Digital Assets: Crypto and the Future of Money

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 problematic client that was interested in crypto. He asked a lot of questions with new terms. He pestered the Advisor about when they could do more; and so, it was a source of frustration for Advisors really. 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?

Uh, so just overviews and then that kind of one pesky Advisor. 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. Some of the IPOs we had this year also contributed. But a lot of investors are really starting to invest for the first time.

Some Advisors are even starting to recommend small allocations to their clients. And then a lot of folks who just kind of ignored this and said, ‘Hey, it's gonna be shut down. I'm gonna ignore this. We don't do [00:03:00] this.’ They started kicking the tires, they started trying to understand what's going on here.

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 we're seeing even more firms apply for approval, including firms like T Rowe that's looking to launch a multi-token ETF. 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. We don't allow Advisors to solicit things like Ethereum or Solana, so that could be in the future, but we don't do that yet.

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, the biggest of those three is the gold angle. And so most people are drawn to Bitcoin because it's the cleanest with that kind of gold narrative. The venture capital narrative might fit for Ethereum, might fit for Solana. But really, it's the gold that's been driving things here.

Now, Mike, when you have these discussions with institutional clients, how do they view the risk and potential of these different cryptocurrencies?

Michael Cyprys: What's interesting with the crypto space is adoption started on the retail side with institutions now slowly beginning to explore allocations. And that's the opposite of what we've seen historically with institutions leaning in ahead of retail in areas, whether it's commodities or private markets. But it's still early days.

On the institutional side, we're starting to see some pensions, endowments, foundations begin to make some small allocations to Bitcoin as a long-term inflation hedge. But keep in mind, institutions tend to make investments in the context of strategic asset allocations, often with a broader macro framework.

Denny, you've written quite a bit about the four-year crypto cycle. Could you explain what that is and where you think we are in the current crypto cycle?

Denny Galindo: Yeah, if you look at the data, you see a pretty clear trend of a four-year cycle. So, there's three up years and one down year, and it's been like clockwork, since Bitcoin was invented.

Now when you see something like that, you always try to explain like: why is this happening? So, there's two kind of dominant explanations that we've seen. So, one's macro, one's micro. Now a lot of investments have this; some people say something is caused by rates. Some people say, ‘Oh no, it's the new product they just came out with.’

So macro micro is a norma way to break up an investment. the macro version for crypto is really the M2 cycle. So, we see that M2 to that global M2 money supply has kind of accelerated and decelerated in four-year cycles, and Bitcoin tends to really match that cycle. It tends to accelerate when M2's accelerating and it tends to decline when it's decelerating or declining.

But there's also this bottoms-up way of looking at it, and commodities are really the place we go to for that analysis. So, a lot of commodities, you know, could be coffee, could be oil – if something disrupts supply And maybe a disease knocks out the coffee crop one year, you tend to get the shortage, you get the price moving up.

Then you get commodity speculators piling in, adding leverage. And it'll just kind of go parabolic. At some point something pops the bubble, usually more supply coming online. Maybe they planted some new coffee trees. maybe if it's oil, they started carpooling. And then the demand drops.

Something pops that bubble, and then you get like a great depression. You get like an 80 percent draw down. All the leverage comes out and the whole thing crashes. So crypto has also followed that. So, it seems to have this M2 component, it seems to have this commodity shortage component. They're both probably true.

They're both important, but we don't know which is the dominant, and that debate is still ongoing Now, we break the four-year cycle into four seasons: spring, summer, fall, and winter. And each season has a different characteristic about which parts of the market work, which don't work, what things look like.

We are in the fall season right now. And that tends to last about a year. We wrote a note last year on this. So we're in, maybe the tail end of fall; Fall is the time for harvest. So, it's the time you want to take your gains. But the debate is, you know, how long will this fall last? When will the next winter start?

So, you know, we had looked in the past and we thought that around November 30th is usually when they end in the past, some a couple weeks later, some a couple weeks before. Now we don't know if that'll happen again. But as we approach November 30th, people are gonna be debating, is this cycle gonna last a bit longer?

Or is it gonna fall apart? Or maybe this pattern won't even hold in the future. And so, this is the big debate in the crypto circles these days.

And Mike, given the volatility, given the great depressions we talked about in Bitcoin with these, you know, 70-80 percent drawdowns, how do you see it fitting into institutional portfolios compared to other cryptocurrencies?

Michael Cyprys: Compared to other cryptocurrencies, Bitcoin is still viewed as the flagship asset within the crypto space – just given higher adoption, greater liquidity, the sheer market value. It has longer history and better regulatory clarity as compared to other tokens. But given the volatility as you mentioned, and the early days nature of cryptocurrencies, adoption is still quite nascent amongst institutional investors.

Some institutional investors view Bitcoin as digital gold or macro hedge against inflation and monetary debasement. It's also sometimes viewed as a low correlation diversifier within multi-asset portfolios. But even that's also been a debate in the marketplace too.

As we look forward from here, crypto adoption within institutional portfolios could potentially expand as regulatory clarity establishes a clear framework for digital assets, right? We had the Genius Act recently that focused on stablecoins. Next up is market structure. There's a bill working its way through Congress.

We've also had developments on the ETF side that lower[s] barriers for institutions to gain exposure there. Not only is it more accessible within traditional portfolios, but the ETF fits nicely into day-to-day workflow.

So, bottom line is institutional views on Bitcoin and crypto are evolving, and how firms view Bitcoin – we think will depend upon the institution's objectives, their risk tolerance and portfolio context. And keep in mind that institutional allocations don't turn on a dime. They tend to be slower moving.

Denny, do retail clients take a similar approach or are they more likely to take bigger bets?

Denny Galindo: Yeah, I think, at least Our clients struggle with this question. And so, we get a lot of questions like, ‘Okay, I don't want to miss this. I'm a little nervous about it. What allocation should I use here?’ And so, we go back to our three, kind of, typical investors when we try to answer this question. We really try and help people figure out where is equal weight.

Where are you equal? 'Cause a lot of people are okay being equal, but they don't wanna be overweight. They don't wanna be too bearish, they just want to be in line with everybody else. So, we wrote a note in February called “Are you Underweight Bitcoin?” And we have three different answers depending on how you're thinking of it.

For the digital gold bugs, gold is often, say, a 5 percent allocation in a portfolio – for those, for those people that do like to hold gold. And if you look at the market cap of Bitcoin versus gold, it's about 7 percent of gold today. So, if you were going to have 5 percent in kind of precious metals, maybe you have 35 [basis points] in Bitcoin, maybe you have the rest in gold, and that's where you’re equal-weight Bitcoin.

Now the second group is these, kind of, disruptive tech investors. So, here, we treat it like a venture capital allocation. A lot of people might have 20 percent in alts. 10 percent of that might be venture. So that's about a 2 percent in this kind of venture capital tech bucket. Bitcoin is about the same size as venture capital market, when you look at the total market cap. So maybe you split that half and half between venture and Bitcoin, that gets you to a 1 percent position.

The last bucket is the diversifiers – and maybe the institutional – more frequently are in this bucket. But they're looking at this like a Mag7 stock, like a big stock that's volatile. Some of the semiconductor stocks are very volatile these days. And so, if you have 1 percent, if you have 2 percent in the portfolio – depending on if you're thinking of a stock and bond portfolio or an equity-only portfolio – that's where you'd be equal weight if you're thinking about it in that way.

So, we have people in all three buckets and, you know, there's a big debate. There's no clear answer. But that's often where people are coming out to. Now in terms of Morgan Stanley Wealth Management, we just recently put out a recommendation for a limit on crypto exposure. So, we don't say you should have zero or 2 percent. But we said, you know, for middle of the road investors, zero to two; more aggressive, zero to three; and the most aggressive would be zero to 4 percent. And that's not really where we want our clients. We want them to be smaller where they can have some exposure if they want it. Not everyone wants it, but if you do want it, you can have it. And it won't really dominate the volatility of the portfolio.

Now, on another note, Mike, how are exchanges and brokers enabling spot crypto for those customers that do want spot? Is this having a noticeable impact on their revenue? Is it starting to make a difference?

Michael Cyprys: So, exchanges like CME have been in this space for many years, since 2017, but the growth is accelerating rapidly. More recently, just in the third quarter, CME saw over 340,000 contracts traded across their crypto complex. That's up over 200 percent year-on-year. Representing notional value traded about 14 billion a day, but that's a small fraction of the overall activity on the CME. So, we're not really noticeable yet in terms of revenues.

But look, they're expanding the platform today. CME offers futures and options across not just Bitcoin, but also Ethereum. They recently introduced Solana and XRP contracts. They're continuing to innovate the rolling out of smaller size contracts that are more accessible, more expiration dates, longer dated contracts.

And next up is 24x7 trading of CME crypto derivatives. That's slated to go live in early [20]26. We're also seeing other exchanges evolved in the ETF marketplace, for example, with NASDAQ and NA, serving as the listing venues for crypto ETFs. On the retail brokerage side, new brokers like Robinhood have been fast movers in the space.

They've been involved for a while, starting with their offering back in 2018, and today they have over 50 tokens on the platform. It's available across the U.S. and many countries in Europe. And the revenue contributions actually quite meaningful. It's about 20 percent of revenues last year, similar percent this year. First half alone, it's coming in about $400 million of revenue from crypto trading.

But broadly, when you look at the brokerage community, retail brokers have generally made crypto ETFs available to customers and brokerage. But spot trading crypto is not yet broadly available on most platforms.

Denny Galindo: It's amazing that they've come so far in such a short time. And are you seeing legacy platforms start to offer crypto as well?

Michael Cyprys: So crypto ETFs are generally available in self-directed brokerage accounts across the industry today. Schwab, for example, commented that their customers hold $25 billion in crypto ETFs, which is about, call it 20 percent share of the ETF space. But access to these crypto ETFs is a bit more restricted within the Advisor-led channel. But we're starting to see that broaden out for ETFs and eventually might see model portfolios with allocations toward crypto ETFs.

Raymond James, for example, noted that digital assets are becoming increasingly important part of financial planning conversations. But when you look at spot crypto trading, though, that generally remains out of reach of most legacy platforms. The key hurdle for that has been regulatory clarity and with a more crypto friendly administration that is changing here.

So, Schwab, for example, acknowledged that they have the regulatory clarity needed and they're working towards launching their spot crypto trading capabilities for the first half of next year. And they're working towards launching their spot crypto trading platform in the first half of next year.

On that topic, Denny, how do you view the merits of holding crypto directly versus through an exchange-traded product like ETFs?

Denny Galindo: Yeah, I mean, our clients are mostly not trading this; day trading this product and kind of moving it back and forth.

So, the ETPs have been a pretty good answer for them. The fees are pretty low. They're easier to use. That's, you know, your money's all in the account. You can just buy it in the same account. You don't have to open a new account. And so, it has worked pretty well for most people that are interested. And remember, they're only putting a couple percent of their portfolio in this. It's not like their entire portfolio is trading these crypto products.

The one issue is liquidity. And so, we're not used to thinking of this in; the U.S. equity markets are the most liquid markets. But in crypto, the crypto markets, the spot markets are actually more liquid than the equity markets.

So, you get a lot of liquidity even after hours, even 24x7. And as other markets around the world kind of take the lead, we saw this on the recent crash on October 10th, where the market closed in the U.S. You couldn't trade the ETFs and then all of a sudden, the market crashed and if you didn't have exposure to 24x7 coverage, you know, you could get stuck there. So, liquidity is probably the one drawback to using the exchange traded products versus the spot product.

But most of our investors aren't treating it that way. They're not day trading it, and they're really keeping it more like that digital gold allocation. And so, they just need to adjust the position size, you know, once a month, once a year maybe; just kind of buy and hold.

And so, the liquidity's not that important to them. But I wonder, you know, as more people get more comfortable, it could become more important in the future. So, it's an open question, but for now, the ETPs have been a pretty good answer here.

Michael Cyprys: Fascinating space. Denny, thanks so much for taking the time to talk.

Denny Galindo: It was great speaking with you, Mike.

Michael Cyprys: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today. 

Welcome to Thoughts on the Market. I’m Mia Nagasaka, Head of Japan Financials Research at Morgan Stanley MUFG Securities.

Today – Japan’s stablecoin revolution and why it matters to global investors.

It’s Friday, October 31st, at 4pm in Tokyo.

Japan may be late to the crypto market. But its first yen-denominated stablecoin is just around the corner. And it has the potential to quietly reshape how digital money moves across the country and globally.

You may have heard of digital money like Bitcoin. It’s significantly more volatile than traditional financial assets like stocks and bonds. Stablecoins are different. They are digital currencies designed to maintain a stable value by being pegged to assets such as the yen or U.S. dollar.

And in June 2023, Japan amended its Payment Services Acts to create a legal framework for stablecoins. Market participants in Japan and abroad are watching closely whether the JPY stablecoin can establish itself as a major global digital currency, such as Tether.

Stablecoins promise to make payments faster, cheaper, and available 24/7. Japan’s cashless payment ratio jumped from about 30 percent in 2020 to 43 percent in 2024, and there’s still room to grow compared to other countries. The government’s push for fintech and digital payments is accelerating, and stablecoins could be the missing link to a truly digital economy.

Unlike Bitcoin or other cryptocurrencies, stablecoins are designed to suppress price volatility. They’re managed by private companies and backed by assets—think cash, government bonds, or even commodities like gold.stablecoins can make digital payments as reliable as cash, but with the speed and flexibility of the internet.

Japan’s regulatory approach is strict: stablecoins must be 100 percent backed by high-quality, liquid assets, and algorithmic stablecoins are prohibited. Issuers must meet transparency and reserve requirements, and monthly audits are standard. This is similar to new rules in the U.S., EU, and Hong Kong.

What does this mean in practice? Financial institutions are exploring stablecoins for instant payments, asset management, and lending. For example, real-time settlement of stock and bond trades normally take days. These transactions could happen in seconds with stablecoins. They also enable new business models like Banking-as-a-Service and Web3 integration, although regulatory costs and low interest rates remain hurdles for profitability.

Or think about SWIFT transactions, the backbone of international payments. Stablecoins will not replace SWIFT, but they can supplement it. Payments that used to take days can now be completed in seconds, with up to 80 percent lower fees. But trust in issuers and compliance with anti-money laundering rules are critical.

There’s another topic on top of investors’ minds. CBDCs – Central Bank Digital Currencies.  Both       stablecoins and CBDCs are digital. But digital currencies are issued by central banks and considered legal tender, whereas stablecoins are private-sector innovations.

Japan is the world’s fourth-largest economy and considered a leader in technology. But it takes a cautious approach to financial transformation. It is preparing for a CBDC but hasn’t committed to launching one yet. If and when that happens, stablecoins and CBDCs can coexist, with the digital currency serving as public infrastructure and stablecoins driving innovation.

So, what’s the bottom line? Japan’s stablecoin journey is just beginning, but its impact could ripple across payments, asset management, and even global finance.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.