Our columnist, a former portfolio manager at a major UK pension fund, gives a professional investor's view on the crypto currency craze.
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The initial controlling investors need to sell their Bitcoin investments to monetise their value. Selling requires an ever-increasing number of willing buyers. For an asset that produces zero income, and whose increasing value is solely determined by increasing numbers of buyers, it smacks of a Ponzi scheme. Any large-scale selling by large investors is likely to trigger a selling panic. The one type of investor who will definitely generate profits from the crypto boom are those who have adopted the philosophy of the famed sellers of shovels during the California gold boom and provide services in the form of exchanges and the like for crypto-related transactions.
But even here there can be confusion on the value that they can provide to institutional investors.
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There are two key questions facing institutional investors if they want to be involved in crypto assets. First, what are the requirements in terms of credit intermediation, regulation and infrastructure and cost. For institutions, though, there is another key question: are cryptocurrencies such as Bitcoin assets akin to others within a pension fund portfolio? Pension funds are not in the business of trading currencies for speculative gains by betting on the direction of cryptocurrencies. It is therefore unclear what role a cryptocurrency offering zero yield would have within an institutional portfolio except as a source of diversification, alongside other volatile but zero-yielding commodities.
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Yet despite their volatility and uneven infrastructure, cryptocurrencies are moving ever closer to the mainstream. Ankush Jain, a partner at Aaro Capital, says this is happening in well-regulated countries such as the UK, where financial regulations have been reviewing them, Germany, where legislation has been proposed to enable banks to handle cryptocurrencies, and Switzerland, which has led the way in establishing crypto exchanges.
Crypto asset advocates such as Jain argue that their volatility presents opportunities in a world where return expectations across almost all established asset classes are depressed. Cryptocurrencies also have almost no correlation to other asset classes, and therefore provide clear diversification benefits. For institutional investment, Jain sees several possibilities:. These offer capacity but are a blunt instrument. They are often small and difficult to source and diligence. Different cryptocurrencies possess varying levels of monetary properties which, in turn, affect their relative usability as money.
For investors, the challenge with investing in any crypto-currency is that the main argument that drives investment in Bitcoin is that the supply of Bitcoin is limited. That may be true, but the supply of cryptocurrencies as a whole is unlimited, with no substantial barriers to entry. Ido Sadeh Man, founder of Saga Monetary Technologies, points out that the cryptosphere is populated with cryptocurrency products — all geared towards delivering value through their approach to solving different issues — but their value is not being driven by demand for cryptocurrency per se, but by user demand for the solution they provide.
Like any form of money, the value of a cryptocurrency is derived from a combination of the usefulness of its money-like properties and subsequent network effects. Unlike traditional currencies, larger cryptocurrencies are secured by their network value, points out Jain.
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The higher the value, the harder it is to attack the network. But that still leaves the issue that cryptocurrencies may have as much long-term stability as tulips in 17th century Netherlands as a store of value. For long-term institutional investors, that is still a deal breaker.
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Linkages to fiat currencies naturally mean that the cryptocurrencies are no longer decentralised as there are implicit links to the monetary policies of the issuing countries in the currency basket. Facebook with its Libra electronic currency is leading a new trend — that of corporations issuing their own units of exchange linked to baskets of assets.
In late I bought a pair of graphics cards to mine, and at first I did pretty well with it. At first it paid for itself, but then it went downhill and was borderline break-even. I could have made more if I'd jumped in and out, but the emotions and risks in trading have burnt me, and I'd rather not take the risk. In , I was doing an apprenticeship at an IT company. At lunchtime we used to chat about little ways of making money on the side. Nobody had really heard of Bitcoin but we decided to give it a go and we spent a few weeks on it.
I traded them in last summer and got half the deposit for my house. I've still got a little bit but I'm just going to sit tight - it's not something I want to pin my future on. Bitcoin sets fresh records after Musk investment. Man has two guesses to unlock bitcoin fortune. Here are some of your Bitcoin adventures.
Cryptocurrencies for pension plans?
James Saye, tech consultant. Heather Delaney, founder of Gallium Ventures. Our client was irate but philosophical. Once it's gone, it really has gone. Javed Khan, independent trader. I decided to trade it a bit, and investigated bots while moving to bigger scale mining. Daniel Crocker, business owner.
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It didn't last long, but luckily I kept hold of mine. I do know people who have gone in deep but I think I've been lucky enough already. Related Topics.
Cryptocurrency Bitcoin Personal investment. More on this story. Published 9 February. Published 13 January.