Asia’s wealthy investors and family offices are becoming interested in digital currencies, but are unlikely to invest heavily until regulations governing them solidify, according to industry experts.
Positive and negative headlines around bitcoin, the largest of the existing cryptocurrencies, has gained the attention of high net worth investors. They have also been interested in blockchain—the electronic multi-ledger technology underlying digital currencies, said observers.
“We are seeing some interest in bitcoin, ether and [cryptocurrency firm] Ripple among investors, especially as cryptocurrencies are a hot topic in the press,” Andrew Wong, Singapore-based business development director at Wealth, a platform that connects investors with wealth service providers, told AsianInvestor.
Adeline Tan, head of wealth advisory at Mercer in Hong Kong, noted that some Asian family offices are looking at how to indirectly access digital currencies.
“Some investors, open to the idea of virtual currencies, are accessing the idea by investing through hedge funds that can make bets on cryptocurrencies, among other types of niche investment ideas,” she said.
Other HNW individuals have been willing to directly invest. An investment expert with a multi-family office in Singapore speaking on the condition of anonymity said some individuals had made money by buying bitcoins.
“Bitcoin might be extremely volatile but it is still one of the better performing assets out there,” he told AsianInvestor.
The pioneer cryptocurrency has undergone some wild performance swings since launching in 2009. In the 12 months to September 28, the value of a bitcoin soared an eye-popping 592% to hit $4,206.6, according to Coinmetrics.
It’s not been a steady climb. On September 1 bitcoin’s value hit a calendar year high of $4,852, before plunging to $3,226 on September 14, after JP Morgan boss Jamie Dimon criticised bitcoin as being nothing short of a “fraud”.
The growing appeal of bitcoin has offered opportunities for daring investors to try and make money, either through capital appreciation or arbitrage. A September 20 report by the Australian Financial Review reported that Australia’s top hedge fund, Warburton Global Macro Fund, made an (unspecified) tidy profit trading the spread between bitcoin prices in North America, Europe and Asia in a six week period between July and August.
Cryptocurrencies outside of bitcoin are also gaining more investor support across the world, with hundreds of the electronic currencies being traded each day.
A global cryptocurrency benchmarking study published in May by the Cambridge Centre for Alternative Finance noted that bitcoin is the largest digital currency by market cap, followed by Ethereum, Dash, Monero and Ripple.
Yet the combined market capitalisation of all cryptocurrencies remains quite small—about $146 billion, according to CoinMarketCap.com.
In contrast, the gold market’s value is estimated at around $7 trillion, according to onlygold.com (based on current gold spot price of $1,271 per troy ounce).
The relatively small and illiquid market for digital currencies means that an investor with large sums of money can impact the price quite heavily, said John Patrick Mullin, the Shanghai location co-ordinator for FinTech Connector, an online platform that connects fintech entrepreneurs and financial services experts.
And while the price volatility of the currencies attracts speculative retail investors, it is keeping many wealthy investors on the sidelines.
“Investors who are investing in cryptocurrencies are not making huge bets or allocating large portions of their portfolios to such assets,” added Mullin.
Many market analysts believe most digital currency investments are speculative and should fall in the high-risk, high-return portion of an investor’s portfolio.
Neverthless, it represents an improvement from the time cryptocurrencies were mostly an area of intellectual curiosity, according to some experts.
“Today, the increasing interest from both individuals and institutional fintech investors is hard to ignore, especially as they try to find ways to participate and gain exposure to the growth in this market, via channels ranging from passive, active and even algo-driven investment products,” said the managing director of Orichal Partners, a recently founded multi-strategy cryptocurrency investment firm in Hong Kong. He declined to be named.
The popularity of cryptocurrencies in the future with investors of all types is likely to depend on how regulations evolve to monitor them.
Currently, financial watchdogs in many countries worry about the safety and security of using digital currencies. Regulators in Singapore, Malaysia, Hong Kong and Australia have all issued warnings about dealing in cryptocurrencies as well as initial coin offerings (ICOs), which allow firms and individuals to raise funds by effectively offering electronic tokens.
The regulatory crackdown has dampened the near-term outlook for cryptocurrencies, but some proponents believe that deliberation by financial regulators will be a long-term positive for the industry.
“Just like the internet dot-com age, inferior cryptocurrencies will be eliminated over time purely due to competition and tightening regulations,” the Orichal Partners executive said.
He says the ICO ban simply reflects China’s desire to proactively manage risks to its financial system.
“China is regulating cryptocurrency as with any disruptive industry—we don’t think China is trying to stifle innovation at this point and blockchain technology will not go unnoticed.”
Disruption to legitimisation
Many financial technology experts argue that cryptocurrencies and the technology supporting them will cause enormous change in financial markets.
FinTech Connector’s Mullin believes blockchain will be the next big technology to catch on in the digital space. The technology functions as a tamper-proof public ledger that can automatically process and settle transactions with no need for a third-party verification. Its use is steadily spreading to other industries, and Mullin believes that investors looking at the technology now can become the early adopters.
Sebastiaan Van Den Berg, chief investment officer at Sun Hung Kai, a property developer, also believes cryptocurrencies—and blockchain—are likely to disrupt parts of the financial services industry. He said this will lead regulators to play a more active role in their oversight as a result.
"Will cryptocurrencies change the way things are being done, or will they need to be transformed and managed so they function within the existing operating and regulatory environment?" he told AsianInvestor. "I don't have the answer but I would be very surprised if governments just let it happen."
Siddharth Agarwal, a lead financial analyst at GlobalData, a data solutions and research consultancy, shares similar views. In a note on Monday (October 2) he said he thinks regulators will formalise the rules around bitcoin and other cryptocurrencies, “bringing them closer to national currencies and leading to even wider acceptance”.
The increasing regulation is intended to check money laundering, terrorism financing and other illegal activities by discouraging use of bitcoin purely for the anonymity it offers. Agarwal said that such regulation will likely have a positive impact on the fledgling cryptocurrency industry.
"As the regulatory environment is now stabilising, we will see massive growth in startups dealing with bitcoin and other cryptocurrencies," he said.
Richard Newell contributed to this story.