Can cryptocurrency become a new asset class for institutional investment
The idea that hedge fund managers are sitting on the sidelines waiting to dip their toes into cryptocurrency markets gets thrown around a lot and is generally untrue. However there are some compelling reasons why in the long-term we could see cryptocurrency become a respected asset class alongside stocks, bonds and commodities.
Inflation protected store of value
Inflation and interest rates have been kept unprecedentedly low for many years. There’s a reasonable chance that the vast majority of investment decisions don’t take it into consideration at this time. However if a market downturn or change to global trade and credit caused rates to increase it could unfold dramatically and cause a rush to inflation protected assets.
Cryptocurrencies are generally fixed supply which unlike government currencies means they can’t print more to stimulate an economy and dilute the populations holdings. If inflation and quantitative easing becomes more prevalent then it could push people to exchange their devaluing fiat holdings to cryptocurrency.
Hedge against market downturn
Gold and silver are the industry standard hedges against a market downturn and I’ve seen it written that you should keep 5% of your net wealth invested in gold at any time. Cryptocurrencies could replace this in the medium term as a digital product is easier to trade and store.
Right now the markets are chaotic and volatile this makes cryptocurrency far too risky to be a real store of value. This will not last forever though and as the industry matures volatility will reduce making it more attractive to investors who require less risk in short-term valuations.
Unlike shares, bonds and commodities cryptocurrency can be traded 24/7 across the globe. It’s likely that traditional asset classes will follow suit but for now cryptocurrency is more flexible and open in terms of trading.
Exchange traded funds are huge for institutional and retail investors alike which is why there’s been so much coverage of the SEC’s decision to postpone it’s assessment of Bitcoin ETF’s. In the medium term however it looks likely that we will see ETF’s and possibly Crypto index funds reach the market which will open up the assets to new investment bodies.
USDT along with other stablecoins makes entering and exiting the crypto markets faster and more efficient than we’ve ever seen before. A trader can now enter and exit the markets without moving funds to and from an exchange.
Cryptocurrency use cases are increasing as the sector develops. This article published today by the BBC suggests the UK is heading towards a cashless society. https://www.bbc.co.uk/news/business-46596154
Cards like TenX and Monaco will make the spending of cryptocurrency more common while the lightning network and mobile crypto wallets are making spending crypto directly more common. As more people use cryptocurrency to pay for general products both on and offline we will see its use and utility grow.
Institutional investors are well vested in high frequency trading of stocks and shares. We are seeing more and more of this algorithmic trading in crypto but it is likely to be large institutions who ultimately dominate this field. There’s money to be made and once that reaches a certain level then the big players will step in if they haven’t already.
Losing the Silk Road stigma
Bitcoin still has a reputation for being linked to buying drugs and guns on the darknet. This is leaving slowly but with no PR team in place it will take some time for the image to fade and be replaced by positive connotations. All cryptocurrencies are in the same boat here and negative press for one will affect the entire sector. Eventually though the general public along with institutional investors will converge on the opinions that people working inside the sector already have “cryptocurrency is an exciting technology that is reshaping the financial industries”
It seems unlikely that we will see a rush of institutional investment in the short term. More likely the general opinion of cryptocurrency will mature along with the sector. As this happens we will see crypto being mentioned more and more frequently alongside stocks, shares and bonds as a genuine bona fide asset class that deserves a place in a portfolio.