Are cryptocurrencies back on track to reshaping our financial system?
The news this week that cryptocurrency giant, Digital Currency Group, has acquired cryptocurrency exchange company, Luno, has once again highlighted the rise of cryptocurrencies as a possible alternative to the current global financial system.
According to Old Mutual Investment Group Director of Investments, Hywel George, Bitcoin, as well as a number of other cryptocurrencies, are looking increasingly as though they’re here to stay. However, he questions how investable they currently are.
“Since the bursting of its bubble back in 2018, Bitcoin has found a more solid foundation, and with increasing use, it looks very much as though it, and many of the cryptocurrencies that came after its creation, are here to stay. As such it is worth digging a lot deeper to gain a proper understanding of them and whether they can complement or outright replace our existing financial ecosystem,” says George.
In short, cryptocurrencies are digital currencies that are secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies work off decentralised networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.
Following the launch of Bitcoin in 2009, a number of other alternative coins or “altcoins” were created and as prices rose, over 1600 are now in circulation. Most are tiny and inconsequential, and have very similar characteristics to bitcoin, but the two notable alternatives to bitcoin that have their own interesting efficacy are Ripple and Ethereum.
Ripple is able to transact regular currencies on its platform as well as Ripple (the dollar, yen etc). Ethereum however is by far and away the most interesting, says George.
“The Ethereum platform enables transactions of almost any type and complexity to reside within its blockchain technology. Critically Ethereum allows fractional ownership to exist easily on its platform. You could own a fraction of a real asset – like a port or road – and trade it with others. You could own your listed shares in the same way, but instead you would simply own a portion of the company – listed stock exchanges would become redundant. You could buy a slice of power generated in Germany and sell it to neighboring Poland. In short, it offers an extraordinary vision of what the future could hold.”
According to the World Economic Forum up to 10% of World GDP may be conducted on blockchain by 2025-27. That’s $8 trillion of value. But is it an asset class?
“To ascertain that, first we need to assess size,” says George. “The market cap of the Gold sector is around $10 trillion. For comparison, global GDP is around $80 trillion, global debt $250 trillion, global equity $80 trillion and global bonds $160 trillion. Bitcoin is fairly substantial now at $200 billion, but is still just two percent of the size of gold, while Ethereum is just $35bn.
“So yes, I would say cryptocurrencies are interesting and in time will form a part of investment portfolios - as an asset class or a currency play. But right now, we need to question how investable they are.”
George points out that investing in cryptocurrencies is not easy. “Take Bitcoin, for example; the only way to really do it efficiently and at scale is direct, by opening a digital wallet on a crypto platform like Coinbase or Luno. This can be done, though it is clunky and the transaction fees they charge tend to be high. Greyscale, offers Investment Trusts for Bitcoin, Ethereum and a mix of cryptocurrencies; however being Trusts, and not ETFs, there is no equalization market making mechanism and so they trade at big premiums or discounts – currently very big premiums. The futures market is small and clunky and difficult to access. The smaller retail platforms actually make it easiest, with bitcoin tradeable on places like IG Index and Robinhood,.
“Once the SEC allows ETFs for cryptocurrencies I suspect these things will explode,” he adds.
Ultimately, George believes that cryptocurrencies are real and are here to stay. “They will become more investable and as they do, will garner more interest from investors across the spectrum. As a store of value – given its finite nature – bitcoin is a true alternative to gold. But as a platform to enable the future of commerce for the next decade, Ethereum is extraordinarily interesting,” he concludes.