Nearly every week seems to bring a new development involving Wall Street and crypto. The biggest banks on Wall Street, once dismissive of crypto, are now embracing it at an unprecedented pace.
Case in point: Morgan Stanley (MS -1.23%) recently announced plans to launch crypto trading for E*Trade clients. It also plans to introduce a client asset allocation strategy that involves cryptocurrencies. On top of that, the Wall Street investment bank plans to develop a new blockchain wallet solution for customers.
So what's behind this push into crypto, and what does it mean for your portfolio?
The political environment
The simplest explanation, of course, is the current political environment. When Donald Trump campaigned for president in 2024, he promised to make America the "crypto capital of the world." That's exactly what he's pushing this year.
In just the first nine months of his presidency, the Trump administration has gone full-tilt on crypto. There's now a pro-crypto head of the Securities and Exchange Commission (SEC). There's new crypto legislation on the books, with more on the way. There's a planned Strategic Bitcoin Reserve, as well as a U.S. Digital Asset Stockpile. There has even been a crypto summit at the White House.
Image source: Getty Images.
So it's perhaps no surprise that the biggest Wall Street banks have also decided to go all-in on crypto. They have effectively been given the green light to reshape the modern financial system with the help of blockchain technology. The former regulatory logjams and bureaucratic red tape have been removed, and it's simply much easier to bring new products to market.
Merger of traditional finance and decentralized finance
While blockchain technology is relatively new and unproven, the growing consensus is that a merger of traditional finance and decentralized finance (DeFi) is inevitable at this point.
The easiest place to see this is in the unexpected embrace of stablecoins by Wall Street. Stablecoins are simply cryptocurrencies pegged 1-to-1 to the U.S. dollar, but they represent a seismic shift in the way Wall Street thinks about money.
For major financial institutions, stablecoins are digital dollars that can then be deployed in a rapidly expanding number of ways. Once a real-world dollar has been converted into a digital dollar, the potential use cases are nearly endless. According to Treasury Secretary Scott Bessent, stablecoins could become a $2 trillion industry within just a few years.
Client demand for crypto
Of course, Wall Street wouldn't be bending over backward to offer new products and services to clients, if they weren't demanding it. Take, for example, the unprecedented demand that now exists for crypto exchange-traded funds (ETFs).
Institutional investors wanted an easy, convenient, and highly regulated way to get exposure to crypto, and that's exactly what these ETFs provide. The first spot Bitcoin ETFs were a huge hit, bringing in more than $100 billion from investors in less than a year.
So, as might be expected, Wall Street is now rushing to offer many other crypto ETFs to clients. This fall, new spot ETFs could be coming for XRP (XRP 3.21%) and Solana (SOL 5.80%), among other cryptocurrencies.
Effect on portfolio
So what does it all mean for the individual investor? First and most importantly, it means a new focus on portfolio diversification strategies using cryptocurrency. At one time, it was thought that crypto was too risky and volatile to consider for a portfolio. But Wall Street has embraced the idea of crypto as a separate asset class.
Thus, purely from the perspective of diversification, it makes sense to add crypto to a portfolio. According to BlackRock (BLK -2.08%), an asset allocation of 1% to 2% to crypto now is reasonable, even for conservative investors. Other institutions are now suggesting crypto allocations of 5% or higher, especially for risk-seeking investors in search of maximum returns.
One crypto to watch
The fact that Wall Street financial giants can't stop talking about crypto means that it worth exploring cryptocurrencies that are at the intersection of traditional finance and decentralized finance.
The one crypto that's front of mind for many investors right now is Ethereum (ETH 4.14%), which remains the top blockchain for DeFi. Ethereum is a powerhouse when it comes to stablecoins. It's also the primary building block for everything that gets built in the DeFi world. According to investment strategist Tom Lee of Fundstrat, Ethereum is now the preferred blockchain of Wall Street, and that augurs well for its future growth prospects.
It's time to reposition your portfolio for cryptocurrency, which is in the midst of unprecedented adoption. If the U.S. really does become the "crypto capital of the world," you will be glad that at least part of your portfolio is in crypto.
