What to know about the opportunity for Crypto investments in your portfolio
Who owns and trades crypto today?
The crypto currency world has frequently made the headlines over the past few years, cropping up in a myriad of different stories, many of which seem very, very far away from the day to day business of managing client money and providing advice to savers looking to invest. However… in the last year or so the tone of the language is changing and a new thread has emerged in these stories that warrants further consideration in spite of market volatility: is there a place for crypto asset investing as part of a diversified investment portfolio?
The evidence suggests that as the crypto world matures, more and more of us are taking part. As of now, market cap for the top five crypto currencies is over $1.5 trillion, and the number of different coins available continues to grow at pace.
Crypto research by the UK’s Financial Conduct Authority (FCA)* in 2021 put the figure for those in the UK who have held or currently hold crypto currency at 5.7% of the adult population. For comparison, stock and share accounts are estimated to be held by 15% of the adult population of the UK**.
Asset Managers push to participate
Looking to the asset management world, creation of mutual funds and ETFs that track the price of individual or baskets of crypto assets is on the rise – though the pace of regulatory approval has been slow and is far from a formality, the trend is for a growing number of fund operators all around the globe to start to offer access to crypto strategies; and the list of investible products is growing. Linedata partnered with institutional crypto trading platform, Liquid Mercury, to give asset managers access and crypto market intelligence.
Global assets in crypto exchange traded products grew from $3.12 billion at end of 2020 to just over $20 billion at end of 2021 – an impressive 549% growth***. Hedge funds and family offices are also very active in this space, though it seems institutional investors are not quite yet ready to back those strategies and capital from high net worth individuals is leading the way. Given the way in which global markets have reacted to high level events of the past decade, there is clearly something attractive in a (potentially…) non-correlated asset that could help further diversify a mixed portfolio.
If we make some assumptions about the regulatory direction of travel – for example that registration of firms in the crypto space will be expanded and that their use for payments, investment products and tokenisation of assets will eventually become recognized and regulated activity (yes, big assumptions but not totally without foundation), then it would seem likely that demand for crypto investments will only increase over time. This is why it makes sense to consider just how this investment product could sit alongside existing services offered by firms today.
Asset managers are challenged by the rapid evolution of crypto assets. This Survey Report from WatersTechnology and Linedata details their involvement.
Further reaching consequences
There are also potentially much further reaching consequences of what we see in the crypto asset world today. Tokenization offers a path to product innovation that has, to date, kept many investible asset types the preserve of the ultra-high net worth market. The potential is there for a very significant expansion of what can be invested in by the mass affluent of the broader population: private debt, early-stage companies investing, infrastructure, technology, art – the list is ever expanding and the underpinning technology and process for trading these tokens is likely to follow the pattern set by crypto markets today.
Questions to ask as an asset manager
- What foundation of knowledge would be required for a firm to construct a crypto investment program?
- Once the basics are understood, how can the many different crypto assets available for investment be analyzed and classified?
- How can crypto markets best be accessed?
- How can you measure trade execution performance in a market with such fragmented liquidity?
- What is the right valuation policy given 24 hour markets - no ‘close’ price exists?
- How will firms handle the operational challenge of custody and banking for clients wanting to hold digital assets that don’t fit the ‘normal’ profile of key service providers today?
While there are still many challenges and questions to be answered, we believe that now is the right time for firms to assess their position relative to this new and emerging asset class and to make an informed choice on whether crypto is right for them and their clients.
About the author, Ed Gouldstone
Ed Gouldstone is a senior leader in global product strategy and development for Linedata Asset Management. He previously led R&D and earlier was COO for Linedata’s European business with responsibility for all aspects of client delivery, support, and strategy.