MEGATRENDSCRYPTOCURRENCYINVESTING
Powerful Diversifier or Portfolio Kryptonite?

SUMMER 2022
For professional investors only.
All investments involve risk,
including possible loss of capital.
PGIM | CRYPTOCURRENCY INVESTING IINTRODUCTION
Red dogs, stump tails and blue pups were just someof the creative names for the ultimately doomed
currencies issued by poorly capitalized state-charteredbanks during the wildcat banking era in U.S.
monetary history from 1837 to 1863 – until Congress
finally passed legislation that created a single centrally
backed national U.S. currency.1, 2
History rarely repeats itself, but it often rhymes –and 150 years later we are in an era with thousandsof unregulated cryptocurrencies and digital tokens
with a collective market cap over $1 trillion.3 These
cryptocurrencies offer the promise of a frictionless,inclusive and decentralized network powered byblockchains and operated completely independently ofcentral banks, which are increasingly seen as debasing
fiat currencies by “printing money.”*or a precious-metal substitute – shortcomings
exacerbated by the powerful headwinds fromincreasing regulatory scrutiny and the growing
likelihood of central bank digital currencies(CBDCs) which provide almost all the functional
benefits of fiat-linked cryptocurrencies, but withno liquidity or credit risk.
•

Beyond hedge funds exploiting inefficiencies togenerate alpha on the other side of “FOMO”driven, largely retail and speculative flows,
there is currently no compelling case for directownership of cryptocurrencies as a meaningfulshare of an institutional portfolio. Theoretically,
cryptocurrencies have no ex-ante foundational
underpinnings for delivering robust riskadjusted returns in the future. Empirically, after
examining the brief historical data available on
crypto, we find little real-world evidence thatcryptocurrencies deliver diversification vs.
mainstream assets, are effective inflation hedges,
possess the intrinsic characteristics of a safe-havenasset, or advance ESG objectives. Of course, itgoes without saying that bitcoin and many othercryptocurrencies have delivered awe-inspiring
returns over the last decade – albeit with frequentand substantial drawdowns – and this speculative
momentum could continue for some time.

•

In contrast to direct cryptocurrency ownership,
there are attractive institutional investment
opportunities in the broader crypto ecosystemand the incidental innovation that hasflourished in the creation of bitcoin andother cryptocurrencies. These include private
applications of distributed ledger technology
and smart contracts used in financial services(like clearing and settlement of securities andinternational payment systems) as well as

For institutional investors, cryptocurrencies also offer
the allure of extraordinary and diversified returns ina market that is now of sufficient size and liquidity
for meaningful institutional positions. Indeed, somemarket participants estimate that about 5% of total
Bitcoin supply are now held by institutional investors
via custodial intermediaries.4
To understand the investment implications of theevolving cryptocurrency landscape, we have drawn
on the insights of more than 30 investment
professionals across PGIM’s fixed income, equity
and private alternatives managers – as well as leading
economists, venture capitalists and crypto investors.
Our resulting conclusions:•

While a few cryptocurrencies will endure on
the fringes of the monetary system, the broad
replacement of fiat currencies globally by
cryptocurrencies is unlikely to materialize.
Functionally, cryptocurrencies are unable tomeet the basic prerequisites of either a currency* To sharpen our focus, we limit our analysis to crypto assets intended as substitutes for fiat currencies, such as bitcoin, ether and sol, which collectively represent close to
60% of the sector’s market cap. Digital tokens specific to a particular application or sidechain are not our primary focus. We also explicitly exclude regulated central bankdigital currencies (CBDCs) and non-fungible tokens (NFTs) from our analysis, except where they intersect with and influence our view on crypto opportunities and risks.

1 CRYPTOCURRENCY INVESTING | PGIM

in logistics and supply-chain management.
Tokenization could be a next-generation
securitization mechanism for real assets.
Additionally, the companies providing the essential
infrastructure for crypto innovation will have ahead start in underpinning CBDCs and otherblockchain-powered applications. This collateralinnovation has the potential to generate attractive
returns for owners of the companies that provide
these services but will not necessarily accrue to theowners of cryptocurrencies.
We share analysis to support our hypotheses andunpack the critical investment implications of these
conclusions in the rest of this report. Chapter 1
summarizes the cryptocurrency landscape, cutting
through the breathless media hype. Chapter 2 explains
why cryptocurrencies are deeply inadequate as

currencies. Chapter 3 lays out the empirical evidence
for why cryptocurrencies fail to meet most institutional
investor objectives around portfolio diversification,risk-adjusted returns, inflation protection and ESG.
To “stress test” our conclusions, we also lay out thepotential scenarios that would need to materialize forthe extraordinary price trajectory of bitcoin and othercryptocurrencies to continue. Our base case is thesescenarios are highly unlikely to materialize.
Finally, Chapter 4 argues that enduring value forlong-term investors will be found not incryptocurrency holdings themselves, but in theuse cases and applications from the remarkablebreakthroughs that are the accidental by-products of
the heroic but potentially doomed quest to build aviable decentralized, unregulated peer-to-peer
payment system.

About PGIM
PGIM, the investment management business of Prudential Financial, Inc. (PFI), has a history that dates
back over 145 years and through more than 30 market cycles.* Built on a foundation of strength, stability
and disciplined risk management, PGIM's more than 1,300 investment professionals are located in key
financial centers around the world. Our firm is comprised of six autonomous asset management businesses,
each specializing in a particular asset class with a focused investment approach. This gives our clientsdiversified solutions from a leading global asset manager with global depth and scale across public andprivate asset classes, including fixed income, equities, real estate, private credit and other alternatives.

* 30 market cycles represents PFI’s asset management expertise through PGIM, its affiliates and its predecessors.

PGIM | CRYPTOCURRENCY INVESTING 2TABLE OF CONTENTS

CHAPTER 1

CHAPTER 3

UNDERSTANDING THE
CRYPTOCURRENCYECOSYSTEMCONSIDERING BITCOIN
FOR AN INSTITUTIONAL
PORTFOLIO

Page 4

CHAPTER 2

NOT QUITE A
CURRENCY
Page 10

Page 14

CHAPTER 4

INVESTMENTOPPORTUNITIES IN
THE BROADER CRYPTOECOSYSTEM
Page 24

3 CRYPTOCURRENCY INVESTING | PGIMCHAPTER 1

UNDERSTANDING THE
CRYPTOCURRENCY ECOSYSTEM

The ingenuity displayed inbringing together distributed
ledgers and cryptographic
methods represents a realtechnological breakthrough.”

CHAPTERS

1

2

3

4
PGIM | CRYPTOCURRENCY INVESTING 4

CHAPTER 1

UNDERSTANDING THE CRYPTOCURRENCY ECOSYSTEM
On October 31, 2008, a user with the pseudonym Satoshi Nakamoto posted a link on a cryptography mailing list
to a short white paper on bitcoin, setting off the cryptocurrency revolution.5 The paper envisioned an electronic
payment system that allows “any two willing parties to transact directly with each other without the need for atrusted third party.”
Bitcoin’s focus on real-time transparency, anonymity,
security and trustless ownership without governmentor legacy banking system involvement was perfectly
timed for a world still reeling from the Global
Financial Crisis and the collapse of Lehman Brothers
six weeks before.6
Whatever bitcoin’s ultimate destiny, the ingenuity
displayed in bringing together distributed
ledgers and cryptographic methods represents agenuine technological breakthrough.* Indeed, fast
forwarding to 2022, bitcoin remains the dominant
cryptocurrency in circulation, with a market share
greater than 40%. And if imitation is the sincerest
form of flattery, bitcoin has spawned over 10,000
cryptocurrencies and digital tokens to date!7
We identify the key features of this array of
cryptocurrencies in this chapter and cut throughthe industry jargon to understand the underlying
innovation behind them as well as the broader andrapidly evolving “crypto ecosystem” – which goes wellbeyond the digital currencies themselves.

use existing blockchains – most commonly the
Ethereum blockchain. Cryptocurrencies are inexorably
linked to their underlying blockchain; indeed, many ofthe differences between them can be attributed to thedifferences in their underlying blockchains.

The four dimensions of every
cryptocurrency
The more than 10,000 successors of bitcoin all
make design decisions along four dimensions:decentralization, security, scalability and stability.
Taken together, these four dimensions allow one toneatly classify the crowded cryptocurrency universe.
Every cryptocurrency (and its underlying blockchain)is a unique and different trade-off between theseelements (Exhibit 1).

Exhibit 1: Four Dimensions of Cryptocurrencies

What are cryptocurrencies?
Cryptocurrencies are digital assets maintained andrecorded on a blockchain without a trusted intermediarysuch as a custodian or bank. Every cryptocurrency
exists on a blockchain – a decentralized ledger – thatrecords, clears and validates every transaction evermade on that network. Some cryptocurrencies (e.g.,
bitcoin, ether, Solana) have their own proprietary
blockchains; others (e.g., Uniswap, Chainlink, Maker)

SCALABILITY

SECURITYSTABILITY

Source: PGIM Thematic Research.

* Bitcoin refers both to the digital cryptocurrency as well as the underlying blockchain network.

5 CRYPTOCURRENCY INVESTING | PGIM

DECENTRALIZATIONDecentralization
Decentralization refers to creating an immutable ledger
that does not rely on a central entity for validation ofparticipants and transactions. This is in stark contrast
to conventional finance where a trusted financial
intermediary (often a bank) clears, verifies and records
transactions on behalf of customers. On a blockchain,
this key function is instead divided among multiple
independent “miners” who are financially incentivized– with utility tokens or cryptocurrencies – to act as
independent verifiers of the network’s authenticity.
Miners record transactions as well as verify otherminers’ transactions. On the bitcoin blockchain, theseincentive tokens are bitcoin. This ability to makepayments anonymously via a “trustless” network
is attractive for those seeking a mechanism that is
relatively anonymous and independent of financial
institutions or governments.

Cryptocurrencies areinexorably linked to theirunderlying blockchain.
Security
Security refers to the rigor associated with verifying
transactions on the blockchain. The degree of rigor
determines the ability of the blockchain to function as
expected while defending itself from fraud, cyberattacks,

hackers, bugs and other malicious ware. With morenodes recording and validating each transaction, thechallenge of corrupting a sufficient portion of the
network to hack it or record false transactions becomes
more daunting. Blockchains that optimize for security(such as the bitcoin network) are typically highly
decentralized. Indeed, though crypto exchanges havebeen hacked repeatedly, the bitcoin blockchain itself has
never been successfully compromissed.

Scalability
Scalability refers to the ability of a blockchain tohandle an increasing volume of transactions. Efficiency
in transaction speed and the cost of recording andvalidating transactions are paramount for scalability– which in turn is essential for blockchain technology
to become a widespread digital payment system.
Without some compromise on decentralization andsecurity – what Ethereum co-founder Vitalik Buterinlabels the “blockchain trilemma” – it will not be easy
for blockchain networks to get to scale efficiently andcompete with traditional networks in convenience,
speed and capacity (Exhibit 2).8
In response to this significant deficit in processing
speed, companies are developing a range of scaling
solutions. Some aim to create new, faster blockchains(termed Layer 1 solutions) while others are building
applications on top of an existing blockchain to boost
its efficiency (termed Layer 2 solutions), essentiallyby bundling multiple user transactions and recording
them in aggregate rather than individually.

Exhibit 2: Transaction Speed of Payment Networks
5,223

Visa
612

Paypal101

Mercado Pago
7

Bitcoin
0

200

400
600
Transactions Per Second

800

1000

Source: PGIM Thematic Research. Data from 2021 10-K for Paypal, Mercado Pago and Visa; Nasdaq Data for Bitcoin.
Note: Maximum number of transactions for Bitcoin. Average number of transactions for Visa, Paypal, and MercadoPay.

PGIM | CRYPTOCURRENCY INVESTING 6

Exhibit 3: Leading Cryptocurrencies and Stablecoins
Cryptocurrency

Market Cap ($ Billions)

Security

Decentralization

Scalability

Stability

Bitcoin (BTC)

$585

✓

✓

Ethereum (ETH)

$278

✓

✓

Tether (USDT)

$83

✓

✓

USD Coin (USDC)

$48

✓

✓

Ripple (XRP)$24✓

Sol (SOL)

$22

✓

✓
✓

Source: PGIM Thematic Research; CoinMarketCap as of May 9, 2022.
Note: Both Tether and USD Coin are backed by cash and money market instruments (commercial paper, Treasury bills, etc.).

For example, Lighting Network is a scaling solution
for the bitcoin blockchain and StarkNet is a scaling
solution for the Ethereum blockchain. Many of these
scaling solutions may be quite relevant for current andfuture CBDCs as well.

Stability
All cryptocurrencies face the trade-offs of theblockchain trilemma. But not all cryptocurrencies
face tremendous volatility in value. Stablecoins such
as Tether, USD Coin and Dai are digital currencies
recorded and transacted on a blockchain whose value
is explicitly linked to another asset. Many of the mostprominent stablecoins are linked to a fiat currency –often, the U.S. dollar (Exhibit 3). Depending on thestablecoin, these reserves can either be “on-chain” (inthe form of digital assets) or “off-chain” (in the formof conventional money market assets).9 Regardless ofwhether a stablecoin is backed by fiat or digital assets,
the reserve mechanisms are not regulated or required
to be audited. In fact, management and reporting ofreserves is largely left to the discretion of the coin issuer.

7 CRYPTOCURRENCY INVESTING | PGIM

Who are the owners ofcryptocurrency?
In understanding the makeup and motivations ofcryptocurrency holders, it is probably most instructive
to focus on bitcoin, which is by far the largest
cryptocurrency by market cap as of March 2022.10
Roughly a third of bitcoin currently in circulation isheld by intermediaries (e.g., exchanges, gambling sites,
darknet sites, or brokers) while half are controlled byindividual investors.11 Individual ownership is highly
concentrated; at the beginning of 2021, the top 0.25%
of owners held about 20% of bitcoin.12
It is worth considering what draws individual
investors to cryptocurrencies. We believe there are
five primary reasons:
1.

Retail and high-net-worth investors are attracted
to the excitement and remarkable speculative
returns possible from holding bitcoins orother cryptocurrencies. Anecdotal media andcocktail party accounts of early adopters who
became overnight bitcoin millionaires are now

commonplace.13 Social media hype from techentrepreneurs and celebrity investors such as Elon
Musk and Cathie Wood has furthered the frenzied
momentum around cryptocurrencies.14
2.

There is declining faith in financial institutions
and governments – a growing phenomenon since
the Global Financial Crisis.15 For example, theEdelman Trust index for the U.S. has declined
by an additional 10 points from an already-low
starting point since 2017.16

3.

Retail investors are drawn to bitcoin because of its
limited supply and inherent scarcity. In particular,
crypto enthusiasts view cryptocurrencies as “digitalgold” that protects them from the monetarydebasement of fiat currencies – a concern that has
been heightened with post-COVID inflationarypressures in many economies.

4.

Active traders, especially multi-strategy and quanthedge funds, exploit inefficiencies and arbitrage
opportunities arising from the wild gyrations incryptocurrency prices. By mid-2021, about 20%

of surveyed hedge funds were actively trading
digital assets like bitcoin.17
5.

Crypto natives are active in the metaverse, where
cryptocurrencies and digital tokens are establishedas the primary medium of exchange. For example,
V-bucks is the in-game currency used in Epic’s
Fortnite multi-user online game, Shards are thedigital token in the online, Pokemon-inspired
game Axie Infinity, and ether is widely used topurchase NFTs (i.e., digital collectibles).

The broader crypto ecosystem
Cryptocurrencies are part of a broader ecosystem(Exhibit 4) that extends well beyond the digitalcurrencies themselves and include the blockchains
they are built on as well as the necessary infrastructure
to support mining and storage. It also includes theexchanges where cryptocurrencies trade and the widearray of use cases and applications built on blockchainssuch as non-fungible tokens and cross-border
payment networks. Additionally, it encompasses the

Exhibit 4: The Cryptocurrency Ecosystem

CRYPTOCURRENCIES
Decentralized, unregulated
digital money

Tether

DIGITAL ASSETS
NFTs, tokenized assets andother decentralized apps and solutions

BitcoinOpen Sea

Maker

EXCHANGES AND WALLETS

INFRASTRUCTURE

Custody, trade, hold andaccess digital assets

To scale, institutionalize and enhance compliance(e.g., KYC, identity, security)

Anchorage

Chainalysis

Coinbase

Fireblocks

Metamask

Lightning Network

BLOCKCHAINS
Decentralized digital ledgers used to record transactions

Bitcoin

Ethereum

SolanaSource: PGIM Thematic Research.

PGIM | CRYPTOCURRENCY INVESTING 8The broader ecosystem has many
companies and applications thatare likely to endure regardless ofthe success of the cryptocurrencies
that spawned them.
constellation of compliance, risk management andsecurity tools designed to increase comfort levels
within the lightly or unregulated crypto marketplace.
Finally, the ecosystem also includes the venture capital
investors and initial coin offerings that fund so muchof this universe.
Critically for investors, this broader ecosystem – andthe tremendous innovation it is generating – hasmany companies, use cases and applications thatare likely to endure regardless of the success of thecryptocurrencies that spawned them. Indeed, manyof these use cases are not limited to or reliant on
cryptocurrencies at all.The best opportunities for
institutional investors may lie in this ecosystem rather
than in cryptocurrencies themselves.
Smart contracts are an excellent example of thiscollateral innovation. They are self-executing digitalcode that holds an agreement between multiple
parties and executes as various terms or conditions are
met. Smart contracts can be applied to transactions

9 CRYPTOCURRENCY INVESTING | PGIM

involving any digital asset – including CBDCs
and digitized tokens or securities. The Ethereum
blockchain, released in 2015, was built as the first
blockchain platform to enable smart contracts. It
now powers a range of digital applications designed
to manage trade finance, escrow services, supplychains and even insurance claims without costly andlengthy human or institutional intermediation. Someforward-thinking central banks and regulators areclosely following innovation in the flourishing crypto
ecosystem – for example, around holding, trading,reporting and security of digital currencies – with aneye on future private-public partnerships that may
allow these innovations to power CBDCs.18

We will return to the multiple investment
opportunities in the broader crypto ecosystem
in Chapter 4. But before we head there, let’s
dive deeper into cryptocurrencies themselves.
The next chapter explains why our base-casescenario is quite bearish about cryptocurrencies
as a currency. This bearishness underpins ourultimate thesis, summarized by the California
Gold Rush adage, that “the best way to profit
is not to speculate on gold, but to sell picks
and shovels.”

CHAPTER 2

NOT QUITE A CURRENCY

No cryptocurrency adequately
fulfills the three essentialfunctions of money.”

CHAPTERS

1

2

3

4
PGIM | CRYPTOCURRENCY INVESTING 10

CHAPTER 2

NOT QUITE A CURRENCY
Money has taken different forms through the ages, from cowry shells to peppercorns and from silver coins to
the greenback, but they all share three common characteristics. They act as (1) a store of value, (2) a widely
accepted medium of exchange and (3) a unit of account. Unfortunately, no cryptocurrency to date adequately
fulfills these three essential functions. Bitcoin, the most prominent cryptocurrency, for example, has anotoriously unstable price, is a poor medium of exchange and is rarely used outside the crypto-native digital
realm as a unit of account. These fundamental inadequacies are rarely acknowledged by crypto enthusiasts,
who often conflate bitcoin’s phenomenal price appreciation with its actual utility as a digital cryptocurrency.19

Do cryptocurrencies pass any of thethree well-defined tests of a currency?

Bitcoin has an unstable price, isa poor medium of exchange andis rarely used outside the cryptonative realm as a unit of account.

Store of Value
Preserving value, at least over short periods oftime, is an important function of currency. Fiatcurrencies can be eroded over time by price inflation.
However, outside of extremely rare hyperinflationary
environments they have been an efficient store ofshort- and medium-term value. In contrast, the wild
price gyrations of many cryptocurrencies make themhighly unattractive as a store of value – even in the

Exhibit 5: Rolling 3-Month Volatility of Select Asset Classes
300%

S&P 500
EM Equities

Commodities
BTC

250%

200%

150%

100%

50%

0%
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: PGIM analysis; Refinitiv and Bloomberg.
Note: Volatility of daily returns, annualized. The Bloomberg Commodity and MSCI Emerging Markets Index were used for Commodities and EM Equities respectively.

11 CRYPTOCURRENCY INVESTING | PGIM

very short term. Exhibit 5 demonstrates how the priceof bitcoin has remained extremely volatile since its
inception. Bitcoin clearly falls short on this first test ofa workable currency.

Central bank digital currencies are
not a distant prospect: China has
already launched the e-CNY.
Of course, stablecoins pegged to fiat currencies could
function as a more reliable store of value, but they
face a potentially existential risk: they would be maderedundant once central bank-issued digital currencies(CBDCs) become more commonplace.*
For example, a digital dollar issued by the Federal
Reserve and backed by the U.S. Treasury would
provide all the functionality of USD Coin – but
without any liquidity or credit risk.20 And CBDCs are
not a distant prospect: China has already launched thee-CNY. The Fed released a long-awaited study on adigital dollar in January 2022 and the ECB will shareits findings on the viability of a digital euro in 2023.
Even beyond the threat from CBDCs, there arematerial risks around the reserve mechanisms ofstablecoins – including a lack of transparency
and third-party audits. Stablecoins are essentiallyunregulated money market funds. Even whenregulated, the stable value of these instruments remains
vulnerable to large outflows under stressed conditions,as was evident during the financial crisis in 2008.21
This lack of transparency and reliable auditing inprominent stablecoins was apparent in the case of
Tether – the largest issuer of stablecoin – which was
fined for falsifying reserve reporting.22

Medium of Exchange
Cryptocurrencies are still not close to being widelyused as a medium of exchange. It is indeed telling thateven after a dozen years, few commercial enterprises
accept them. Using bitcoin as an example, thissituation is unlikely to change soon for several reasons.
First, the bitcoin blockchain, optimized for security
and decentralization, does not prioritize operational
efficiency. Bitcoin’s maximum transaction speed of 7transactions per second (TPS) pales in comparison to
the speed of conventional payment networks, which
average 1,700 TPS.**
Second, bitcoin transactions are expensive rather thancheap and frictionless. In fact, bitcoin’s transaction
fees are an intrinsic outcome of the highly secureand decentralized structure of its blockchain and theneed to incentivize miners to decipher cryptographic
problems. Fees have been as high as $50 for a single
transaction – making bitcoin highly impractical foreveryday, small-scale transactions.23

Bitcoin’s high transaction fees
are an intrinsic outcome of thehighly secure and decentralized
structure of its blockchain.
Unit of AccountCurrencies are used to denominate the value of
products and services. That is, a haircut, a cup of tea,
or a diamond ring are typically priced in euros, pesos
or yuan. Fiat currencies serve as a common yardstick
to measure value across the wide range of daily
economic transactions.
Outside of the deep digital realm, however,cryptocurrencies are only rarely used to price products
or services. While a growing number of companies
accept bitcoin as a payment option (e.g., Burger King,
Microsoft, Norwegian Air, and Pizza Hut, to name afew), none of them price their products or services in* A CBDC is the digital form of a country’s fiat currency. Instead of issuing paper money, the central bank issues electronic coins or accounts backed by the full faith andcredit of the government. However, as they are issued by central banks, they are not truly decentralized and not technically considered cryptocurrencies.
** Blockchains optimized for scalability do offer more attractive transaction speeds. For example, the Solana blockchain theoretically offers up to 65,000 TPS. However,even its cryptocurrency falls short in terms of being a store of value or a unit of account.

PGIM | CRYPTOCURRENCY INVESTING 12

Merchants simply accepting
bitcoin does not mean it ispreferable – or even viable – forwages, prices and assets to all bedenominated in bitcoin.
bitcoin. In other words, virtually no business fixes theprice of their product in bitcoin and then converts it
into fiat currencies.
Importantly, merchants simply accepting bitcoin does
not mean it is preferable – or even viable – for wages,
prices and assets to all be denominated in bitcoin.24
The lone real-world example of a nation adopting
bitcoin as its currency, El Salvador, has not gone
well so far. Early experience strongly suggests bothconsumers and businesses have resisted governmentmandated adoption and prefer to price merchandise
and transact in U.S. dollars anyway.25, 26

13 CRYPTOCURRENCY INVESTING | PGIM

No matter how robust the evidence on theinadequacies of cryptocurrencies as a currency,
it is undoubtedly true that some market actors
have invested heavily in cryptocurrencies.
The soaring speculative rise of many
cryptocurrencies has been dramatic, and it ishard to predict how much further momentum
can carry cryptocurrency valuations. Some
investors now see cryptocurrencies as a new“digital gold.”
Regardless of their multiple shortcomings
as currencies, Chapter 3 discusses if
cryptocurrencies have a useful or significant
role to play in institutional portfolios – andalso lays out some alternative scenarios
institutional investors would need to believe
under which cryptocurrencies would
potentially continue to flourish.

CHAPTER 3CONSIDERING BITCOIN FOR AN
INSTITUTIONAL PORTFOLIO

The time has come to seriously
examine what role bitcoin
might play in an institutional
multi-asset portfolio.”

CHAPTERS

1

2

3

4
PGIM | CRYPTOCURRENCY INVESTING 14

CHAPTER 3CONSIDERING BITCOIN FOR AN INSTITUTIONAL PORTFOLIO
The spectacular returns, growing scale and market cap of the crypto universe, the search for higher real returns
in a yield-starved investment universe as well as their purported role as “digital gold” — a safe haven in volatile
times – has led many institutional investors to at least consider allocating a small percentage of their portfolio
to cryptocurrencies.

Are cryptocurrencies an effective
portfolio diversifier?

Even for the most hardened skeptics, the time
has come to seriously examine what role bitcoin
might play in an institutional multi-asset portfolio,
particularly in an era of rising geopolitical andinflation risks.

Given its deliberate detachment from sovereign statesand monetary institutions, bitcoin would appear tobe less impacted by classic macroeconomic factors
than conventional asset classes such as equities, bonds
or commodities.

While it would be foolhardy to arrive at adefinitive verdict given the brief time period since
Bitcoin’s inception and the ongoing evolution of
cryptocurrencies, our evaluation of the evidence todate strongly suggests that, despite robust valuations
and the conviction of ardent crypto enthusiasts,
direct investment in bitcoin or other cryptocurrencies
currently offers little benefit to institutional investors
and considerable volatility and regulatory risk.

Unfortunately, for investors looking fordiversification, bitcoin’s correlation with equities andcommodities has been unstable and trending higherof late. Between 2013 and 2019, bitcoin had a nearzero average correlation with broad U.S. equities
and commodities. Starting in 2020, however, its

Exhibit 6: Bitcoin Correlation with Various Assets(Rolling 1-year)
Correlation Coefficient
0.5
0.4

S&P 500

U.S. Bond Index

Commodities

Nasdaq

0.3
0.2
0.1
0
-0.1
-0.2
2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: PGIM analysis; Refinitiv and Bloomberg.
Note: The Bloomberg Commodity Index and Bloomberg Aggregate Bond Index were used for Commodity and Bonds respectively.

15 CRYPTOCURRENCY INVESTING | PGIM

2021

2022

correlation with U.S. equities and commodities spiked
sharply and has remained consistently positive since(Exhibit 6). Even the International Monetary Fundhas noted the “increased and sizable co-movement andspillovers between crypto and equity markets indicate
a growing interconnectedness” that is a growing sourceof systemic risk.27 This suggests cryptocurrencies may
not be particularly effective as a portfolio diversifier
going forward.

Bitcoin’s correlation with equities
and commodities has been unstable
and trending higher since 2020.
That an emerging asset class has a growing correlation
with other assets as it matures is not only theoreticallyplausible but has historical precedent. Some frontier
equity markets have demonstrated a similar tendency
in the past. It should therefore come as no surprise thatas bitcoin has gone mainstream it has also grown moresensitive to the broader liquidity and risk sentimentfactors that move other assets. In fact, market factor
analysis demonstrates that bitcoin has developed astrong “trend following” tendency and more investors
view bitcoin as a high-beta, risk-on asset.28

Is bitcoin an effective hedge against
inflation?
Bitcoin is scarce. That is, its supply is limited to 21
million coins and this is hard-coded into the bitcoin
algorithm. This constraint suggests its value, much likegold, may be resistant to fiat monetary debasement
or price inflation. However, there is scant evidence tosupport this thesis. In the lone episode of elevated U.S.
inflation since the introduction of cryptocurrencies,
bitcoin provided only limited inflation protection.
U.S. prices were whipsawed during the pandemic andinflation began to soar steadily in 2021 and into 2022.
The price of bitcoin moved with inflation only for abrief time before falling sharply (Exhibit 7). Gold, on
the other hand, has demonstrated since the 1970s thatit can be a reasonably effective and reliable long-term
inflation hedge.29

Exhibit 7: U.S. Inflation vs. Bitcoin PriceYoY Percentage Change

BTC Price
80,000

Bitcoin

10

CPI

8
60,000

6
40,0004

20,0002

0
Apr-200Jul-20

Oct-20Jan-21

May-21

Aug-21

Nov-21

Mar-22

Source: Bloomberg and Federal Reserve Economic Data.

PGIM | CRYPTOCURRENCY INVESTING 16

How does bitcoin’s volatility andrisk-adjusted return compare toother assets?

than either equities or commodities over its brief
history. Between June 2010 and March 2022, bitcoin
recorded more than 25 episodes of drawdowns of 25%
or more. By comparison, equities and commodities
recorded just one each (Exhibit 9).

Bitcoin has a justified reputation for being substantiallymore volatile than other asset classes (Exhibit 8).

When considering risk-adjusted returns, bitcoin
had an extraordinary risk-return profile early on.
However, it has not retained this superior performance.

This extreme volatility manifests itself in far moreinstances of 10%, 25% and even 50% drawdowns

Exhibit 8: Asset Volatility(January 2011 – March 2022)

95.9%

13.4%

15.3%

16.8%

CommoditiesGold

S&P500

6.7%
USD

BTC

Source: PGIM Thematic Research; Refinitiv and Bloomberg.
Note: Volatility of daily returns, annualized. The Bloomberg Commodity Index and London Bullion Market Association Gold Price were used for Commodities and Gold respectively.

Exhibit 9: Frequency of Drawdowns(June 2010 – March 2022)
Frequency
BTC

45

Commodities

S&P 500

35
25

15
5
10%

25%

Source: PGIM Thematic Research; Bloomberg and Refinitiv.
Note: Drawdowns calculated over a 3-month rolling window. The Bloomberg Commodity Index was used for Commodities.

17 CRYPTOCURRENCY INVESTING | PGIM

50%

Exhibit 10: Sharpe Ratios of Select Asset Classes
2.50
2011-20172018-2021

2.00
1.50
1.00
0.50
0
-0.50
-1.00
BitcoinS&P 500

Bond Index World Equities

TIPS

USD

EM Equities

Gold

Commodities

Source: PGIM Thematic Research; Refinitiv and Bloomberg.
Note: The MSCI World Index, Bloomberg Aggregate Bond Index, Bloomberg Inflation-Linked Bond Index, U.S. Dollar Index, MSCI Emerging Markets Index, London Bullion
Market Association Gold Price, and Bloomberg Commodity Index were used for Global Equities, Bond Index, TIPS, USD, EM Equities, Gold, and Commodities respectively.

Since 2018, its Sharpe ratio has been similar toother assets (Exhibit 10). Given the frequency andseverity of drawdowns and its diminished riskadjusted performance since 2018, it is not clear whatrole an asset class offering zero yield and dubious
diversification qualities should play in a long-term
strategic portfolio allocation.30

Bitcoin had an extraordinaryrisk-return profile early on,
but it has not retained thissuperior performance.
Does bitcoin function as a safe-havenasset? Is it “digital gold”?
Like gold, bitcoin is not issued nor controlled byan institution, central bank, or government. This
characteristic has enabled gold to serve as a safe-havenasset during some periods of increased economic or
political uncertainty. Does bitcoin share some of thosecharacteristics as well? No, it does not.

For starters, the theoretical foundations ofcryptocurrencies as a safe haven are somewhat shaky.
A white paper, no matter how elegant, cannot decreea safe haven. In contrast, gold and other precious
metals have held some financial status for over 2,000
years.31 Furthermore, many precious metals havemultiple consumer and industrial uses that – unlike
cryptocurrencies – give them a non-zero price floor.32
For example, currently about half of gold production
goes to jewelry, one-tenth to industry and a quarter toback central bank reserves.33
More importantly, the empirical evidence to date does
not support the hypothesis of bitcoin as a safe haven.
Over its short history, bitcoin has not exhibited stability
in its value. Between 2015 and 2022, for example,
its volatility was consistently much higher than otherconventional safe-haven assets such as gold, U.S.
Treasuries, or the U.S. Dollar (Exhibit 11).
The true test for a safe-haven asset, however, is how
it retains its value during a period of extreme andwidespread market volatility. Bitcoin was not exactly
a steadying force in early 2020 when global asset
prices spiraled downward due to worldwide COVIDinduced shutdowns. It did not exhibit safe-havencharacteristics at that time and held far less of its value
PGIM | CRYPTOCURRENCY INVESTING 18

than conventional safe-haven assets like gold and the
U.S. dollar (Exhibit 12).

can potentially exploit market inefficiencies anddislocations that arise in these immature, retail- andmomentum-driven markets.

Does bitcoin offer any short-termalpha opportunities?

Dislocations in the nascent cryptocurrency market
draw comparisons to other less efficient frontiermarkets. For example, futures contracts for somecryptocurrencies are not standardized and theirprices do not always align with spot markets

Some features of cryptocurrency markets, especially
the wild price gyrations, provide opportunities for
active trading. In particular, hedge fund strategies

Exhibit 11: Price Volatility of Select Asset Classes
140%

USD

S&P 500

Gold

BTC

ETH

U.S. Treasury

120%
100%
80%
60%
40%
20%
0%
2016

2017

2018

2019

2020

2021

2022

Source: Refinitiv and Bloomberg.
Note: Annualized rolling 1-year volatility. The London Bullion Market Association Gold Price and Bloomberg Treasury Index were used for Gold and Treasuries respectively.

Exhibit 12: COVID Market Drawdown
20%

BTC

Global Equities

Gold

USD

Treasury

10%
0%
-10%
-20%
-30%
-40%
-50%
Feb-20Mar-20

Apr-20May-20Jun-20Source: Refinitiv and Bloomberg.
Note: The MSCI World Index, London Bullion Market Association Gold Price, and Bloomberg Treasury Index were used for Global Equities, Gold and Treasuries respectively.

19 CRYPTOCURRENCY INVESTING | PGIM

across exchanges, creating arbitrage opportunities
that quant hedge funds have been successfully
exploiting.34 In addition, the extraordinary volatilityof cryptocurrencies presents a wide range to tradein. Also, similar to frontier markets, liquidity andleverage can be unreliable and scarce in cryptocurrency
markets.35 Such a backdrop provides return potential
for market players who have the capability of providing
leverage or liquidity to the market when it is needed
most. These alpha opportunities are available to arange of multi-strategy and quantitative hedge funds.36

Cryptocurrencies are problematicalong multiple dimensions of ESG.
How do cryptocurrencies align withoverall ESG objectives?
For sustainability-minded investors, cryptocurrencies
are problematic along multiple dimensions of ESG.
Environmentally, the most worrying aspect of
cryptocurrency is its massive energy consumption.
Major blockchains – including bitcoin and theoriginal Ethereum – currently utilize a proof-of-work(POW) mechanism to validate transactions that isextremely energy intensive. With a POW validation
structure, miners on the blockchain compete for theright to create the next block in the chain by solving
complex computational problems. This race typicallyinvolves thousands of competitors and is repeatedevery 10 minutes or so. Each of the competitors utilize
computing power and consume electricity, while
only one of them wins and is rewarded with newly
minted coins.
Because of this highly decentralized validation process,just a single transaction on the bitcoin blockchain,for example, requires enough energy to power the
average American home for over two months and has
a carbon footprint equivalent to 2 million transactions
on the Visa network (Exhibit 13). The total electricalenergy use around bitcoin annually is on par with thepower consumption of countries like Thailand, South
Africa and Ukraine.37 In fact, the soaring demand forelectricity from bitcoin miners has given new life tocarbon-intensive energy sources – like fossil fuel power
plants – as well as raising concerns over diverting
scarce renewable energy from other potential uses.38
The intense energy consumption around bitcoin
mining and validation is a major reason several
countries – including China – have banned mining
altogether.39 Indeed, in the wake of the Chinese ban,mining activity has shifted to alternate locations like
Kazakhstan, Canada and Texas and has strained power
grids in some of these new locations.40, 41
Subsequent iterations of blockchain such as Cardano
and Solana reduce their energy footprint throughthe use of different, less energy-intensive validation
mechanisms. Indeed, even Ethereum is planning atransition to this proof-of-stake validation process inlate 2022. However, critics suggest these less energyintensive validation protocols may be less secure.42
Nevertheless, the oversized energy footprint of bitcoin
remains a major area of concern for ESG investors.
Socially, cryptocurrencies offer the promise of being
more inclusive and accessible, providing a digitalplatform to underbanked households. However, many
mobile phone-based payment services in developing
countries (e.g., M-Pesa’s domestic money transfers in
Kenya and Tanzania or Grameen Bank’s international
remittance pilots in Bangladesh) have alleviated someof these financial inclusiveness concerns. Mobile
phones, of course, are more widely available than highspeed internet service and these payment networks
require neither a new currency nor new payment
infrastructure.
Furthermore, when it comes to the distribution of
wealth, there is no reason to think crypto wealth isless unequal than conventional wealth, and recent
empirical research confirms that the distribution ofholdings of bitcoin does significantly differ from the
distribution of wealth in the U.S. – 0.25% of total
global accounts control roughly 20% of the bitcoins
in circulation.43
Finally, from a governance perspective, the anonymity
and difficulty in identifying cryptocurrency ownership
raises significant concerns around anti-money
laundering (AML) and sanction evasion. Regulatory
scrutiny of these risks is growing.

PGIM | CRYPTOCURRENCY INVESTING 20

Exhibit 13: Annualized Bitcoin Power Usage and Carbon Footprint

CARBON FOOTPRINTELECTRICAL ENERGYANNUALIZED BITCOIN
FOOTPRINTSSINGLE BITCOIN
TRANSACTION

Czech Republic

2 Million

The annual carbon footprint of BTC(114 Mt CO2) is comparable tothe annual carbon emissions of the
Czech Republic.

A single BTC transaction has a carbon
footprint (1,180 kg CO2) equivalent to
two million Visa transactions.

Thailand73 Days

BTC uses as much electricity
annually (204 TWh) as theentire nation of Thailand.

A single BTC transaction
consumes sufficient electrical power(2,200 kWh) to power an average
U.S. household for 73 days.

Source: “Bitcoin Energy Consumption Index,” Digiconomist, March 2022.

For example, South Korean regulators are auditing
commercial banks’ ties to cryptocurrency exchanges
for AML adequacy and U.K. cryptocurrencies now
need to comply with AML requirements by April 2022
as well.44, 45
On sanction evasion, concerns have escalated withthe war in Ukraine. Increased trading between rubleand crypto suggest evasion of financial sanctions.
Furthermore, links between sanctioned individuals andcryptocurrency wallets, have culminated in the seizureof multiple crypto accounts.46, 47, 48

Will the risk profile of cryptocurrencies
improve or worsen going forward?
Our base case is that (1) regulatory uncertainty will
decrease as policy frameworks and legal guidelines
catch up with the frenzied pace of growth andinnovation in the crypto ecosystem, but with that
greater clarity will come more rigor; (2) tougher
cryptocurrency regulations may act as a significant
headwind on the industry; (3) there may be a real
threat to the survival of many cryptocurrencies from
central bank digital currencies.

21 CRYPTOCURRENCY INVESTING | PGIMFirst and foremost, a lack of clear and uniform
regulations – both across and within countries – has
led to tremendous uncertainty for long-term investors
evaluating cryptocurrencies for their portfolio.49 It
remains ambiguous, for example, when a cryptocurrency
in the U.S. falls under the regulatory framework of asecurity – and thus subject to SEC regulations about
issuance – and when it is deemed to be an asset like
bitcoin and Ethereum have claimed. This lack of clarity
around a fundamental question is emblematic of thematerial policy risks facing crypto investors.
Some regulators are keen to nurture the innovation
around cryptocurrencies and blockchain technology.
The UK government, for example, is planning toaccept stablecoins as a form of payment in a push
to become a global hub of crypto innovation.50
Meanwhile, other regulators view cryptocurrencies asa major risk to both consumers and to the commercial
banking systems they oversee.51, 52
In addition to unclear regulation and rising scrutiny,
cryptocurrencies are facing outright prohibition
in some countries. China’s abrupt banning of all
cryptocurrency trading and mining in the fall of
2021 is a prominent example, but by no means theonly one (e.g., Egypt and Bangladesh).53 Even when
not explicitly prohibited, some countries are taking
measures to rein in crypto trading. India, for example,
has decided to tax income from the transfer ofcryptocurrencies at 30%.54
Market manipulation is another area of concern.
With almost no regulations around cryptocurrency
insider trading or price manipulation, celebrity crypto

influencers can send market prices soaring or tumblingwith impunity. In May 2021, a series of tweets by Elon
Musk, mentioning personal and corporate activity inbitcoin, sent the price of bitcoin soaring by as much as
10%.55 This was not the only incident, as supportive
tweets around dogecoin led to short-lived 30% gains.56
This came just two weeks after prior comments sent
dogecoin prices into sharp decline.57

Box 1: What do investors need to believe to justify cryptocurrency valuations?
What do you have to believe?

Why this outcome is not our base caseSpiraling inflation from central banks “printing money” and excessive
government debt leads market participants to abandon governmentissued fiat currencies for cryptocurrencies across most transactions.

Fighting inflationary pressure remains a key objective for central banks, with agreater risk they overshoot in monetary tightening and rate increases triggeringa recession. In any case, persistently high inflation in a few G8 currencies would
more likely lead to a shift to other major fiat currencies rather than bitcoin.

Cryptocurrency’s extreme volatility turns out not to be a retail-fueled
speculative bubble but the price discovery journey of a new asset classthat slowly becomes a stable and truly diversifying addition to investor
portfolios. In this scenario, bitcoin matures into “digital gold” and takes
a significant share of gold’s market share as an institutional asset.

While multiple bitcoin rallies may imply more staying power than typicalbubbles, cryptocurrency pricing is likely based on speculative behavior anda fundamental thesis around its value has yet to emerge. Furthermore, withlimited evidence that bitcoin is an inflation hedge or safe-haven asset it isunlikely cryptocurrencies will be widely held by institutional investors.

Major cyberattacks overwhelm traditional financial institutions as wellas wholesale and retail payment networks. With plummeting trust in theformal banking system, market participants turn to cryptocurrencies toseek security and reliability.

Cyberattacks that systematically derail the global payment networks for asustained period would likely also disrupt the global internet infrastructure –making mining, trading and using cryptocurrencies quite problematic.

Major central banks fail to launch CBDCs due to a desire to protect
the conventional banking system, technological and operational
shortcomings in the public sector, or just general ineptitude. In theabsence of major CBDCs, digital stablecoins fill the void.

While some central banks will inevitably lag, nearly all major central banks are
exploring how to issue digital currencies. China has already launched a digitalrenminbi. Active discussions are ongoing in the U.S. and the EU, with our basecase that several G8 countries will launch CBDCs over the next five years.

Mistrust in governments and institutions by their citizens grows morewidespread, perhaps triggered by a global banking sector meltdown.
Cryptocurrencies fill the void.

The 2008 financial crisis and COVID pandemic tangibly demonstrated thatgovernments and central banks remain willing and able to support commercial
banks under stress. Furthermore, with more than 100 different fiat currencies
and central banks, it remains a remote possibility that confidence is depleted
in all major fiat currencies simultaneously, so systemic risk in one country or
region is more likely to lead to a flight to other fiat currencies.

Human activity moves from the physical to the digital realm, where
cryptocurrencies dominate. With gaming, eSports, the metaverse, andWeb 3.0 accounting for a material share of global economic activity inthe virtual realm, cryptocurrencies see explosive growth.

Our base case is that while the metaverse will take up a growing share ofpeople’s entertainment budgets, especially younger millennials and Gen Z,
the majority of people will prefer to spend their non-entertainment resources
and time in the physical rather than virtual world. Furthermore, if CBDCs are
successfully established, even e-gaming and metaverse activity is likely to shift
from crypto to fiat digital currencies.

PGIM | CRYPTOCURRENCY INVESTING 22

These episodes of market manipulation have drawn
the attention of regulators in some jurisdictions whocite this as a primary reason for rejecting new crypto
investment vehicles like bitcoin ETFs.58 In response,a coalition of major cryptocurrency firms – including
exchanges, digital asset platforms, and crypto software
providers – has launched an initiative to self-regulate
the industry. The coalition acknowledges the potential
for fraud and manipulation in the cryptocurrency
space and is urging digital asset companies to sign a“market integrity” pledge that calls for the industry toprotect investors.59
Regulators and market participants have also been
concerned by the notable and repeated breakdowns in
the infrastructure supporting cryptocurrency mining
and trading. Centralized cryptocurrency exchanges
are one example. These exchanges set prices forvarious digital assets and take a small fee off everytransaction. Only a few countries have appropriate
guidelines or regulations in place even though morethan 300 exchanges are now operating globally.60 With
the rapid growth in cryptocurrency trading volumes,
many exchanges do not have the capital or technicalresources to scale up robustly, becoming populartargets for hackers. High-profile hacks of major
cryptocurrency exchanges – like Mt. Gox, BitMart,
Coincheck, and Binance – have been occurring
since 2012 with more than 46 exchanges suffering
thefts. The trend appears to be accelerating – overall
cryptocurrency theft rose by more than 75% in 2021,
totaling more than $14 billion in stolen assets.61
Despite the growing investment mythology
surrounding bitcoin, direct investment in it does
not currently offer an attractive proposition for
institutional investors. Specifically, it has notdemonstrated enduring characteristics as a reliable
portfolio diversifier, safe-haven asset, or inflation
hedge. Its risk-adjusted returns of late are comparable

23 CRYPTOCURRENCY INVESTING | PGIM

to other asset classes but come with significantly
greater frequency of drawdowns. Furthermore,
the unsettled and increasingly harsher regulatory
backdrop, the immature operational infrastructure
supporting it and its problematic ESG attributes posesignificant and material risks for institutional investors.
While this is our base case, it is worth considering thealternative scenarios under which cryptocurrencies
continue to rise in valuation and importance. We
highlight a few of these potential pathways to cryptodominance, as well as the counterarguments that lead
us to currently consider these scenarios unlikely (seeBox 1 on the prior page).

Despite the investment mythology
surrounding bitcoin it does not
currently offer an attractive
proposition for investors.

We therefore believe it’s important for
institutional investors to focus instead on
evaluating the potentially more attractive
long-term opportunities in the broader
crypto ecosystem, beyond cryptocurrencies
themselves. Chapter 4 highlights a range ofinvestment opportunities investors will wantto evaluate as they consider the more longlasting and enduring investment ideas in the
broader crypto ecosystem that have emerged
alongside the cryptocurrency phenomenon.

CHAPTER 4INVESTMENT OPPORTUNITIES IN
THE BROADER CRYPTO ECOSYSTEM

The most powerfulapplications of blockchain
may be unrelated to
cryptocurrencies.”

CHAPTERS

1

2

3

4
PGIM | CRYPTOCURRENCY INVESTING 24

CHAPTER 4INVESTMENT OPPORTUNITIES IN THE BROADERCRYPTO ECOSYSTEM
In many ways the cryptocurrency boom resembles the Dutch tulip mania of the 1630s and the internet stock
bubble of the late 1990s. But savvy long-term investors willing to look beyond the breathless hype surrounding
cryptocurrencies are likely to find enduring investment opportunities around tangible, real-world applications of
distributed ledger technology that are likely to generate attractive risk-adjusted returns – even if crypto-mania
itself fizzles.
We lay out four longer-term investment themes that
CIOs will want to evaluate for their portfolios as theylook beyond cryptocurrencies for sources of long-termvalue creation.

1. Private blockchains andsmart contracts
The most powerful use cases for blockchain may beunrelated to the cryptocurrency payment networks.
Indeed, blockchains are a highly secure and robust
system for verifying and recording transactions. While
there is hype around the “blockchain revolution,”
investors would be wise to focus on blockchain use
cases with well-defined practical applications that
address real-world problems today, especially in thefinancial services sector.
While permissioned private blockchains still require
central authorities to authenticate users initially, they
can reduce the costs of routine financial transactions
as they eliminate the need for counterparty andtrade verification as well as transaction and record
reconciliation. Because of the centralized authority
verifying users, private blockchains can be easily scaled
and will likely have the largest near-term impact onfinancial services firms.62
Permissioned blockchains also offer efficiencies in theorigination, servicing and trading of assets, especiallythose (like real estate) with many different participants
across the value chain and incompatible legacy
25 CRYPTOCURRENCY INVESTING | PGIM

systems. The complexity of the value chain aroundmortgage origination, securitization and servicing,for example, has led companies to push for a more
efficient and real-time process using blockchains. For
example, Figure Technologies is a company which
originates home equity loans and mortgages as well
as securitizes and services them on the Provenanceblockchain. This distributed ledger platform is an earlyexample of the greater transparency and efficiency
potential of permissioned blockchains targeting
specific challenges.63, 64
When partnered with self-executing smart contracts,
distributed ledger technology offers greater efficiency
in the clearing and settlement of securities than current
systems. Major global financial institutions are alreadyutilizing private blockchains to enable real-timeclearing and settlement of transactions today. In fact,
private blockchains are already handling trades withalmost no need for humans to verify counterparties,
confirm trade instructions or settle transactions. In
2021, for example, JP Morgan launched Onyx, an
Ethereum-based blockchain that uses smart contracts,
to swap digitized Treasury collateral and digitized cash
instantaneously and clears, settles and records billions
in daily repo trading.65
Furthermore, innovations in smart contracts andthe rapidly evolving ecosystem of innovative Layer-2
technologies are rapidly expanding the functionality
and creating new and important possibilities forapplications in the conventional financial realm.

The next step for settlements could be more complex
transactions like OTC derivative contracts and otherkinds of bespoke, highly customized transactions.66

Partnered with self-executing
smart contracts, distributed ledger
technology offers greater efficiency
in the clearing and settlement of
securities than current systems.
2. The infrastructure and ecosystem
supporting blockchain applications
and CBDCs
A range of surrounding technology and services will
be required to support permissioned blockchains andsmart contracts – and many will also play a pivotal rolein supporting the adoption and growth of CBDCs.
Specifically, investors should focus on two areas which
are likely to be especially attractive: (1) blockchain
enablers and (2) fraud prevention and regulatorycompliance services.

Key blockchain enablers
The internet didn’t really take off and gain widespread
adoption until its broad infrastructure had matured
and was able to overcome initial challenges.
Similarly, the landscape for innovation in blockchain
infrastructure is wide open and there is tremendous
potential for key enablers to reduce current challenges
and barriers.
One such area for blockchain is interoperability.
While there already exists a diverse ecosystem ofblockchains, these different blockchain networks do
not interact with each other in a meaningful way.
Their ability to “talk” and transact with each otherseamlessly is referred to as interoperability and thisinnovation will enable a wide range of blockchainenabled products and services.67 This innovation
could make interoperable smart contracts possible andopen up new possibilities for record and document
management in healthcare, law and real estate byallowing important business information to be securely
sent back and forth between private and public
networks in a customizable and controlled manner.68
VC-funded platforms like Polkadot and Cosmos aremajor enablers of interoperability.
Another infrastructure area that has drawn VC
investment is Layer 2 technologies that enhance
performance and scalability on popular platforms
like Ethereum. Polygon, for example, is a company
which provides software that lowers the cost andfriction of transacting on Ethereum.69 Another areaof innovation in crypto infrastructure is the growthof companies that support the development ofdecentralized applications, or dApps. For example,
Alchemy is software to create cryptocurrency appsthat communicate with Ethereum and several otherblockchains.70

Fraud prevention, security and regulatorycompliance
Given the complicated regulatory environment for
cryptocurrencies and concerns raised by decentralized
and anonymous transactions, there is a growing
field of AML risk assessment and management. A
whole slew of PE and VC-funded software firms like
Fireblocks and Chainalysis in the US, and Coinfirm
and Elliptic in the UK, currently provide services
to exchanges, payment providers and custodians
to help them conduct due diligence on customers,
track transactions and manage these risks. Firms like
Simplex in Israel utilize AI to provide crypto and fraud
prevention solutions to merchants. Meanwhile Merkle
Science in Singapore offers businesses, banks andgovernment agencies tools for crypto threat detection
and risk management. As the world of digital assets
and CBDCs matures and intersects further withconventional finance and other firms, the need forthese services will grow.

3. Tokenization: Next-generation
securitization of real assets
Tokenization of real assets – essentially fractionalizing
ownership into digital tokens on a distributed ledger– represents a potentially game-changing future

PGIM | CRYPTOCURRENCY INVESTING 26

application that opens up simpler, more costefficient ways to issue, manage, and transact assets
and investments.

Tokenization of real assets
opens up simpler, more costeffective ways to issue, manage
and transact assets.
In theory, any real asset – precious metals, real estate,
artwork or infrastructure – could be tokenized andsubstantially reduce frictional costs from transactions
and servicing. This would increase liquidity, simplifytransactions, enhance price transparency, and allow
more granular portfolio construction. It also allows
investors to potentially benefit from increased
liquidity, shorter and more flexible lock-up periods,
and easier proof of ownership.
It is important to note, however, this application
remains at a very early stage and significant challenges
need to be resolved. First, the lack of clear regulatory,
legal and tax guidelines around tokenized assets leads
to compliance uncertainties. Second, while distributed
ledger technology is already being employed by banks
in their clearing and settling operations, it needs tobe further refined to work across private assets andat efficient scale under real-world conditions. Third,
market participants need to build trust in the new
operational mechanisms and governance frameworks
and adapt their internal systems to them.
However, when the legal, governance and regulatory
frameworks become more settled, tokenization willlead to a more fractionalized ownership model forreal assets. For example, institutional investors whoare significant participants in real estate funds areaccustomed to influencing the contours of the fund’sinvestment strategy. A more fractionalized ownershipmodel could potentially reduce the influence ofanchor investors in the covenants or terms for large
real estate transactions that could now be broadly
syndicated with smaller institutional, high-net-worth

27 CRYPTOCURRENCY INVESTING | PGIM

and even retail investors. Tokenization could also
lower the transaction costs of holding a significantly
more diversified portfolio of real assets as expensive
intermediaries in the securitization marketplace aredisplaced by cheaper blockchain-powered technologies.
Indeed, the prospect of fractionalized ownership andbetter liquidity under a tokenized real asset regime
might allow investors and real estate managers todiversify or fine-tune portfolios with greater ease.

4. Monitor the metaverse as a leading
indicator of crypto innovation
Metaverse platforms combine augmented reality (AR),virtual reality (VR), blockchain technology and digitaltokens or currencies to create highly immersive digitalworlds where people can gather to socialize, play,work, and trade digital goods.71 While it is unclear
whether the metaverse will simply become a part of ourentertainment allocation, or become something much
more meaningful than that, we believe institutional
investors should track new technologies, companies andplatforms in the metaverse for three primary reasons.
First, the metaverse is big and will get bigger. Virtual
gaming, entertainment (e.g., concerts by major bands)
on virtual sites, and advertising in the metaverse
generates roughly $500 billion annually in revenue
today – as large as the “real-world” global sports
industry – and is growing rapidly.72, 73 In 2021, evenputting aside NFTs, over $60 billion was spent on
purely cosmetic, nonfunctional virtual goods.74 Given
the degree of investment going into real-time 3-D
rendered virtual universes, investors should observe
how these platforms evolve.
Second, we are not quite there yet, but applicationsin the metaverse may start leading to tangible
improvements in real-world industries. Johns Hopkins
recently performed its first pair of surgeries on live
patients using augmented reality displays.75 In the
defense sector, the U.S. military has discovered thatyou can accelerate the learning curve for new recruits
looking to fly helicopters with VR goggles, effectively
giving them a private helicopter to learn on.76 And inindustrials, BMW’s new all-electric vehicle ran a VR
simulation for six months before finalizing the actual

layout for the factory – changing 30% of the designfrom the original during those virtual experiments.77
Perhaps even more importantly, these new usesof metaverse platforms are spawning innovativetechnologies, in holographic displays and speech
recognition, for example. Investors will therefore
want to evaluate opportunities both in metaverse
applications – especially in education, training,
healthcare and e-commerce – as well as the VR/AR
hardware field.78

Third, cryptocurrencies and digital tokens are thecurrency in the metaverse. This is a world where
crypto natives have chosen to adopt digital currencies
and tokens as the sole medium of exchange and unitof account to trade NFTs, buy digital assets in a
multiplayer game, or attend a virtual concert. Investors
looking to understand the future direction of the broad
cryptocurrency and digital token landscape will needto monitor the transaction, payment and currency
systems being developed for and in the metaverse.

Conclusion
It is clear cryptocurrency is not currently (and may never be) ready for prime time. Given its flip-flopping
correlations with other assets, frequent stomach-churning drawdowns, a highly unsettled regulatory
landscape, immature infrastructure and problematic ESG impact, investing directly in bitcoin and othercryptocurrencies is currently quite unattractive for institutional investors.
Of course, investors will want to monitor developments in the cryptocurrency space in the unlikely
event that conditions arise for the mainstreaming of private cryptocurrencies. But regardless of how
cryptocurrencies themselves endure, savvy long-term investors will certainly want to capture theemerging constellation of investment opportunities in the broader ecosystem of innovation surrounding
cryptocurrencies – many of which will power new trading platforms, smart contracts, central bank digitalcurrencies and next-generation securitization technologies in the years and decades ahead.

PGIM | CRYPTOCURRENCY INVESTING 28

ACKNOWLEDGMENTS
PGIM gratefully acknowledges the contributions by the following individuals:
Victoria Cheng, Partner, PruVen Capital
Ezechiel Copic, Global Head, Public Sector Research & Development, C Labs
Seth Ginns, Managing Partner and Head of Liquid Investments, CoinFund
Ramneek Gupta, Founder and Managing Partner, PruVen CapitalDavid Lawant, Director of Research, Bitwise Asset Management
Dr. Nathan Sheets, Global Chief Economist, Citibank
Travis Skelly, Partner, PruVen CapitalPete Townsend, Managing Director, Techstars

PGIM Contributors
Lauren Alpeyrie, PGIM Real Estate

Gregory Peters, PGIM Fixed Income

Raimondo Amabile, PGIM Real Estate

Dr. Bruce Phelps, PGIM IAS

Mariusz Banasiak, PGIM Fixed Income

Abhinai Pothireddy, PGIM Innovation

Mark Baribeau, Jennison Associates

Dave Power, PGIM Quantitative Solutions

Edward Campbell, PGIM Quantitative Solutions

Raj Shant, Jennison Associates

Peter Clark, Jennison Associates

Dr. Gavin Smith , PGIM Quantitative Solutions

Dr. Guillermo Felices, PGIM Fixed Income

Peter So , PGIM Innovation

Dr. Ellen Gaske, PGIM Fixed Income

Dr. Yesim Tokat-Acikel, PGIM Quantitative Solutions

Dr. Lorne Johnson, PGIM Quantitative Solutions

Robert Tipp, PGIM Fixed Income

Ed Keon, PGIM Quantitative Solutions

Andrew Tucker, Jennison Associates

David Klausner, PGIM Fixed Income

Eugenia Unanyants-Jackson, PGIM

Dr. Harshad Lalit, PGIM Quantitative SolutionsPeter Vaiciunas, PGIM Quantitative Solutions

Morgan Laughlin, PGIM Real Estate

Dr. Sushil Wadhwani, PGIM Quantitative Solutions

Dr. Katharine Neiss, PGIM Fixed Income

Lauren Waldman, PGIM

Dr. Harsh Parikh, PGIM IAS

Dr. Noah Weisberger, PGIM IAS

Principal Authors
Shehriyar Antia, PGIM Thematic Research
Dr. Taimur Hyat, PGIM
Jakob Wilhelmus, PGIM Thematic Research

29 CRYPTOCURRENCY INVESTING | PGIM

Endnotes
1. Goodwin, Jason, “Greenback: The Almighty Dollar and the Invention of America,” MacMillan, Page 195, 2004.
2. Rolnick, Arthur and Weber, Warren, “Free Banking, Wildcat Banking, and Shinplasters,” Federal Reserve Bank of Minneapolis,
Quarterly Review, Fall 1982.
3. CoinMarketCap, as of May 9, 2022. < www.coinmarketcap.com >4. Karniol-Tambour, Karen, Tan, Ross, Tsarapkina, Dina, Sondheimer, Joe and Barnes, Will, “The Evolution of Institutional Investors’
Exposure to Cryptocurrencies and Blockchain Technologies,” Bridgewater, January 14, 2022. < https://www.bridgewater.com/researchand-insights/the-evolution-of-institutional-investors-exposure-to-cryptocurrencies-and-blockchain-technologies >5. Nakamoto, Satoshi, “Bitcoin: A Peer-to-Peer Electronic Cash System,” 2008. < https://bitcoin.org/bitcoin.pdf >6. Prasad, Eswar, “The Future of Money,” Harvard University Press, Page 106, 2021.
7. CoinMarketCap, as of May 9, 2022. < www.coinmarketcap.com >8. In the first half of 2022, the Ethereum network is planning on adopting a proof-of-stake validation system that will lower transaction
costs and enable better scaling.
9. Catalini, Christian and de Gortari, Alonso, “On the Economic Design of Stablecoins,” 2021. < https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=3899499 >10. CoinMarketCap as of May 9, 2022. < www.coinmarketcap.com >11. Makarov, Igor and Schoar, Antoinette, “Blockchain Analysis of the Bitcoin Market,” 2021. < https://www.nber.org/system/files/
working_papers/w29396/w29396.pdf >12. Ibid.
13. Yaffe-Bellany, David, “They Made Millions on Luna, Solana and Polygon: Crypto’s Boom Beyond Bitcoin,” New York Times, February
7, 2022. < https://www.nytimes.com/2022/02/07/technology/cryptocurrency-luna-solana-polygon.html >14. Otani, Akane, “Elon Musk Has Become Bitcoin’s Biggest Influencer, Like It or Not,” Wall Street Journal, May 23, 2021. < https://www.wsj.com/articles/elon-musk-has-become-bitcoins-biggest-influencer-like-it-or-not-11621762202 >15. Sullivan, Tim, “Transparency, Trust, and Bitcoin,” Harvard Business Review, June 2015. < https://hbr.org/2015/06/transparency-trustand-bitcoin >16. “Edelman Trust Barometer 2022,” Edelman, 2022. < https://www.edelman.com/sites/g/files/aatuss191/files/2022-01/2022%20
Edelman%20Trust%20Barometer%20FINAL_Jan25.pdf >17. “3rd Annual Global Crypto Hedge Fund Report 2021,” PricewaterhouseCoopers, May 2021. < https://www.pwc.com/gx/en/financialservices/pdf/3rd-annual-pwc-elwood-aima-crypto-hedge-fund-report-(may-2021).pdf >18. “Bank of Canada and MIT Announce Joint Central Bank Digital Currency Collaboration,” Bank of Canada, Press release, March 16,
2022. < https://www.bankofcanada.ca/2022/03/central-bank-digital-currency-collaboration >19. Taleb, Nassim Nicholas “Bitcoin, Currencies, and Fragility,” 2021. < https://arxiv.org/abs/2106.14204 >20. “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” Board of Governors of the Federal Reserve System,
January 2022. < https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf >21. “Money Market Fund Reform Options,” President’s Working Group on Financial Markets, October 2010. < https://www.sec.gov/rules/
other/2010/ic-29497.pdf >22. Palma, Stefania and Stafford, Philip, “Tether to Pay $41M for Claiming Its Stablecoins Were Fully Backed by Dollars,” Financial Times,
October 15, 2021. < https://www.ft.com/content/d7db307c-ef43-4af8-8f14-c1d1ba414058 >23. Harper, Colin, “Bitcoin Transactions Are More Expensive Than Ever,” CoinDesk, September 14, 2021. < https://www.coindesk.com/
markets/2021/04/21/bitcoin-transactions-are-more-expensive-than-ever >24. Taleb, Nassim Nicholas “Bitcoin, Currencies, and Fragility,” 2021. < https://arxiv.org/abs/2106.14204 >25. McDonald, Michael, “El Salvador’s Companies Barely Bother With Bitcoin,” Bloomberg, March 18, 2022. < https://www.bloomberg.
com/news/articles/2022-03-18/el-salvador-s-businesses-barely-bother-with-bitcoin-study-finds >26. Gerard, David, “Bitcoin Failed in El Salvador. The President Says the Answer Is More Bitcoin,” Foreign Policy, December 6, 2021.
< https://foreignpolicy.com/2021/12/06/bitcoin-city-el-salvador-nayib-bukele >27. Adrian, Tobias, Iyer, Tara and Qureshi, Mahvash, “Crypto Prices Move More in Sync With Stocks, Posing New Risks,” IMF, January
11, 2022. < https://blogs.imf.org/2022/01/11/crypto-prices-move-more-in-sync-with-stocks-posing-new-risks >28. Botte, Alex and Nigro, Mike, “Risk Analysis of Crypto Assets,” TwoSigma, July 2021. < https://www.twosigma.com/articles/riskanalysis-of-crypto-assets >PGIM | CRYPTOCURRENCY INVESTING 30

29. Parikh, Harsh, “Institutional Gold!” PGIM Institutional Advisory & Solutions, November 2019.
30. Prasad, Eswar, “The Future of Money,” Harvard University Press, Page 143, 2021.
31. “Ancient Gold Coins,” Deutsche Bundesbank, December 1980.
32. Prasad, Eswar, “The Future of Money,” Harvard University Press, 2021.
33. “Gold and Cryptocurrencies,” World Gold Council, February 2, 2021. < https://www.gold.org/goldhub/research/gold-andcryptocurrencies >34. Greifeld, Katherine and Hajric, Vildana, “Bitcoin’s Money-Printing Machine Breaks Down as Futures Fall,” June 22, 2021. < https://www.bloomberg.com/news/articles/2021-06-22/bitcoin-s-money-printing-machine-breaks-down-as-futures-collapse >35. Ossinger, Joanna, “Bitcoin Rally Faces Potential Test From Falling Market Liquidity,” February 22, 2021. < https://www.bloomberg.
com/news/articles/2021-02-22/bitcoin-rally-faces-potential-test-from-falling-market-liquidity >36. “3rd Annual Global Crypto Hedge Fund Report 2021,” PricewaterhouseCoopers, May 2021. < https://www.pwc.com/gx/en/financialservices/pdf/3rd-annual-pwc-elwood-aima-crypto-hedge-fund-report-(may-2021).pdf >37. Digiconomist as of March 29, 2022. < https://digiconomist.net/bitcoin-energy-consumption >38. Spegele, Brian and Ostroff, Caitlin, “Bitcoin Miners Are Giving New Life to Old Fossil-Fuel Power Plants,” Wall Street Journal, May
21, 2021. < https://www.wsj.com/articles/bitcoin-miners-are-giving-new-life-to-old-fossil-fuel-power-plants-11621594803 >39. “China Widens Ban on Crypto Transactions; Bitcoin Tumbles,” Bloomberg, September 24, 2021. < https://www.bloomberg.com/news/
articles/2021-09-24/china-deems-all-crypto-related-transactions-illegal-in-crackdown >40. McGregor, Grady, “China Already Banned Crypto Mining. Now It’s Cracking Down on Any Holdouts,” Fortune, November 17,
2021. < https://fortune.com/2021/11/17/china-bitcoin-mining-ban-crypto-holdouts-ether-solana-price >41. Bitcoin Mining Map, Cambridge Bitcoin Electricity Consumption Index. < https://ccaf.io/cbeci/mining_map >42. Kharif, Olga, Mathis, Will and Saul, Josh, “Crypto’s Energy Guzzling Sparks an Alternative That Merely Sips,” Bloomberg, November
17, 2021. < https://www.bloomberg.com/news/articles/2021-11-17/crypto-s-power-consumption-sparks-an-energy-efficient-alternative >43. Taleb, Nassim Nicholas “Bitcoin, Currencies, and Fragility,” 2021. < https://arxiv.org/abs/2106.14204 >44. Harley-McKeown, Lucy, “Crypto Firms Face Cliff-Edge in UK as Time Ticks Down for AML Approval,” The Block, February 10,2022. < https://www.theblockcrypto.com/post/133597/crypto-firms-face-cliff-edge-in-uk-as-time-ticks-down-for-aml-approval >45. Alper, Tim, “South Korean Crypto Exchanges Face AML Probes as Regulators Test Compliance,” Cryptonews, January 17, 2022.
< https://cryptonews.com/news/south-korean-crypto-exchanges-face-aml-probes-as-regulators-test-compliance.htm >46. Szalay, Eva, “Hundreds of Thousands of Crypto Accounts Linked to Oligarchs, Data Company Finds,” Financial Times, March 15,2022. < https://www.ft.com/content/e3d7f22d-d858-44c0-a86e-6909a6eab266#post-7e9c3b04-a6b5-4a52-b7c0-640fc64d748f >47. “US and German Law Enforcement Investigation Leads to Shutdown of Largest Online Darknet Marketplace,” Internal Revenue
Service, April 5, 2022. < https://www.irs.gov/compliance/criminal-investigation/us-and-german-law-enforcement-investigation-leadsto-shutdown-of-largest-online-darknet-marketplace >48. Egkolfopoulou, Misyrlena, “Cryptocurrency Is a Potential New Tool for Billionaires to Avoid Sanctions,” Bloomberg, February 24,
2021. < https://www.bloomberg.com/news/articles/2022-02-24/russia-billionaires-could-use-crypto-to-go-around-severe-us-sanctions >49. “Cryptocurrency: A Legal Framework for a Fast-Moving Technology,” Vandeventer Black LLP, June 2, 2021. < https://www.jdsupra.
com/legalnews/cryptocurrency-a-legal-framework-for-a-8631830 >50. Glen, John, Keynote Speech at the Innovate Finance Global Summit, April 4, 2022. < https://www.gov.uk/government/speeches/
keynote-speech-by-john-glen-economic-secretary-to-the-treasury-at-the-innovate-finance-global-summit >51. “BIS Annual Economic Report,” Bank of International Settlement, Chapter III, June 23, 2021. < https://www.bis.org/publ/arpdf/
ar2021e3.pdf >52. Menon, Ravi, “The Future of Money, Finance and the Internet,” Speech at the Singapore FinTech Festival, November 9, 2021.
< https://www.mas.gov.sg/news/speeches/2021/the-future-of-money-finance-and-the-internet >53. John, Alun, Shen, Samuel and Wilson, Tom, “China’s Top Regulators Ban Crypto Trading and Mining, Sending Bitcoin Tumbling,”
Reuters, September 24, 2021. < https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrencytrading-2021-09-24 >54. Bhatia, Ruchi and Ghosh, Suvahree, “Crypto Tax in India Spurs Bonanza for Digital-Coin Bourses,” Bloomberg, February 17, 2022. <https://www.bloomberg.com/news/articles/2022-02-17/india-s-30-crypto-tax-spurs-bonanza-for-digital-coin-exchanges >55. Molla, Rani, “When Elon Musk Tweets, Crypto Prices Move,” Vox, June 14, 2021. < https://www.vox.com/
recode/2021/5/18/22441831/elon-musk-bitcoin-dogecoin-crypto-prices-tesla >56. Pound, Jesse, “Dogecoin Jumps After Series of Elon Musk Tweets Fans More Wild Cryptocurrency Trading,” CNBC, May 21, 2021. <https://www.cnbc.com/2021/05/20/dogecoin-jumps-on-elon-musk-tweet-as-wild-cryptocurrency-trading-continues.html >31 CRYPTOCURRENCY INVESTING | PGIM

57. Bentley, Alden and Chavez-dreyfuss, Gertrude, “Dogecoin Tumbles After Elon Musk Calls It a ‘Hustle’ on ‘SNL’ Show,” Reuters, May
7, 2021. < https://www.reuters.com/technology/dogecoin-spotlight-cryptocurrency-backer-musk-makes-snl-appearance-2021-05-07 >58. Lang, Hannah, “Crypto Firms Launch Coalition to Promote Market Integrity,” Reuters, February 7, 2022. < https://www.reuters.com/
technology/crypto-firms-launch-coalition-promote-market-integrity-2022-02-07 >59. Ibid.
60. CoinMarketCap as of May 9, 2022. < https://coinmarketcap.com/rankings/exchanges >61. Sigalos, MacKenzie, “Crypto Scammers Took a Record $14B in 2021,” CNBC, January 7, 2022. < https://www.cnbc.
com/2022/01/06/crypto-scammers-took-a-record-14-billion-in-2021-chainalysis.html >62. Carson, Brant, Romanelli, Giulio, Walsh, Patricia and Zhumaev, Askhat, “Blockchain Beyond the Hype: What Is the Strategic Business
Value?” McKinsey Digital, June 19, 2018. < https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchainbeyond-the-hype-what-is-the-strategic-business-value >63. “Figure and Apollo Execute Mortgage Transactions Using Blockchain Technology to Transfer Ownership,” Figure, Press release, March
17, 2022. < https://www.prnewswire.com/news-releases/figure-and-apollo-execute-mortgage-transactions-using-blockchain-technologyto-transfer-ownership-301504772.html >64. Krebs, Eric and Tempkin, Adam, “Apollo Joins Forces With Blockchain Startup Figure,” Bloomberg, July 14, 2021. < https://www.
bloomberg.com/news/articles/2021-07-14/apollo-joins-forces-with-blockchain-startup-figure-in-tech-push >65. Leising, Matthew, “JPMorgan Using Blockchain to Move Billions in Repo-Market Trades,” December 10, 2020. < https://www.
bloomberg.com/news/articles/2020-12-10/jpmorgan-using-blockchain-to-move-billions-in-repo-market-trades >66. Morini, Massimo, “Managing Derivatives on a Blockchain. A Financial Market Professional Implementation,” January 9, 2019.
< https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3075540 >67. “Cross-Chain Interoperability: What It Means for Blockchain,” Gemini, December 21, 2021. < https://www.gemini.com/cryptopedia/
why-is-interoperability-important-for-blockchain#section-benefits-of-blockchain-interoperability >68. Ibid.
69. Kruppa, Miles and Waters, Richard, “Sequoia and Silver Lake Fund Crypto Infrastructure Start-ups,” Financial Times, February 8,
2022. < https://www.ft.com/content/3bdbde8d-64b1-40cf-89ba-21b276c192c5 >70. Ibid.
71. Bremmer, Ian, “The Technopolar Moment,” Foreign Affairs, November/December 2021. < https://www.foreignaffairs.com/articles/
world/2021-10-19/ian-bremmer-big-tech-global-order >72. Kanterman, Matthew and Naidu, Nathan, “Metaverse May Be $800B Market, Next Tech Platform,” Bloomberg Intelligence,
December 1, 2021. < https://www.bloomberg.com/professional/blog/metaverse-may-be-800-billion-market-next-tech-platform >73. “Global Sports Market Opportunities and Strategies Report 2021,” Research and Markets, Press release, July 22, 2021. < https://www.
globenewswire.com/news-release/2021/07/22/2266996/28124/en/Global-Sports-Market-Opportunities-and-Strategies-Report-2021Sports-Market-Forecast-to-Reach-599-9-billion-by-2025-as-COVID-19-Lockdowns-Ease.html >74. “The Premise and the Peril of the Metaverse,” McKinsey Podcast, March 29, 2022. < https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/the-promise-and-peril-of-the-metaverse >75. Ibid.
76. Oprihory, Jennifer-Leigh, “Virtual Reality Spreads to USAF Helicopter Training,” Air Force Magazine, October 18, 2019. < https://www.airforcemag.com/Virtual-Reality-Spreads-to-USAF-Helicopter-Training >77. “Innovation and Practical Applications of the Metaverse,” McKinsey Podcast, March 29, 2022. < https://www.mckinsey.com/businessfunctions/mckinsey-digital/our-insights/innovative-and-practical-applications-of-the-metaverse >78. “Metaverse Report – Future Is Here,” Deloitte, March 2022. < https://www2.deloitte.com/cn/en/pages/technology-media-andtelecommunications/articles/metaverse-whitepaper.html >PGIM | CRYPTOCURRENCY INVESTING 32

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PGIM’S MEGATREND SERIESHow today’s shifting global landscape will affect the investments of tomorrow

Reshaping Services
Technological disruption has finally reached the shores of the service economy. It’s adevelopment that will represent a major shift for investors and the global economy asservices represent more than two-thirds of global GDP, three-quarters of the workforce indeveloped markets, and nearly half of the workforce in advanced emerging markets.
Learn more at pgim.com/reshaping

Weathering Climate Change
Climate change is no longer a hypothetical risk. It is already transforming the global
economy, reshaping markets and altering the investment landscape. In this paper, we
propose an actionable climate change agenda that addresses both hidden portfolio
vulnerabilities and potential opportunities in the transition to a lower-carbon world.
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After the Great Lockdown
The pandemic has forced businesses to adapt in ways that will lead to lasting changes
in consumer behavior and corporate business models. Now is the time to focus on themassive disruption that lies ahead so we’re best positioned for when the Great Lockdown
has passed.
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The Future Means Business
Disruptive forces have led to the emergence of three new business models that areradically changing the investment calculus for institutional investors. Here we explore theinvestment implications of these transformative new corporate models.
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The Technology Frontier
We are living in an era of unprecedented technological change. At PGIM, we believe
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The End of Sovereignty?
Never before in history have people, information and capital moved across borders at the
speed, frequency and volume we see today. In this white paper, we take a closer look at theescalating tussle between globalization and nationalism, the implications this could havefor global financial markets, and how long-term investors may best position themselvesto navigate these uncertain times.

Emerging Markets at the Crossroads
A radical shift in the forces shaping emerging market growth will require investors to takea different investment approach from what may have worked in the past. Increasingly,
discovering investment opportunities will be rooted in the ability to capture alpha fromthe new growth drivers, rather than in chasing the beta of the broad universe.

A Silver Lining
The unprecedented aging of the global population creates increased opportunities insenior housing, multifamily condos, biotech, and the emerging silvertech industry.
Institutional investors should consider how this megatrend could affect their portfolios,
given the trend’s evolving impact on consumer spending and far-reaching effects on
emerging nations, home to two-thirds of the world’s elderly.

Longevity and Liabilities
The rise in global life expectancy has implications for pension plan liabilities that are notfully appreciated. As new mortality tables demonstrate, longevity risk to pension liabilities
could increase dramatically over the next two to three decades. This report examines thechallenge and the available risk mitigation strategies.

The Wealth of Cities
Never in history has the pace of urbanization been so rapid: 60 to 70 million people
moving to cities every year for the next few decades. To help institutional investors benefit
from this “prime time” of urbanization, we identified a range of specific investment ideas
across the major investable themes of this opportune megatrend.

35 CRYPTOCURRENCY INVESTING | PGIM

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containing 30% post-consumer waste and produced carbon neutral.
PGIM | CRYPTOCURRENCY INVESTING 36ཻқࣆߴͤ ຌࣁྋͺธࠅ 6(& ͹ౌ࿧౦ࣁ‫ޒ‬໲ճऀͲ͍Ζ 3*,0 ΢ϱέ͗ࡠ੔ͪ͢΍͹Ͳͤɽͤ ຌࣁྋͺ৚ๅ఑‫ڛ‬Ν໪దͳͪ͢΍͹Ͳ͍Εɼಝఈ͹ۜ༧ঐ඾͹‫ש‬༢຤ͺ൤ജΝ໪దͳͪ͢΍͹Ͳͺ͍ΕΉͦΞɽΉͪɼຌࣁྋͶ‫͠ࡎى‬Η಼ͪ༲౵Ͷͯ͏ͱͺࠕ‫ޛ‬รߍ͠ΗΖ͞ͳ΍͍ΕΉͤɽͤ ‫͠ࡎى‬Ηͱ͏Ζࢤ৖ಊ޴౵ͺ‫Ͳ఼࣎ݳ‬͹‫ݡ‬մͲ͍Εɼ͞ΗΔͺࠕ‫ޛ‬รߍͤΖ͞ͳ΍͍ΕΉͤɽΉͪɼͨ͹݃Վ͹ࣰ֮੓Νන໎ͤΖ΍͹Ͳͺ͵͚ɼগཔ͹ࢤ৖‫ڧ؂‬͹รಊ౵ΝฯৄͤΖ΍͹Ͳ΍͍ΕΉͦΞɽͤ ຌࣁྋͶ‫͠ࡎى‬Ηͱ͏Ζࢤ৖‫ؖ‬࿊υʖν‫;ٶ‬৚ๅ౵ͺ৶བͲ͘Ζͳ൓இ֦ͪ͢झ৚ๅ‫͖ݱ‬Δ೘घͪ͢΍͹Ͳͤ͗ɼͨ͹৚ๅ͹ਜ਼֮੓ɼࣰ֮੓Ͷͯ͏ͱ౲ऀ͗ฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ գ‫ڊ‬͹ӣ༽ࣰ੹ͺචͥ͢΍গཔ͹ӣ༽੔Վ౵ΝฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ ຌࣁྋͺ๑ແɼճ‫ܯ‬ɼ੭ແ৏͹Πχώ΢η͍Ζ͏ͺ౦ࣁਬও౵Νߨ͑ͪΌͶࡠ੔͠Ηͪ΍͹Ͳͺ͍ΕΉͦΞɽͤ ౲ऀͶΓΖࣆ઴টଡ଼͵͢Ͷɼຌࣁྋ͹Ҳ෨Ήͪͺસ෨Ν෵੣ͤΖ͞ͳͺ‫͕͚ݐ‬இΕ஗͢Ήͤɽ※ 本資料内で取り上げられた資産クラス、個別セクター等はあくまで例示目的であり、推奨ならびにこれらにかかる将来性を明示・暗示的に示唆するものではありません。
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3*,0ζϡϏϱ‫ࣞה‬ճऀۜ༧ঐ඾खӀ‫ؖ ंۂ‬౨ࡔແ‫ۃ‬ௗʤۜঐʥ୊ߺՅ೘‫ڢ‬ճҲൢऀ஄๑ਕ౦ࣁ৶୙‫ڢ‬ճɼҲൢऀ஄๑ਕೖຌ౦ࣁ‫ޒ‬໲‫ڢۂ‬ճ
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