Alternative Investing: Cryptocurrencies
Last month in an interview with Bloomberg TV, BlackRock Chief Executive Officer Larry Fink said the following when asked about cryptocurrencies:
"Related to cryptocurrencies, I'm a big believer in the potential of what a cryptocurrency can do. You see huge opportunities, but what we're talking about today, it's much more of a speculative platform, people are speculating on it."
Fink added that thus far, his firm hasn't seen much interest from clients beyond "some speculative stuff"
"We're being asked that question but it's more of a venture capital type of interchange, but we're not hearing clients say 'we want to use this as an asset class'," he said.
Diversification is fundamental to the risk management of a portfolio. Regardless of your age and risk tolerance, you should always look to diversify your investments so that they are as uncorrelated as possible. For example, even if you are a fresh out of university graduate working at Morgan Stanley, open to risk and therefore allocates 90% of his portfolio to stocks in Emerging Markets indices, you wouldn't just go for Petrobas and Brasil Foods- that would be putting all your eggs in uma cesta [Brazilian for "basket"] Logically you would invest your money in different asset classes and markets too. The reasoning is that if an earthquake were to happen in Chile and the price of your mining stocks dropped, it would not affect the performance of your technology stocks in China.
Accordingly, having exposure in your portfolio to cryptocurrencies and companies developing blockchain technology would not be an outlandish idea, but actually beneficial in terms of diversification and managing overall risk, on principal.
However money laundering, volatility and regulation are the three most popular responses many will offer when questioned as to why they won't invest in cryptocurrencies. Morality is an issue as cryptocurrencies are used as a form of payment on online black markets. Further, it is very possible that you could buy a cryptocurrency such as Ethereum, Ripple or Bitcoin today and it will lose a significant amount of its value; Ethereum flash crashed from $320 to $0.10 on the 21st of June 2017 proving such fears and also revealing the weaknesses in blockchain technology which is still developing. Of more importance, is the threat of government regulation or simply declaring cryptocurrencies illegal- the recent actions of the Chinese government make such actions more plausible.
However speculation is just that; speculation, meaning that the future of cryptocurrenices is uncertain. The bubble could burst and they lose their entire market valuation, or the bubble could burst and they could soar to even higher highs in the long-term.
Who knows? In 10 years time each bank may have their own digital trademark currency... Only time will tell, however if clients are not asking questions or even having simple conversations with their portfolio managers related to digital currencies, the longer it will take for this asset to reach its full potential and tremendously impact our monetary ecosystem in the positive way it can.
By investing in cryptocurrencies, you are not only raising the visibility of this asset class but also the technology behind it. From my point of view, the blockchain and its capabilities are bigger than the "bubble" we are in. The values which cryptocurrencies and blockchain technology will bring to our society are immeasurable.
Onto the financial side of things, for short-term gains [six months to one year] I recommend buying alternative currencies such as Litecoin or NEM over Bitcoin.
Bitcoin has a very strong momentum which I do not think will falter as its coverage has shifted from predominantly financial to national, and people are even beginning to accept the currency as a form of payment. However, it is trading at a high price of $18997.38 and as the whole sector is only now garnering mass media attention, alternative currencies will move in the same upward direction as Bitcoin but not with the same momentum, making them safer options in this very volatile sector. Alternative currencies are cheaper so could offer better returns.
For long-term returns, I would recommend buying Ethereum as it not only distributes the cryptocurrency token Ether but also focuses on developing blockchain technology which will have more impact from a macro perspective on multiple industries. Further, Ethereum has the most advanced technology, supported by the fact that JP Morgan have developed Quorum [an enterprise focused version of Ethereum], despite their CEO James Dimon being a staunch skeptic of Bitcoin...
I believe we are in the media attention phase now, and by the third quarter of 2018 we will begin to enter the public phase as marked on the graph below. It is my belief that by the end of next year when the bubble bursting becomes a much more real threat, Ethereum will survive- either being acquired by a corporation or receiving enough funding to stay afloat and further develop the technology.
Source: The bubble phases chart of Hofstra University’s Jean-Paul Rodriguez
Conservative investors and the market in general perceive any cryptocurrency as overvalued right now and too volatile to have any good return prospects, I think this is wrong. What many in the market are only seeing is the negative use of cryptocurrencies such as money laundering, instead of the benefits of their economic models will bring in our everyday lives. These currencies provide a value which is bigger than the bubble. Overall, I think that the price of crypotocurrencies will come down and then go up in the same way the technology stocks which survived the dot-com bubble did; history always repeats itself.
Diversification is fundamental to the risk management of a portfolio. Regardless of your age and risk tolerance, you should always look to diversify your investments so that they are as uncorrelated as possible. For example, even if you are a fresh out of university graduate working at Morgan Stanley, open to risk and therefore allocates 90% of his portfolio to stocks in Emerging Markets indices, you wouldn't just go for Petrobas and Brasil Foods- that would be putting all your eggs in uma cesta [Brazilian for "basket"] Logically you would invest your money in different asset classes and markets too. The reasoning is that if an earthquake were to happen in Chile and the price of your mining stocks dropped, it would not affect the performance of your technology stocks in China.
Accordingly, having exposure in your portfolio to cryptocurrencies and companies developing blockchain technology would not be an outlandish idea, but actually beneficial in terms of diversification and managing overall risk, on principal.
However money laundering, volatility and regulation are the three most popular responses many will offer when questioned as to why they won't invest in cryptocurrencies. Morality is an issue as cryptocurrencies are used as a form of payment on online black markets. Further, it is very possible that you could buy a cryptocurrency such as Ethereum, Ripple or Bitcoin today and it will lose a significant amount of its value; Ethereum flash crashed from $320 to $0.10 on the 21st of June 2017 proving such fears and also revealing the weaknesses in blockchain technology which is still developing. Of more importance, is the threat of government regulation or simply declaring cryptocurrencies illegal- the recent actions of the Chinese government make such actions more plausible.
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| Ethereum crash |
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| Bitcoin crash |
However speculation is just that; speculation, meaning that the future of cryptocurrenices is uncertain. The bubble could burst and they lose their entire market valuation, or the bubble could burst and they could soar to even higher highs in the long-term.
Who knows? In 10 years time each bank may have their own digital trademark currency... Only time will tell, however if clients are not asking questions or even having simple conversations with their portfolio managers related to digital currencies, the longer it will take for this asset to reach its full potential and tremendously impact our monetary ecosystem in the positive way it can.
By investing in cryptocurrencies, you are not only raising the visibility of this asset class but also the technology behind it. From my point of view, the blockchain and its capabilities are bigger than the "bubble" we are in. The values which cryptocurrencies and blockchain technology will bring to our society are immeasurable.
Onto the financial side of things, for short-term gains [six months to one year] I recommend buying alternative currencies such as Litecoin or NEM over Bitcoin.
Bitcoin has a very strong momentum which I do not think will falter as its coverage has shifted from predominantly financial to national, and people are even beginning to accept the currency as a form of payment. However, it is trading at a high price of $18997.38 and as the whole sector is only now garnering mass media attention, alternative currencies will move in the same upward direction as Bitcoin but not with the same momentum, making them safer options in this very volatile sector. Alternative currencies are cheaper so could offer better returns.
For long-term returns, I would recommend buying Ethereum as it not only distributes the cryptocurrency token Ether but also focuses on developing blockchain technology which will have more impact from a macro perspective on multiple industries. Further, Ethereum has the most advanced technology, supported by the fact that JP Morgan have developed Quorum [an enterprise focused version of Ethereum], despite their CEO James Dimon being a staunch skeptic of Bitcoin...
I believe we are in the media attention phase now, and by the third quarter of 2018 we will begin to enter the public phase as marked on the graph below. It is my belief that by the end of next year when the bubble bursting becomes a much more real threat, Ethereum will survive- either being acquired by a corporation or receiving enough funding to stay afloat and further develop the technology.
Conservative investors and the market in general perceive any cryptocurrency as overvalued right now and too volatile to have any good return prospects, I think this is wrong. What many in the market are only seeing is the negative use of cryptocurrencies such as money laundering, instead of the benefits of their economic models will bring in our everyday lives. These currencies provide a value which is bigger than the bubble. Overall, I think that the price of crypotocurrencies will come down and then go up in the same way the technology stocks which survived the dot-com bubble did; history always repeats itself.
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