Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. Today we look at whether cryptocurrencies, which have soared to record highs and are backed by an increasing number of big-name corporates and financial institutions, will play a prominent role in asset owners' investment portfolios.
Will cryptocurrencies finally gain favour with asset owners?
The year 2021 may continue to be a bumper year for cryptocurrencies, but it's unlikely that the digital asset class will end up playing a major role in asset owners' investment portfolios.
Bitcoin, the best-known cryptocurrency, hit another peak over the weekend (February 20 to 21), rising above $58,000 as it continues its strong momentum this year (see graph below). It has risen more than 90% since the start of January, pushing its total market value above $1 trillion.
Mastercard also plans to accept bitcoin as a form of payment while BlackRock, the world's largest asset manager, is exploring ways on how it can use the digital currency.
The rally has been largely spurred on by well-known companies adopting it as a method of payment. Electric carmaker Tesla chief executive Elon Mus said in early February that the company had bought $1.5 billion worth of bitcoin and would accept it as payment for its cars in future.
However, investment experts at asset owners think that cryptocurrencies are unlikely to be embraced soon.
"No. Even currency and gold don't play a significant role in our portfolio. It is very hard to understand its risk profile and make educated decisions," said the chief investment officer of a Chinese insurer.
The CIO of another insurer was more upbeat on cryptocurrencies, saying that having a small amount of investment in the virtual asset, getting involved to learn and watch it would probably be a rational approach to take. However, he is not convinced that the virtual asset will be more than a curiosity for most asset owners for some time to come.
"If I were to have a bet, I think it will go institutional long term. It's not going to be a huge percentage, like 20% of portfolios, but the number may not be zero. It feels still very early days," he told AsianInvestor.
Similarly, while the investment expert of a quasi-sovereign wealth fund in Asia said the institution has minor indirect exposure to cryptocurrencies through technology-themed funds, he believes the limited market size means they cannot play a major role in asset owners' portfolios.
"A small investment amount by a big institution is already able to drive its price to sky-high," he told AsianInvestor.
He has a point; even Bitcoin’s $1 trillion-plus total market value pales in comparison to global institutional assets. Willis Towers Watson's Global Pension Assets Study covered 22 major pension markets with $52.52 trillion in total pension assets. And sovereign wealth funds and insurance companies boast trillions of dollars more.
Critics have long argued that Bitcoin is less a currency and more a speculative trading tool that is open to market manipulation. Economists argue it has little practical use, while it does not offer a steady income like a bond or a share. Added to that, Bitcoin mining has a definite environmental impact (it’s energy-intensive), leaving it subject to regulatory risks.
Indeed, many major institutional investors remain unconvinced of the benefits of Bitcoin and its peers.
“I think the technology that underpins them… will be useful for a number of applications, but I just don't see [CPPIB] investing in cryptocurrencies in the short term,” said Alain Carrier, London-based head of international at Canada Pension Plan Investment Board at the Greenwich Economic Forum this month.
Asset owners could be more interested in central bank digital currencies (CBDCs). China, Korea, Japan and other nations are eyeing plans to roll out CBDCs in the coming year or two. The careful distribution and control of digital currencies by central banks means they will prove far less volatile than today’s cryptocurrencies – although that also means they are less rewarding.
Previous Year of the Ox outlooks: