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Welcome to Crypto Long & Short! 

This week, Glenn Williams Jr. argues that decentralized exchanges (DEXes) have an intriguing road ahead amid the wreckage of FTX.

Then, Kelly Chambers of THEIA8900 notes the digital-asset myopia among financial advisers focused on bitcoin (BTC) and Ethereum’s ETH.

– Nick Baker

The push following FTX’s collapse to regulate centralized crypto exchanges will likely be a net positive for those looking to expand their understanding of crypto. I don’t say that as someone who advocates for or against regulation, but as someone who expects crypto participants to adapt as the environment shifts.

I recognize the importance of regulation, but am sometimes skeptical of the motivations behind it. I also live on Earth, and more specifically New Jersey. So I walk around with the underlying assumption that regulation, like bad traffic, is largely unavoidable.

All three things involve centralized exchanges (CEXes). That root word “central” sure looks like a regulatory bullseye now.

For me when I was early in my crypto journey, centralized exchanges served as a welcome onramp where I could set up an account, link to a bank account (letting me easily bring fiat money into the digital asset realm) and then press a button and see that I’d just purchased bitcoin (BTC). I also provided loads of personal information during the Know-Your-Customer (KYC) process.

For purists, this all runs completely counter to the crypto ideal of decentralized, trustless, peer-to-peer transactions. I actually think that the existence of centralized exchanges is a positive. For many investors it represents a comfortable way to gain access to this space, via an accountable entity. I expect them to stay.

But I also expect that the recent crackdown – and, in all candor, I think some of the increased scrutiny has been earned following the bankruptcy of FTX – will accelerate the learning curve for those willing to dive into decentralized exchanges (DEXes), which operate very differently from anything you see in traditional finance (TradFi).

As an investor, my interest would not just be in the exchanges themselves, but also the tokens associated with them, and their economics. For market-centric people from the TradFi world – as I am – that requires a certain level of commitment to learning the technical differences behind many of these protocols.

Certain fundamental attributes are certainly worth paying attention to. For starters, with DEXes you will largely be dealing with code as opposed to humans. Math as opposed to management. Unlike crypto CEXes, DEXes do not really resemble the New York Stock Exchange or Nasdaq.

Decisions that management teams make within CEXes are instead handled at DEXes through a vote among token holders. Governance is enforced in a trustless and decentralized manner.

For point of reference, the largest DEX by market capitalization is Uniswap. The $5 billion market cap of its UNI token pales in comparison to Binance’s BNB token ($48 billion). In a sense this illustrates the potential opportunity that exists within the DEX landscape.

The distribution of capital from DEXes also presents some interesting opportunities. Akin to stock buybacks in the traditional world, DEXes will often distribute value back to token holders via a token burn, or a token buy back and burn. In short, the objective is to reduce the supply of the asset, which (when supply and demand dynamics hold true to form), lend to increased values for the asset.

In fairness, this is done by both centralized and decentralized exchanges. The distinction with DEXes, however, is that while a CEX has to consider the interest of both individual shareholders and token holders, no such conflict exists within DEXes.

There is no company president or management team to consider. Only the token holders themselves, who can often vote for or against the payment mechanism. The decision is up to the network itself.

DEX tokens often provide incentives to holders on the basis of yield generation, reduced trading fees and governance. As the demand for usage of the network increases, the value of the asset is likely to as well, without the overhang of malfeasance, and the extreme target of regulators (at least for now).

All told, increased scrutiny of centralized exchanges will likely lead to increased knowledge and adoption of decentralized ones. In many ways, this aligns closer with the original Bitcoin whitepaper, which in large measure kicked everything off.

Cboe Digital is a U.S. regulated exchange and clearinghouse bringing trust and transparency to the crypto spot and derivatives markets.  Cboe Digital honors a separation of duties and includes intermediaries as a key tenet in managing risk and avoiding conflicts of interest.  Our unified spot and derivatives markets are underpinned by responsible innovation and enable collateral efficiency. www.cboedigital.com.

Understandably, crypto regulation is getting a lot of attention. But for investors looking to allocate capital over a longer horizon, focusing too much on tracking legislation and industry legal woes may be a distraction to long-term success.

So what’s an investor to do when news headlines are luring us in with who Securities and Exchange Commission Chair Gary Gensler is after or what Kevin O’Leary thinks of the SEC? Start a weekly challenge, of course!

I call it the Weekly Digital Asset Power Hour.

I know a lot of financial professionals who block off time for “research” (aka reading news). The challenge is to dedicate at least one of those hours per week to learning about a digital asset. CoinDesk’s Digital Asset Classification Standard has 500 assets waiting for you. (If this at all sounds boring, remind yourself that Warren Buffett has long done this with 10-Ks – oof.)

The more you understand the use cases of individual assets, the better you can diversify beyond bitcoin (BTC) and Ethereum’s ETH, whether that be selecting individual assets or taking an index approach. The data suggests that it may also give you a competitive edge.

For example, Bitwise recently surveyed financial advisers. One of the questions made me hesitate. The question was: Which areas of the crypto market do you find most interesting?

As I looked at the answers, noting BTC and ETH’s dominance with Web3 and the metaverse way behind, I could not help but think, “Are the advisers really answering the question as it’s worded?” Bitcoin is the largest digital asset, but most interesting? I think they were subconsciously actually answering this: What part of crypto do you understand best? Humans tend not to be interested in things we don’t understand, especially when technical. (Don’t ask me to explain how my iPhone works. I am not interested.)

A follow-up question reinforced my inkling. Most advisers are getting their crypto education from traditional media, which focuses on BTC, ETH, regulation and the latest news on the Sam Bankman-Fried saga.

Why does this matter? It suggests some of the most sophisticated investors – financial advisers – lack broad knowledge of digital assets.

Jennifer Murphy, the CEO of Runa Digital Assets, wrote in a previous version of this newsletter: “Long-term investors would do well to make sure their portfolios include the potential wealth creators that will disproportionately drive market returns in the coming decades.”

The “potential wealth creators” are the crypto use cases that will survive and thrive over the next decade. And one could argue that assets other than BTC and ETH may be larger wealth creators given that being newer means they have a longer growth runway.

For example, take the once buzzworthy metaverse, part of CoinDesk Indices’ Culture & Entertainment sector. Far less attention is now being paid to the metaverse and its underlying digital assets. Yet, recent data from Statista reports that the metaverse could have $490 billion in market revenue by 2030, up from $45 billion in 2022.

From CoinDesk’s Nick Baker, here’s some recent news worth reading:

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