How to Think About These Assets in a Serious Investment Portfolio

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And, contrary to the stereotype, it’s not just Millennials and Gen Z investors who are buying. Local cryptocurrency exchange BTC Markets says the biggest influx of customers last year were Australians between the ages of 45 and 59. The average size of crypto portfolios was highest for those over 60 due to their higher disposable income.

A growing number of increasingly sophisticated investors are crowding into this nascent asset class. Of course, that doesn’t mean you should too.

Given the obvious risk associated with it, for some investors (especially those who are retired or approaching retirement), any exposure to the crypto markets may be a step too far. This is a very reasonable valuation for an investor.

But there is also a growing consensus that a crypto allocation deserves at least proper consideration.

From speculation to utility

For Caroline Bowler, managing director of BTC Markets, the demand for crypto assets goes beyond spot price speculation for emerging utility and the underlying use cases of associated technologies.

“The use cases for crypto are long established, but never more visible,” she says. “People all over the world are using crypto as a store of value, a means of payment, and a quick and efficient way to get money to family members overseas.”

The war in Ukraine has helped make the past 12 months or so a watershed moment for cryptocurrency entering the mainstream, she suggests, as tens of millions of dollars worth of tokens such as bitcoin, ether and tether were sent to wallets set up by the Ukrainian government and NGOs after the Russian invasion.

“While interest rates are expected to rise, crypto’s use as a store of value is demonstrated by its price stabilizing,” says Bowler.

“Investing as a store of value may yet prove to be one of the most important use cases, as the growth of crypto has been seen as a reaction to loose monetary policy by central banks since 2008. .
the global financial crisis.” She adds. “As an increasingly mainstream asset, crypto can also be a hedge against rising rates and inflation.”

But the controversial nature of cryptocurrencies is such that nearly every perceived investment benefit is up for debate, including the suggestion that they could be remotely described as stable (just take a quick look at a chart bitcoin prices over the past year).

Although crypto enthusiasts are keen to point out that the market will calm down as it matures, Grant Wilson, a former hedge fund manager and now head of Asia-Pacific at investment advisory firm Exante Data, says that volatility will likely be persistent.

The conundrum of correlation

The inability to be certain is one of many known unknowns that makes it difficult to value crypto assets, and therefore invest in them.

Another uncertainty, Wilson says, is the extent to which crypto assets correlate with other asset classes or behave differently, giving a portfolio clear diversification benefits. This is one of the central arguments made by those who position crypto as an effective foil against inflation.

Common valuation methods used by the crypto industry, such as “stock-to-flow models” and “network-to-transaction value ratios,” are just “garbage,” Wilson bluntly told the summit on Wednesday. .

“At the end of the day, it’s just going to be about building a time series and longer data sets, and then we can start to understand what correlation patterns we can really rely on,” Wilson added.

Alex Vynokur, managing director of exchange-traded fund manager BetaShares, agrees that the early stage nature of crypto assets makes them difficult to value.

“These asset classes are very new,” Vynokur said at the top. “[Whereas] all asset classes traditionally considered investable have been around for a long time and have shown how they behave in different market conditions and in different economic conditions.

Over the past six months, the performance of bitcoin and ether have hovered around 0.5% of major global stock indices, Vynokur pointed out.

“It’s significantly higher than in the last 10 years,” he said. “Time will tell what the long-term correlation will be.”

Benjamin Celermajer, director of crypto-specialist investment manager Magnet Capital, agrees that the equity and crypto markets have become more correlated than they used to be.

But he says that a lot depends on how investors (or perhaps traders is the more accurate term) engage with the crypto markets.

“A lot of investors treat bitcoin like a tech stock or a volatility tool,” he said at the summit. “If that’s how they view bitcoin as opposed to a store of value or a long-term investment opportunity, then of course it’s going to become more correlated with other volatile markets such as tech stocks and the like. . [sectors of] stock markets”.

Compared to other asset classes, the correlation is low, he says, a swing that will continue as the market develops.

He also says it’s important to distinguish between different digital tokens and the different ways they can act within a diverse portfolio.

Bitcoin, he says, is more like a commodity, which is why some proponents describe it as “digital gold.”

Anthony Scaramucci on the big screen at the Financial Review Crypto Summit. oscar colman

Ether is the “base layer of the decentralized economy,” he explains. It is the token tied to the Ethereum blockchain – an open-source public ledger that records transactions and powers decentralized finance (DeFi) and other applications. DeFi refers to financial instruments that cut out financial intermediaries such as banks and exchanges by relying on automated “smart” contracts.

These types of applications, he says, which are built on various blockchains such as Ethereum, might be viewed by investors as akin to start-ups in which a venture capitalist might invest.

Like businesses, these apps have a wide range of business models – some generate revenue, some generate revenue, some distribute that revenue, and so on.

“So I think looking at crypto as a whole and saying it’s impossible to invest because of XYZ characteristics…is a naïve, old-fashioned approach,” Celermajer says.

However, very few of these applications could be considered established in the sense of producing real profits, and their use cases at this point are largely very “crypto-native” rather than serving the mainstream economy.

Bitcoin at US$500,000?

Some cryptocurrency investors may be optimistic about the success these technologies and applications could have in the long term, but they should remember that their portfolios would still be exposed in the short term, says financial adviser Ben Smythe of Minchin Moore Private Wealth.

“While crypto assets may prove to be another source of return for investors, they should be viewed as a speculative asset class at this stage in the evolution of crypto,” says Smythe.

For some investors, the potential speculative upside may be enough to push them over the line.

Scaramucci thinks bitcoin will hit $500,000 (it was trading at $43,650.10 at the time of writing and a 20-day moving average of $42,380.35), hinting that a world where every restaurant accepts digital currency as payment could be just five years away.

Part of his conviction stems from the scarcity of bitcoin. The world’s largest cryptocurrency by market capitalization is capped at 21 million coins and less than two million remain to be mined.

As bitcoin usage grows, demand will be met with ever-shrinking supply, exacerbated by a “halving” event scheduled for 2024, when the number of bitcoins allowed to be produced will drop from 900 to 450.

But Scaramucci also admitted he had been wrong before, betting that bitcoin would hit $100,000 (his all-time high was $68,000 and has fallen almost 40% since).

Whether they are drawn to the simple capital gains of a speculative price rise or believe that some of the vaunted deeper fundamentals may indeed have some merit, investors are advised to start small.

“You have to have some skin in the game to learn,” says Chloe White, former Treasury adviser and founder of crypto policy consultancy Genesis Block, who started her crypto wallet with a 0.5 allocation. %.

“Don’t wait until you feel like you’ve got it 100% to get your little half percent exposure, because you need to have some sort of openness to invest in the space.”

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