Crypto Goes Mainstream

Our Research and Investment Management analysts Michael Cyprys and Denny Galindo discuss how and why cryptocurrencies are transitioning from niche speculation to portfolio staples. 

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Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and Exchanges for Morgan Stanley Research.

Denny Galindo: And I'm Denny Galindo, Investment Strategist for Morgan Stanley Wealth Management.

Michael Cyprys: Today we break down the forces making crypto more accessible and what this shift means for investors everywhere.

It's Tuesday, November 11th at 10am in New York.

We've seen cryptocurrencies move from the fringes of finance to being considered a legitimate part of mainstream asset allocation. Financial platforms, especially those serving institutional clients, are starting to integrate crypto more than ever.

Denny, you've written extensively about the crypto market for some time now among your many jobs here at Morgan Stanley. So, from your perspective in wealth management, what are you hearing from retail clients about their growing interest in crypto?

Denny Galindo: Yeah, we actually started writing about crypto back in 2017. We had our first explainer deck, and we started writing extensive educational reports in 2021. So, we've covered it for a while.

Advisors who dabble in crypto typically had this one client. He asked a lot of questions about when they could do more. We also had some clients who were curious, maybe their neighbor made a lot of money, bought a new boat and they were like wondering, you know, what is this Bitcoin thing?

Now, this year we've seen a sea change. I think it was the election really started it; the Genius Act, and some of the legislation also kind of added to it. Almost all this interest is really on Bitcoin only, although we also have gotten a decent amount of interest about stablecoins and how those might impact things. But it's really just the beginning and I think it's an area that's; it's not going to go away.

Mike, on the institutional side, what trends are you seeing among asset managers and brokers in terms of crypto adoption integration?

Michael Cyprys: So, we've seen a big move into the ETF space as large money managers make crypto easier to access for both retail and institutional investors. Now this comes on the back of the SEC approving the first spot Bitcoin and Ethereum ETFs back in 2024. And since then, we've seen firms from BlackRock to Fidelity, Franklin, Invesco, and many others, including crypto native firms having launched spot Bitcoin ETFs and spot Ethereum ETFs. And these steps in the minds of many investors have legitimized crypto as an investible asset class.

Most recently, we've seen the SEC adopt generic ETF listing standards for crypto ETFs that can make it easier to accelerate ETF launches in reduced regulatory frictions. And today the crypto ETF space is about $200 billion of assets under management and saw inflows of over [$]40 billion last year, over [$]45 billion so far this year – despite some of the near-term volatility. And most of the asset class today is in Bitcoin, single token ETFs, with BlackRock and Fidelity managing the largest ETFs in the space.

Speaking of products, what types of crypto are retail investors most curious about? And why do those particular ones make sense for their portfolios?

Denny Galindo: Yeah, I think you hit the nail on the head. The most popular products are really the Bitcoin products. We as a firm allowed solicitation in Bitcoin ETPs more than a year ago in brokerage accounts. We just expanded them to allow them in Advisory in October. So, we're still early days here. There really hasn't been that much interest in the other crypto products.

Now when people think about this, there's three buckets here. There are some people that think of it like digital gold. And they're worried about inflation. They're worried about government deficits. And that's kind of the angle that they're approaching crypto from. A second group think of it like a venture capital, like a disruptive innovation in tech that's going after this big addressable market. And, you know, hopefully the penetration will rise in the future. And then the third bucket is really thinking [of it] out it as a diversifier. So, they're saying, ‘Hey, this thing is volatile. It doesn't match stocks, bonds, other assets. And so, I kind of want to use it for diversification.’

Now, Mike, when you have these discussions with institutional clients, how do they view the risk and potentia