Cryptocurrencies such as bitcoin are becoming viable alternatives to traditional fiat currencies and are gaining traction within investor portfolios globally. Today, cryptocurrencies are increasingly being viewed as not only a medium of exchange, but also a store of value among other things.
In recent years, investment in cryptocurrency has skyrocketed, moving from a price-discovery phase driven by early adopters to high levels of retail investment and speculation, which led to the price of bitcoin surging by more than 560 per cent in 2017.
Despite significant asset price deflation, cryptocurrency is now entering a new phase with the emergence of custodial services and hedge funds in conjunction with growing demand and interest from institutional and retail investors alike.
Just this past month, we’ve heard Intercontinental Exchange, the owner of the New York Stock Exchange, announce its intention to launch a cryptocurrency payments platform for mainstream use in partnership with Microsoft, Starbucks and Boston Consulting Group. Additionally, Boerse Stuttgart, Germany’s second largest stock exchange, has announced the creation of a trading venue, an initial coin offering platform and custodial services.
It isn’t just the corporate world that is taking an interest in cryptocurrency, but the public sector as well. Cities, governments and central banks are all beginning to recognise the potential of cryptocurrency and the underlying technology to improve efficiencies in the global financial system, but also for various other services and industries, including logistics, healthcare and voting.
As governments around the world take steps to establish a regulatory framework and crack down on misuse of cryptocurrencies, this is likely to result in a steady increase in capital investment, trading volumes and reduced volatility.
Cryptocurrency asset growth potential
Currently, total cryptocurrency market capitalisation stands at around US$250 billion, a drop in the ocean when compared to the US$7.8 trillion gold market. This shows the enormous growth potential that lies ahead for cryptocurrencies.
This potential isn’t going unnoticed and in recent months prominent high net worth investors, such as George Soros and the Rockefeller family, have announced partnerships with cryptocurrency investment firms, putting the asset class firmly in the spotlight.
Despite calls from naysayers labelling cryptocurrency as a Ponzi scheme and having a short lifespan, retail investors, institutional investors and SMSF trustees are now realising it is here to stay.
Diversification potential
The fundamentals of cryptocurrencies rely on the development of the underlying technology and the potential future-use cases of the tokens. This means cryptocurrencies are not directly associated with other Australian sectors such as retail, resources or property. As such, investing in this asset class can provide investors with a diversified investment portfolio and a hedge against traditional assets, such as property, equities and bonds, which display some correlation in their market movements.
Product innovation, such as the CoinJar Digital Currency Fund – Australia’s first cryptocurrency index-style fund – is making cryptocurrency investing simpler. The fund provides investors with a vehicle to obtain exposure without taking on the security risks or custodial responsibility themselves.
Cryptocurrencies are likely to offer even more opportunities for investors in the future, with predictions that every type of investment will become ‘tokenised’, unlocking potentially enormous value. Blockchain technology will allow investors to gain portfolio exposure to tangible assets such as property, commodities or even art, creating liquidity in what were previously illiquid markets.
How does it fit into a portfolio?
There are many different types of cryptocurrencies and categories that investors can choose from. These include utility coins, privacy coins, store-of-value coins, exchange-based coins and the list goes on. While cryptocurrency investors might be spoilt for choice, it is important to consider an investment in the context of a broader investment portfolio.
Jordan Michaelides is head of institutional at CoinJar.