January 1, 2025

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Hi readers,

Happy New Year! As we step into this fresh year, we're excited to keep sharing impactful insights and analysis for what will surely be a banner year for crypto.

In today's newsletter, Markus Thielen of 10x Research poses three critical questions multi-asset investors should ask themselves to assess bitcoin's suitability and optimal allocation for their portfolios.

Then, David Attermann of M31 Capital dives into why data security is broken and how blockchain holds the key.

Here's to a successful and rewarding year ahead.

Thanks for joining us.

– Alexandra Levis

From the Analyst

Three Questions Reveal Your Ideal Bitcoin Allocation

By answering three key questions on return expectations and target portfolio volatility, multi-asset investors can evaluate bitcoin's suitability for their portfolios and determine its optimal allocation based on their unique goals.

Contrary to popular belief, bitcoin's price is primarily driven by demand, not its (mining) supply. Each of bitcoin's five bull markets has been propelled by innovations in how investors access it — ranging from the creation of early spot exchanges to the introduction of futures, uncollateralized borrowing, spot bitcoin ETFs, and now options on these ETFs. This evolution underscores bitcoin's deepening integration into traditional financial markets, a trend accelerated by regulatory approvals from U.S. agencies like the CFTC and SEC, which have progressively legitimized bitcoin-based financial products.

The 2017 decision to retain Bitcoin's 1-megabyte (MB) block size marked the resolution of a long-standing debate within the Bitcoin community on scaling the network. Originally implemented to manage congestion and uphold decentralization, the block size limit became a defining feature. By prioritizing decentralization over higher transaction throughput, this decision cemented bitcoin's role as "digital gold."

This framework helps traditional finance investors understand bitcoin's role as digital gold, a risk mitigation tool or an inflation hedge, and offers insights into its valuation potential. While bitcoin is unlikely to disrupt jewelry ($8 trillion), it could capture portions of the $10 trillion addressable market, including private investments ($4 trillion), central bank reserves ($3.1 trillion), and industrial use ($2.7 trillion). With bitcoin's current market cap at $2 trillion, this suggests a potential 5x growth as it solidifies its position as digital gold.

Exhibit 1: Bitcoin (log chart) power law curves

The fundamental distinction is Bitcoin's nature as a technology with strong network effects, which gold inherently lacks. Network technologies often follow an "S-curve" adoption model, with mass adoption accelerating once the critical 8% threshold is surpassed.

With a market capitalization of $2 trillion, bitcoin represents just 0.58% of the nearly $400 trillion global financial asset portfolio. This share is poised to increase as asset managers, pension funds, and sovereign wealth funds progressively integrate bitcoin into their investment strategies.

To strategically integrate bitcoin into a forward-looking, Markowitz-optimized portfolio, investors must address three key questions:

How is bitcoin expected to perform relative to equities?
How will equities perform relative to bonds?
What is the target portfolio's overall volatility?

These insights drive more informed allocation decisions within multi-asset portfolios.

Exhibit 2: Optimal multi-asset allocation based on our expected return/risk parameters

For example, if bitcoin is projected to outperform U.S. stocks by +30% in 2025, U.S. stocks outperform U.S. bonds by +15%, and the portfolio targets a 12% volatility level, the following adjustments occur: equities increase from 19.1% to 24.9%, real estate drops from 16.8% to 0%, fixed income rises from 44.6% to 57.7%, and alternatives (including private equity, hedge funds, gold, and bitcoin) decrease from 19.5% to 17.4%. Notably, bitcoin's allocation jumps significantly — from 0.58% (based on its current market share of the $400 trillion global financial asset pool) to 5.77%.

This adjustment boosts the portfolio's expected return from 11.3% to 14.1%, leveraging a volatility-targeted Black-Litterman-optimized framework, which is an analytical tool to optimize asset allocation within an investor's risk tolerance and market views. By answering these key questions and applying this approach, investors can determine their ideal bitcoin allocation.

- Markus Thielen, head of research, 10x Research

Institutional Outlook

How Web3 Is Disrupting AI Cloud Computing

Centralized data networks, ones that are owned and/or managed by a single entity, have been structurally broken for years. Why? Single points of failure. If one entity (or even a few) has access to a database, then there is only one "point" to compromise in order to gain full access. This is a serious problem for networks holding sensitive data like customer information, government files, and financial records, and those with control of infrastructure like power grids.

Billions of digital records were stolen in 2024 alone, causing an estimated $10 trillion in damages! Notable breaches include nearly all of AT&T's customer information and call logs, half of America's personal health information, 700 million end-user records from companies using Snowflake, 10 billion unique passwords stored on RockYou24, and Social Security records for 300 million Americans.

Source: Statista, 2024

This is not just a private sector issue — governments and crucial national infrastructure also rely on centralized networks. Notable recent breaches include records on 22 million Americans stolen from the U.S. Office of Personnel Management, sensitive government communications from multiple U.S. federal agencies, personal biometric data on 1.1 billion Indian citizens, and the ongoing Chinese infiltration of several U.S. internet service providers.

Although hundreds of billions of dollars are spent each year on cyber security, data breaches are getting larger and happening more frequently. It's become clear that incremental products cannot fix these network vulnerabilities — the infrastructure must be completely rearchitected.

Source: market.us, 2024

AI magnifies the issue

Recent advancements in generative AI have made it easier to automate everyday tasks and enhance work productivity. But the most useful and valuable AI applications require context, i.e. access to sensitive user health, financial, and personal information. Because these AI models also require massive computing power, they largely can't run on consumer devices (computer, mobile), and instead must access public cloud networks, like AWS, to process more complex inference requests. Given the serious limitations inherent in centralized networks illustrated earlier, the inability to securely connect sensitive user data with cloud AI has become a significant hurdle for adoption.

Even Apple pointed this out during their announcement for Apple Intelligence earlier this year, stating the need to be able to enlist help from larger, more complex models in the cloud and how the traditional cloud model isn't viable anymore.

They name three specific reasons:

Privacy and security verification: Providers' claims, like not logging user data, often lack transparency and enforcement. Service updates or infrastructure troubleshooting can inadvertently log sensitive data.
Runtime lacks transparency: Providers rarely disclose software details, and users cannot verify if the service runs unmodified or detect changes, even with open-source tools.
Single point of failure: Administrators require high-level access for maintenance, risking accidental data exposure or abuse by attackers targeting these privileged interfaces.

Fortunately, Web3 cloud platforms offer the perfect solution.

Blockchain-Orchestrated Confidential Cloud (BOCC)

BOCC networks are like AWS — except built completely on confidential hardware and governed by smart contracts. Though still early days, this infrastructure has been in development for years and is finally starting to onboard Web3 projects and Web2 enterprise customers. The best example of this architecture is Super Protocol, an off-chain enterprise-grade cloud platform managed completely by on-chain smart contracts and built on trustless execution environments (TEEs). These are secure hardware enclaves that keep code and data verifiably confidential and secure.

Source: Super Protocol

The implications of this technology address all of Apple's concerns noted earlier:

Privacy and security verification: With public smart contracts orchestrating the network, users can verify whether user data was transported and used as promised.
Workload and program transparency: The network also verifies the work done within the confidential TEEs, cryptographically proving the correct hardware, data, and software were used, and that the output wasn't tampered with. This information is also submitted on-chain for all to audit.
Single point of failure: Network resources (data, software, hardware) are only accessible by the owner's private key. Therefore, even if one user is compromised, only that user's resources are at risk.

While cloud AI represents an enormous opportunity for Web3 to disrupt, BOCCs can be applied to any type of centralized data network (power grid, digital voting infrastructure, military IT, etc.), to provide superior and verifiable privacy and security, without sacrificing performance or latency. Our digital infrastructure has never been more vulnerable, but blockchain-orchestration can fix it.

- David Attermann, head of web3 investments, M31 Capital