Market views: Will cryptocurrencies ever go mainstream with asset owners?
Ever-unpredictable, cryptocurrencies have had a particularly volatile period of late.
Bitcoin, the priciest and most well-known, saw its value collapse by 45% during the past few weeks, from highs of $63.237 on April 15 to to $34,618 on Friday (May 29). Similarly Ether, the main currency for the Ethereum blockchain network, saw its value drop over 40% in less than two hours at one point.
For would-be cypto investors in Asia, these pitches of yaws of value just underlines the asset class's intrinsic volatility. That has been one of the key draws for many risk-tolerant (or get-rich-quick) speculative investors, along with some institutional investors such as hedge funds. But it has also meant that the digital currencies have so far struggled to gain traction with many large asset owners. The likelihood of rising regulation in addition to this is unlikely to increase their appeal in the short run, although it may eventually bolster their stability.
And yet, the huge overall growth in value of leaders such as Bitcoin (it was valued as low as $9,689.12 just on year ago, on May 29), does make for a tempting investment prospect, particularly at a time when asset owners and wealthy individuals are finding it harder to find appealing areas of return amid pricey markets bracing for inflation. Do recent price corrections offer an entry point for any of these investors?
AsianInvestor asked a set of market observers and one asset owner whether cryptocurrencies will enjoy sustainable mainstream investing appeal.
Kevin Jeffrey, director for investments
Willis Towers Watson
Many will argue that cryptocurrencies have already gone mainstream – with a market capitalisation of about $1.7 trillion (May 27, CoinMarketCap) and many of the world’s largest banks, asset managers and audit firms already entering the space.
However, for a typical institutional investor this is not a primary focus, as these assets are somewhat nascent at a little over a decade old and the price volatility is unappealing to the more conservative asset owners.
We do observe many retail investors, family offices and hedge funds actively participating in cryptocurrency markets due to a higher risk tolerance and arguably a greater understanding of what the underlying technologies could potentially achieve.
We believe that the wider digital asset ecosystem is a fascinating area of innovation which is already influencing existing financial and economic norms. In March 2020, WTW’s Thinking Ahead Institute published Asset classes of tomorrow – When securitisation meets blockchain, which touches on some of our thinking.
The future for the space is highly uncertain, with regulation pending and ESG issues to consider. At this stage Willis Towers Watson is not recommending any explicit allocations to cryptocurrencies, but our research teams are keeping a close eye as the asset class develops.
Chief investment officer
North Asia-based state pension fund
We do not invest into cryptocurrencies, and we are not planning to do so. They are too volatile and unpredictable.
We see that younger millionaires have a really strong interest in crypto assets, compared with the baby boomers like myself. However, when I study the crypto asset class, they go against ESG (environmental, social and governance) issues. To generate [and mine] these digital currencies requires quite a huge amount of fuel consumption, such as electricity.
This points to a very strong contradiction among millionaires. They really care about ESG issues, but they are really investing in the none, or anti-ESG-related asset, such as digital assets.
There have not been all that many discussions on that kind of contradiction, but as time goes by I think that ESG-related issues could hurt digital assets' interest or favor.
Cheung Chilok, portfolio manager, delegated solutions
The difficulty - if not the impossibility - of assessing the fair value of cryptocurrencies remains a main hurdle for them to become mainstream with institutional investors. Other considerations investors have are around the potential benefits of cryptocurrencies versus the risks and the inherent responsible investing concerns such as the carbon emission that comes with the energy used in coin mining and the potential usage in transactions with criminal purposes.
To qualify cryptocurrencies as a valid strategic long-term asset, considerable barriers still exist. Typical considerations are around the degree of their functionality as a store of value, hedge against fiat currencies, payment replacements and source of asymmetric returns. There are better positioned alternatives in each of these areas at the moment.
In addition, cryptocurrencies are an order of magnitude riskier than traditional investments, and to date remain largely unregulated investments. On balance, the potential benefits of cryptocurrencies do not outweigh the inherent risks and cryptocurrencies are still a way from becoming a part of the investment mainstream.
Chris Zuehlke, Partner
Cumberland was built to serve institutional demand in cryptoassets and so we've seen the narrative shift quite quickly from healthy scepticism to real commitments in the space.
Goldman Sachs has started offering derivative products to its clients, Wells Fargo is rolling out an actively managed crypto strategy and Citigroup noted its foreign exchange customers were expressing interest in crypto products.
So, from our position in the market, we've now crossed key indicators that crypto has become a mainstream product for sophisticated investors. In addition to the underlying assets, we also have also seen novel applications for smart contracts beyond crypto, which shows additional avenues of adoption.