FinTech

Why There's A Need for Traditional Investment Vehicles for the Digital Asset Sector

By Michael Collett, CMO of Stack, an Asia-based provider of Cryptocurrency Trackers and Index Funds. Contact Stack here for more information.

The creation of bitcoin in 2008 heralded a new age of finance—which is only now coming to the fore of traditional financial actors’ minds and entering the mainstream investment landscape. Having shown incredibly strong performance over a ten year period, bitcoin has presented early investors with a 145% annualized return, outperforming all other markets and indices in the same timeframe. However, the volatility of cryptocurrency markets—a product in their nascency—and the libertarian ethos of the earliest advocates of digital assets bred skepticism of bitcoin in traditional financial circles. They have missed out on huge potential returns as a result.

Entering into a new decade, the face of bitcoin has changed, and traditional finance is now eagerly moving into the space. Capital inflows to the cryptocurrency market are coming from institutional sources, not crowdfunded projects and low-volume retail investment.

Once criticized by traditional financiers, demand from investors, institutions, and HNWIs for traditional investment vehicles to provide controlled exposure to the high-yield potential of bitcoin is increasing. However, this growing demand is not being met by the industry, which has yet to provide the institutional grade, traditional investment vehicles required to bring bitcoin to a new class of investor—who expect reliability, responsibility, and professionalism from their financial service providers and fund managers. 

Economic Uncertainty and a Demand for Diversification

Renewed investor interest in buying and owning bitcoin and other digital assets is the result of two related phenomena—deteriorating investor confidence in more traditional markets, and bitcoin’s incredible proven rate of returns in the medium to long-term. 2019 was a year of bitcoin’s rebound, peaking at over $13,000 USD despite entering the year valued at under $4,000 USD. This recovery was fueled by decreased investor confidence in more traditional markets and concerns over global economic stability. With trade tensions flaring between the US and China, South Korea and Japan; Brexit bringing the UK’s economic future onto doubt; combined with tensions in Hong Kong and Iran—institutions and HNWIs began scrambling for new means of diversifying their portfolios to “recession-proof” assets to offset potential risk.

With investors seeking new asset classes to store their wealth and strengthen their portfolios, assets uncorrelated with traditional markets have benefited. Bitcoin has joined the ranks of gold as a reliable safe-haven for investor wealth, highlighted by the striking correlation in both market trajectories over the course of 2019. Gold and bitcoin entered into almost perfect lockstep in times of economic and political uncertainty, particularly as US-China trade tensions, Brexit, and instability in Hong Kong impacted traditional markets. With speculation that global political events could trigger a worldwide recession, this trend seems set to continue in 2020.

Unmatched Performance and a Promising Trajectory

Bitcoin yearly returns

Bitcoin yearly returns

The pursuit of alternative investments by institutions, HNWIs, and the old world of finance takes place against the backdrop of bitcoin’s incredible historical returns. Proving itself one of the best performing assets in market history—the once obscure “internet money” witnessed a 19x return since 2014, experiencing year on year positive returns since 2012, with the exception of 2014 and 2018.

This year-on-year performance is unparalleled in more traditional markets. Few investment vehicles readily accessible to traditional financial actors offer the duality of high potential returns and insulation from global markets that bitcoin does.

Given this, the long-term benefits of holding bitcoin have led to increased interest in the asset, as well as the entry of more “long-minded’ investors to the bitcoin market, which was previously chastised as entirely speculative in nature. Numerous reports showcase that the number of long positions being taken in both bitcoin futures markets, as well as the number of individuals and institutions holding bitcoin for extended period is on the rise.

Bitcoin untouched supply for 5 years

Despite this increase in activity, actors within traditional financial markets face an extreme lack of exposure to what is potentially the world’s most promising new asset class. Traditional investors wanting to hedge in bitcoin simply do not have adequate institutional grade portals for them to access the cryptocurrency space, which is fraught with complexity and risk.

Bridging Bitcoin and Traditional Finance 

Nowhere is this lack of institutional-grade investment vehicles more pronounced than in the Asia-Pacific region. Relative to its traditional financial services sector, Asia’s cryptocurrency industry is still largely underdeveloped to cater for traditional financial actors. The dearth of reputable platforms and portals to serve as a ramp into the bitcoin market has left a gaping hole of opportunity in Asia and its ability to participate in the asset’s spectacular growth story.

For those who do have access to traditional investment vehicles for digital assets in Europe and North America, they are forced to endure exorbitant fees for processing and custodying client assets, and astronomical performance fees from wealth management firms for single asset portfolios. Institutions and HNWIs are expected to pay a premium of 20-40% over the underlying asset, precluding many institutional and professional investors from entering the market and stifles the bitcoin economy’s growth.

This difficulty and set of operational, exchange, solvency, and storage risks in buying and holding cryptocurrencies calls for more ways to integrate BTC into your investment portfolio as seamlessly as any other financial product. What traditional investors in Asia will continue to expect of the cryptocurrency market before entering the space is sophisticated, institutional grade products which cater to their specific needs and follow the industry best practices of established financial markets.

Until now, the industry has failed to provide this class of investment vehicle, while a lack of trusted advisors within the cryptocurrency sector, with proven knowledge of financial markets, has led to limited trust of the entire marketplace in financial circles. The bitcoin market is, over a decade after its inception, now at a crossroads—professionalize or stagnate.

The once illusory demand for digital assets from the old world of finance has become a reality—what is left is for someone to answer their call.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.