & Squire research, and the applications just keep coming. IBM is reported to lead the pack with 345 blockchain patent applications, with both Bank of America and Capital One among the top 10.

As more banking and finance companies substantiate crypto and blockchain use cases, category adoption will continue to escalate, boding decidedly well for crypto VC fund AUM growth. Uncovering and leveraging patent trends can also encourage maximized “first mover” advantage – a competitive edge that can prove mission-critical for developing crypto businesses and those who invest in them.

Inflation Impacts

Similar to gold, which is often regarded as an “alternative currency,” crypto was similarly thought to be an inflation hedge. Results throughout 2022 have proved that assumption to be incorrect, as crypto got crushed along with other high-risk assets.

On the flip side, with the Consumer Price Index at a 40-year high and inflation sky high, investors are increasingly seeking out-of-the-box ways to drive risk-adjusted returns that outpace inflation.

Given the depths that the crypto market has fallen to, which is likely to continue amid macroeconomic concerns, crypto investment funds can capitalize on the pricing opportunity to create well-diversified portfolios to add stability and serve as a foil against inflation when it’s predominantly caused by factors like monetary expansion. In fact, upon the release of the Federal Reserve’s July meeting minutes, citing inflation as still "unacceptably high" and indicating continued increases in interest rates, Bitcoin and Ethereum prices dropped 2.4% and 2%, respectively, that day.

The management of crypto assets is distinct from other forms of financial management because these are digital assets that are tokenized via a blockchain and must be tracked, bought and sold based on real-time data to ensure successful portfolio performance. While cryptocurrency remains volatile and isn’t appropriate for every investor, the class does offer diversification and other wealth building and protection benefits. It is a truth that’s driving the fund management community to take on DeFi in droves.

Devon Drew, CIMA, is founder and CEO of DFD Partners, a data-driven SaaS distribution platform allowing smaller asset management firms to leverage data, automation and machine learning tools to more effectively scale and compete – both with larger firms and in the global marketplace at large. Merilee Kern, an internationally-regarded brand strategist and analyst, assisted in the preparation of this article.