For some hardcore crypto evangelists, the merits of investing your personal or household capital in digital assets is undisputed.
“If you do the homework, you end up investing some portion of your assets in cryptocurrency,” Anthony Scaramucci, founder of New York-based hedge fund SkyBridge Capital, told The Australian Financial Review Cryptocurrency Summit on Wednesday.
Scaramucci, who is best known for his brief and volatile stint as White House communications director to former US president Donald Trump, only made his first bitcoin trade in 2020. But he has since become a vocal convert and now oversees a growing exposure to digital assets as part of his firm’s $15 billion alternative investments portfolio.
The underlying technology had inherent appeal, he said, as a “delayering” agent that would cut fees and waste from the financial system, helping investors and consumers pay less for transactions and services. That was one of several elements he expected to drive value over time.
“You want to get in here ahead of the curve – if you’re not long crypto, you’re effectively short it.”
Of course, it is all well and good for mega-wealthy Wall Street celebrities to take a punt on future technologies with eye-watering returns (and risks) on offer. Regular retail investors are right to be a little more cautious about blindly acting on a tip from “The Mooch”.
After all, this is a notoriously volatile and risky market – and one regulators have warned is home to criminals and scammers.
Unfortunately, trustworthy financial advice is hard to come by when it comes to cryptocurrencies. Although research published this week found almost 90 per cent of advisers surveyed have received inquiries from clients about investing in crypto assets, most are unable to legally recommend them or even discuss them properly with investors.
But, despite the lack of professional advice available, the evidence suggests many Australians are purchasing crypto assets to include in an investment portfolio – at least 800,000, to be precise, according to the latest data from Treasury.
And, contrary to the stereotype, it is not just Millennial and Generation Z investors who are buying in. Local cryptocurrency exchange BTC Markets says the largest inflow of its clients last year were Australians aged 45 to 59. The average crypto portfolio sizes were highest for the over 60 demographic because of their larger disposable income.
A growing number of increasingly sophisticated investors are piling in to this nascent asset class. Naturally, that does not mean you should too.
Given the obvious risk attached, for some investors (especially those in or approaching retirement) any exposure to crypto markets may be a step too far. That is a very reasonable assessment for an investor to make.
But there is also a growing consensus that says a crypto allocation at least warrants proper consideration.
From speculation to utility
For BTC Markets chief executive Caroline Bowler, the demand for crypto assets goes deeper than spot price speculation to the emerging utility and underlying use cases of the associated technologies.
“The use cases for crypto are long-established, but never more visible,” she says. “Around the world, people are using crypto as a store of value, a means of payment and a fast, efficient way to remit money to family members overseas.”
The war in Ukraine has helped make the past 12 months or so a “watershed” moment for cryptocurrency’s entry into 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.
“As interest rates look set to rise, crypto’s use as a store of value is being demonstrated by the stabilisation of its price,” Bowler says.
“Investment as a store of value may yet prove to be one of the most significant use cases because the growth of crypto has been seen as a reaction to loose monetary policy by central banks since the 2008
global financial crisis.” she adds. “As an increasingly mainstream asset, crypto can also be a hedge against rising rates and inflation.”
But such is the contentious nature of cryptocurrencies that almost all of the perceived investment benefits are up for debate – not least the suggestion that they could be remotely described as stable (just take a cursory glance at a bitcoin price chart over the past year).
Although crypto enthusiasts are keen to stress the market will calm as it matures, Grant Wilson, a former hedge fund manager and now head of Asia-Pacific at investment consultancy Exante Data, says volatility will probably be persistent.
The inability to be certain about that is one of many known unknowns that make valuing crypto assets, and therefore investing in them, fraught with difficulty.
Another uncertainty, Wilson says, is the extent to which crypto assets are correlated 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.
The common valuation methods used by the crypto industry such as “stock-to-flow models” and “network value to transaction ratios” are just “garbage”, Wilson told the summit bluntly on Wednesday.
“Ultimately, it will come down to just building a longer time series and data sets, and then we can start to understand what correlation patterns we can really rely upon,” Wilson added.
Alex Vynokur, chief executive of exchange-traded fund manager BetaShares, agrees that the early stage nature of crypto assets makes them difficult to assess.
“These asset classes are very new,” Vynokur told the summit. “[Whereas] all asset classes that are traditionally considered as investible have been around for a long time, and have shown how they behave in different market conditions in different economic conditions.”
Over the past six months, the performance of bitcoin and ether have been within about 0.5 per cent of major global sharemarket indices, Vynokur pointed out.
“That is significantly higher than over the last 10 years,” he said. “Time will tell what the long-term correlation is going to be.”
Benjamin Celermajer, director of crypto-specialist investment manager Magnet Capital, agrees that equity and crypto markets have become more correlated than they had previously.
But he says this is largely a function of the way that investors (or perhaps traders is the more accurate term) are engaging in crypto markets.
“A lot of investors are treating bitcoin like a tech stock or like a volatility tool,” he told the summit. “If that’s how they view bitcoin as opposed to as a store of value, or as a long-term investment opportunity, of course it’s going to become more correlated with other volatile markets such as tech stocks and other [sectors of] equity markets.”
Relative to other asset classes, the correlation is low, he says, tipping that will continue as the market develops.
He also says it is important to distinguish between the different digital tokens and the various ways they may act within a diversified portfolio.
Bitcoin, he says, is more like a commodity, which is why some advocates describe it as “digital gold”.
Ether is the “base layer to the decentralised economy”, he explains. It is the token linked to the ethereum blockchain – an open-sourced public ledger that records transactions and powers decentralised finance (DeFi) and other applications. DeFi refers to financial instruments that cut out financial middlemen such as banks and stock exchanges by relying on automated “smart” contracts.
These kinds of applications, he says, which are built on various blockchains such as ethereum, could be seen by investors as akin to start-up companies in which a venture capitalist might invest.
Like companies, these applications have a wide range of business models – some produce revenue, others produce income, some distribute that income, and so on.
“So I think looking at crypto as a whole and saying it’s uninvestable because of XYZ characteristics … is a naive and old school approach,” Celermajer says.
However, very few of those applications could be considered established in the sense of producing real profits, and their use cases at this stage are largely very “crypto-native” rather than servicing the traditional economy.
Bitcoin to $US500,000?
Some cryptocurrency investors may be bullish on the success these technologies and applications may have in the long term, but they need to remember 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 returns for investors, they should be seen as a speculative asset class at this stage of crypto’s evolution,” Smythe says.
For some investors, the potential speculative upside may be enough to get them over the line.
Scaramucci thinks bitcoin is going to $US$500,000 (it was trading at $43,650.10 at the time of writing and a 20-day moving average of $42,380.35), tipping that a world where every restaurant will accept the digital currency as payment could be just five years away.
Part of his conviction stems from bitcoin’s scarcity. The world’s largest cryptocurrency by market cap is limited to 21 million coins and there are less than two million left to be mined.
As the use of bitcoin grows, demand will collide with ever-shrinking supply, exacerbated by a “halving” event scheduled for 2024, when the number of bitcoins allowed to be produced will fall from 900 to 450.
But Scaramucci also admitted he had been wrong before, betting that bitcoin would surge to US$100,000 (its record high was $US68,000 and has crashed nearly 40 per cent since).
Whether they are enticed to the simple capital gains of a speculative price rise, or think some of the deeper fundamentals being touted may indeed have some merit, investors are advised to start small.
“You’ve got 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 portfolio with a 0.5 per cent allocation.
“Don’t wait until you feel like you 100 per cent understand everything to get your little half a percent of exposure because you’ve got to have some kind of openness to investing in the space.”
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