Given how prices have moved this year, it’s no surprise that a recent AJ Bell survey found that more than three-quarters of financial advisers say their clients have asked them to invest in crypto. cash.
The analysis shows that a person who invested £ 50 per month in bitcoin over the past year would have experienced a growth of 127.6% on their initial investment of £ 600, which is now worth £ 1,365.
Such growth will have led to inevitable questions for advisers about the merits of holding bitcoin and other cryptocurrencies in their portfolios, alongside more traditional asset classes such as stocks and bonds.
Gold and cryptocurrency mining; power and emissions
According to the survey of over 300 financial advisers, some 36% said their clients held cryptoassets, but only 4% said they would consider advising their clients to invest in crypto-assets directly. cash.
“Cryptocurrency is here to stay predictable, so advisers will continue to answer client questions on the subject,” said Laith Khalaf, financial analyst at AJ Bell.
“However, the asset class hasn’t really made its way into mainstream solutions, with the notable exception of Ruffer’s funds which bought bitcoin earlier this year but turned a profit fairly quickly thereafter. “, he added.
Despite this, the survey found that more than a quarter of advisers said they would consider investing in a multi-asset fund with some exposure to crypto.
This compares to 43% who hold gold as part of a balanced asset allocation.
“This seems the most likely route for crypto to be part of the portfolios of advised investors going forward, although it would require more asset allocators to gain exposure to cryptocurrencies, which we do not have. not seen yet, as the prevailing mood towards crypto in the investment community is still deeply skeptical, ”Khalaf said.
“It seems legitimate given its volatility, a lack of functionality in the real economy, a high carbon footprint and many regulatory risks,” he added.
“So while investors may choose to hit a few pounds here and there, crypto in its current state is not very investable for advisers or fund managers.”
So what do multi-asset specialists think of the merits of crypto in their portfolios?
The wild west
Chris Rush, chief investment officer at Iboss, said that while he does not invest directly in crypto, he believes digital currencies and blockchain technology will undoubtedly be transformative in many industries.
“Finding the winners in these evolving and, for many, revolutionary markets will likely be incredibly difficult, and the investment environment is analogous to the Californian gold pioneers of the mid-19th century,” he said.
The most frequently referenced form of digital currency is private cryptocurrency. According to Rush, these share the general characteristics of being decentralized and privately created digital currencies, with, for now, little government oversight and regulation.
He added that the relative recentness of the technology and the perceived wealth to be made have aroused the interest of experts and amateurs alike.
“Those who know their financial history may recognize some parallels here with the dot-com bubble,” he said.
“Although the number of IPOs in the late 1990s (856 in 1999 and 2000) is paltry compared to the more than 4,000 crypto tokens currently available to potential investors, the challenge is similar; winners and will those winners trade at a higher valuation than they currently are? ”
In an industry where innovation is evolving at a staggering rate, Rush noted that there is an opportunity to make a lot of money, but finding the winners can be extremely difficult.
Moreover, if investors select incorrectly or if the bet does not pay off, he added that there is a real potential for permanent capital loss.
“A considerable amount of capital poured into the private crypto space as investors sought to make their fortunes in what could be considered the Wild West of the investment world,” he said.
“Unfortunately, that means the crypto space has its fair share of outlaws, some of these outlaws are shooting from the hip while others are participating in much more sophisticated heists.”
The dangers of social media
Given their profession, multi-asset managers are called upon to have an opinion on many subjects.
However, while Rush said the Iboss team has considerable expertise in risk-reward profiles and correlations between stocks, bonds, real estate, cash and even gold, the wide range of opinions make the current iteration of cryptocurrencies extremely difficult to assess.
“That is why we would consider them primarily as speculative,” he said.
“The sentiment-based value of many private cryptos is easily swayed by social media influencers. It’s not hard to find celebrities, self-proclaimed financial luminaries or social media gurus exploiting their followers to increase the price of an existing crypto or push a new one. “
Perhaps the best-known example is Elon Musk, whose comments on Twitter Rush indicated to have measurably affected the price of bitcoin and ushered in the arrival of the crypto meme of choice – dogecoin.
“Those familiar with the biggest fool theory might spot the biggest fool in the influencer-influenced relationship,” he said.
“However, while the extreme price volatility and the ability of Musk and Arc Capital’s Cathie Wood continue to drive prices significantly, it does little to help the evolution or help the cryptos. to become legitimate traditional assets. “
Right now, the most popular cryptocurrency for investors is bitcoin.
However, Rush said his popularity appears to be primarily due to first-mover advantage, which he says is a phrase that has historically turned out to be somewhat misleading.
Indeed, Nigel Green, CEO and founder of the deVere group, recently predicted that not only will ethereum crypto continue to outperform bitcoin in 2021, but he added that it will eventually outperform its rival.
“Ethereum is more useful than bitcoin and has technological advantages over its more well-known rival,” he said in late August.
“Ultimately, this will mean that its value will surpass that of bitcoin – likely within five years. There will of course be peaks and troughs along the way, but Ethereum’s rise to the top of cryptovers seems unstoppable. “
“That said, I remain confident that bitcoin will reach, if not surpass, its all-time high in mid-April of $ 65,000 by the end of 2021,” he added.
Think long term
As valuations recover in the market after the recent sell off, UK money app Ziglu advises cryptocurrency investors to plan for the long term.
After posting strong gains in August, Ziglu believes the recovery is a good time for investors to reassess their holdings and plan for the long term by focusing on regular monthly investments in the market.
Mark Hipperson, Founder and CEO of Ziglu, said: “We believe that cryptocurrencies should be a long-term investment and encourage our clients to invest little and often, as it is a proven method to mitigate the risk. market volatility and maximize returns. .
“The recent rally from the price drop earlier in the year shows how volatile there will always be in the crypto market, with peaks and troughs. Regular investments will allow investors to assess the market. ‘impact over time. “
For Rush, one of the biggest issues with holding crypto as part of a multi-asset fund is that it’s not a store of value. Namely, no one knows how to value them.
“A lot of people have an opinion, but enough people have to know how to value them before they can value them, the same with any asset like gold or whatever,” he said.
“That’s basically what everyone decides and I think more than any other asset they are all threatened by government legislation.”
Indeed, Rush said the evolution of criminal activity, or closely related criminal activity to the crypto world, appears to be growing faster than the assets themselves.
As a result, he notes that regulators have started to step up their scrutiny of crypto assets.
“While many crypto enthusiasts publicly welcome regulatory oversight, it is rare that increased uncertainty has benefited asset prices of any kind, especially if large-scale frauds are discovered in the process of being developed. road, ”he said.
So what does the UK regulator say about the risks of investing in crypto?
In January of this year, the FCA warned consumers about the risks of investments announcing high returns based on crypto assets.
“Investing in crypto assets, or related investments and loans usually involves taking very high risks with investor money,” the FCA said.
“If consumers invest in these kinds of products, they should be prepared to lose all of their money.”
It would appear that for now, while advisers should expect to continue to question the merits of investing in crypto, the investment solutions available to them look set to remain scarce.