By Brett Munster
Why crypto will be the biggest beneficiary of the largest generational wealth transfer in history
In previous editions of this newsletter, we’ve explored various economic, financial, socioeconomic, and political trends indicating that crypto adoption will likely continue growing in the coming decades. However, one critical dynamic we haven’t discussed is the major demographic shift that could significantly boost crypto’s adoption and usage over the next 20 years.
The Baby Boomer generation is currently the wealthiest cohort in America, collectively owning over half of the nation’s $140 trillion in wealth. Boomers are now between the ages of 60 and 78. With the average life expectancy in the U.S. being 77 years according to the CDC, the unfortunate reality is that most Boomers will pass away over the next two decades (if you are reading this mom and dad, please live to be 196). Putting the morbid reality aside, older generations are set to pass trillions of dollars of money and assets to their children in what will be the largest generational wealth transfer in history.
Over the next two decades, Cerulli Associates estimates that $73 trillion will be transferred from older generations, primarily Baby Boomers, to younger generations, with Millennials being the primary beneficiaries. Bank of America estimates this figure to be slightly higher at about $84 trillion by 2045. Consultancy firm Knight Frank even estimates $90 trillion will be inherited by Millennials over the next 20 years, potentially making them the “richest generation in history.”
Here is the thing: Millennials and Gen Z invest differently from their parents. Having grown up with the internet and smartphones, these digitally native generations have experienced significant economic challenges such as the Great Financial Crisis, the Occupy Wall Street movement, rising inflation, crippling student debt, and skyrocketing house prices. Unlike Baby Boomers, many Millennials will retire without defined pension plans and Social Security is unlikely to be a reliable source of retirement income for us (yes, I’m a Millennial). We see the unsustainable financial path the U.S. Government is currently on and recognize the risks of endless money printing. These economic challenges have weakened the financial footing of most Millennials, causing our ability and propensity to invest or save to fall behind Baby Boomers at similar ages. It should be no surprise that there is a sense of disillusionment with the traditional financial system among younger generations.
According to a survey published by Bank of America, 72% of Millennials and Gen Z believe it’s no longer possible to achieve above average returns by investing solely in traditional stocks and bonds. This sentiment is reflected in their investment preferences: while older investors favor traditional equities, younger generations are more inclined towards bitcoin and crypto.
The appeal of bitcoin and crypto among Millennials and Gen Z might even be underestimated by Bank of America. A study by the CFA Institute and FINRA found that crypto assets are the most common investment held by Millennial and Gen Z investors, surpassing stocks, bonds, and real estate. For over half of these younger investors, crypto accounts for their primary and largest investment, and this trend is growing faster than any other asset class.
As a recent Galaxy Digital report on this trend pointed out, “having an alternative financial system using digitally native currency outside the control of banks and governments has resonated with [Millennials and Gen Z]. Bitcoin and crypto’s appeal aligned with the values of younger generations as a digital-first, accessible, permissionless, privacy-focused, always online independent approach to personal finance.”
The bottom line is that a significant portion of that $70-90 trillion of inheritance, which is currently largely comprised of stocks, bonds and real estate, is going to be reallocated away from traditional investments and into crypto over the next 20 years.
As a fun thought exercise, let’s assume that $10 trillion (roughly 10-15%) of that inheritance gets reallocated to crypto over the next two decades. If you remember our analysis from earlier this year, crypto’s market cap does not go up 1:1 for every dollar that gets invested. The long-term average multiplier is 4x meaning for every $1 invested into the crypto ecosystem, the market cap increases by $4. Therefore a $10 trillion capital inflow into crypto could potentially increase the market cap of the crypto industry by $40 trillion. Keep in mind the market cap of the crypto industry today is only $2.1 trillion.
That is a 20x increase over the next two decades from U.S. based Millennials and Gen Z alone. This projection doesn’t account for investments from hedge funds, pension funds, or corporations. It doesn’t take into account any international investors (hint: the U.S. accounts for only roughly one quarter of the crypto market). When you consider the upcoming generational wealth transfer and the investment preferences of younger generations, the future of crypto looks extremely promising.
The Ethereum ETF is here
Last Wednesday, all eight spot Ethereum ETF issuers submitted their amended and final S-1 applications to the SEC. This was the final step before the SEC approves the ETFs. As of writing this, at least five ETFs have been approved by the SEC, and according to the CBOE, they will begin trading on Tuesday, July 23. Hopefully by the time you read this, the Ethereum ETFs should have already started trading.
Last month, we analyzed the potential impact of Ethereum ETFs on ETH’s price. While that analysis still holds, it’s likely we could see ETH’s price dip in the initial weeks following the launch for the same reason bitcoin’s price dipped in the first two weeks following its ETF launch.
When the bitcoin ETFs launched, all but one were net new products. The lone exception was Grayscale’s bitcoin trust (GBTC) which was being converted from an existing trust to an ETF.. Launched in 2013, GBTC grew to over $28 billion, being the only publicly traded stock providing direct bitcoin exposure. With no competition, Grayscale could charge a hefty 2% annual fee.
When the bitcoin ETFs launched, all the new issuers charged roughly 0.2% – 0.25%, or roughly 1/10th that of GBTC. Having grown accustomed to the revenue from larger fees, Grayscale decided to keep the high fees when it converted to an ETF. The result was a mass exodus out of Grayscale and into other, lower costs ETFs. At the time of the conversion, GBTC was holding approximately $28 billion worth of bitcoin. Within two weeks of launch it had lost nearly $8 billion (28% loss in assets) and currently sits at $17 billion.
Why would Grayscale charge 10x the market rate? Likely, Grayscale executives believed that despite some asset loss due to higher fees, other factors (such as taxes) would incentivize many GBTC investors to remain. They calculated that charging 2% on a slightly smaller amount would yield more revenue than charging 0.2% on the full amount. Whether this strategy proves prudent remains to be seen, but it’s certainly unfavorable for GBTC holders who are paying exorbitant fees compared to the rest of the market.
Which brings us to the Ethereum ETF launch. Similar to bitcoin, Grayscale has an existing Ethereum trust that they are converting to an ETF. According to the S1s filed, the fees for the Ethereum ETFs will range between 0.15% to 0.25%. That is all but Grayscale’s ETH ETF which they are keeping the fees at 2.5%. Just like with the bitcoin ETF, Grayscale is keeping the fees on their ETH ETF 10x higher than the rest of the market.
Grayscale’s existing trust holds roughly $10 billion worth of ETH. Assuming a similar exodus as seen with the bitcoin ETF, we could see $2-3 billion worth of sell pressure on ETH in the first few weeks after launch. This sell pressure is likely to outpace net inflows, causing ETH’s price to dip over the next week or two. However, similar to bitcoin, the sell pressure will be finite and should be exhausted relatively quickly. As it subsides, inflows will likely overtake outflows, and ETH’s price should begin to rise. It is likely we could see ETH’s ETF launch follow the same pattern bitcoin did in its first 6 months.
In the long term, the approval and launch of Ethereum ETFs is incredibly bullish for ETH’s price. However, expect a potential initial dip in ETH’s price over the next couple of weeks as the market works through the sell pressure from Grayscale’s conversion.
In Other News
The GOP has officially adopted a number of pro-crypto policies as part of its platform.
The SEC dropped its investigation into Stacks and Hiro, a blockchain software developer formerly known as Blockstack.
BlackRock CEO Larry Fink reiterated his belief that bitcoin is an asset that everybody should consider holding as part of their portfolio.
Bitcoin can protect freedom and help win elections.
Mt. Gox begins transferring $3.1 billion in BTC to the creditor of repayments.
The US House of Representatives failed to override President Joe Biden’s veto to overturn SAB 121.
US Bitcoin ETFs post ninth consecutive day of net inflows, extending a 9-day winning streak amid surging demand.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
BACK TO INSIGHTS