"Cryptocurrencies are a subset of digital currency that is decentralized, and based on a set of algorithms and protocols that enable a peer-to-peer, cryptographically based payment mechanism, medium of exchange and store of value" (Gartner). Particularly, electronic and encrypted currencies are used to pay for the "proof-of-work" of "minors", who validate and write operations in the register of a blockchain.
Cryptocurrencies are linked with blockchains, each of them having a specific purpose or protocol. The first of them - the Bitcoin - was created in 2009. Since, others were developed, with various degrees of success, depending on the level of innovation. According to Coinmarketcap.com, more than 860 cryptocurrencies are available and new ones are created every day.
Cryptocurrencies’ capitalization increased 80-fold in one year
The value of each cryptocurrency is basically determined according to the cost of the resources (hardware, electricity) needed to validate a new block. Then, this value evolves with demand, technical developments, method of compensation, but also with external factors:
- slowing supply growth of quantity of Bitcoins
- geopolitics and capital control (Brexit, election of President Trump, devaluation of the Chinese currency...)
- anticipation of demand (interest of asset managers, financial companies and central banks for the use of cryptocurrencies)
- increasing acceptance of consumers and suppliers of products and services (eg recognition of Bitcoin as a legal currency by Japan in April 2017)
The global capitalization of cryptocurrencies reached a peak of $161Bn on August 29, 2017, with a volume of daily transactions amounting to $3-4Bn. The market remains dominated by Bitcoin, which represents 45% of the capitalization. Ether (20%), Bitcoin Cash and Ripple (7%) complete the podium. Litecoin, Dash or NEM can also be mentioned, each representing 1 to 2% of the market.
Are cryptocurrencies an investment opportunity?
Beyond a means of payment, cryptocurrencies are now becoming investment vehicles. Indeed, they represent a high growth potential with a pent up demand and a high volatility that creates investment opportunities. But it’s not their only attractive feature:
- they constitute a universe of diversification of portfolios. DLT Financial estimates the correlation between the DLT10 Index (a cryptocurrency financial index based on 10 major digital currencies) and the S&P 500 stands at 4.7%
- they could be an anti-inflationary store of value, since coins issues are generally limited in volume
- they could be safe-haven investment, thanks to their independence from central banks’ control and economic incertitude.
Of course, any investment with high performance potential comes with risks. Because they are based on an ongoing technology, with relatively few users, without – for the moment – central regulation, cryptocurrencies are highly volatile. Some – such as CEOs of major banks – have loudly expressed their fears that a bubble is close to blow up. It is true that there are similarities with the Internet bubble, with opportunistic and irrelevant offers that override investors’ enthusiasm. Cyber threats have also tarnished their image, even though hacking and scams have never been linked to the protocol but to “wallets” and exchange platforms (eg Bitfinex, see below).
From the bursting of the Internet bubble emerged as today’s big companies, which have deeply changed the economy and our lifestyle. The same could be true for blockchains and cryptocurrencies, whose potential applications are innumerable. The biggest risk might be to not considering them as a potential investment universe.
How to invest?
Except to become a blockchain "minor", the main two ways of investing directly in cryptocurrencies are:
- to acquire « coins » via purchase platforms (Coinbase, Coinmkt, Hivewallet…) or exchange platforms (Bithumb, Poloniex, Kraken, Bitfinex, OKCoin, etc.)
- to participate in Initial Coin Offering (ICO), which aims to raise funds to finance projects on a blockchain. In the first half of 2017, more than $1 billion was raised through ICO
With so much lucrative potential at stake, financial companies have begun to focus on electronic currencies. Investment solutions have been proposed since 2015 and other investment offerings and services were announced recently:
The Bitcoin Investment Trust, now owned by Grayscale Investments, was launched in 2015 and quoted on OTC market. Its aim is to track the underlying value of bitcoin and to enable investors to gain exposure to its price movement, without buying and storing bitcoins. It’s only open to investors with an income above $200,00 or with at least $1 million net worth. The minimum investment is $25,000. AUM: $751Mn - Performance YTD: +520.6% (08/25/2017)
In April 2017, Grayscale launched a similar ETF benchmarked on Ether: Ethereum Classic Investment Trust. AUM: $46Mn (08/25/2017)
In September 2015, ARK Web x.0 ETF (ARKW), managed by Ark Investment Management, became the first ETF to invest in bitcoins by purchasing shares of Bitcoin Investment Trust. ARKW is invested in next-generation Internet-linked companies and now offers Bitcoin exposure around 9,7%.
In Europe, XBT Provider, a Swedish issuer, launched a publicly listed bitcoin Exchange Traded Note (ETN) in April 2015: Bitcoin Tracker One, and its euro-denominated version: Bitcoin Tracker Euros (total AUM: $190Mn as at 07/31/2017). Since June 2017, Hargreaves Lansdown allows its customers to invest in this ETN through their self-invested personal pension (Sipp) or their traditional account. Vontobel proposes Voncert, a tracker tradable at the SIX Structured Products Exchange, which expires in July 2018.
Crypto Fund AG, headed by Jan Brzezek, former chairman of the Asset Management division at UBS, announced its intention to introduce the “world’s first diversified cryptocurrency fund”, based on the Cryptocurrency Index (CRIX). Fund launch is expected in Q4 2017 and the provider aims at a volume of CHF100Mn in the first year.
In July 2017, Falcon Private Bank became the first Swiss private bank providing blockchain asset management solutions for its clients, in partnership with Bitcoin Suisse AG. In August, it expanded to Bitcoin Cash, Ether and Litecoin the cryptocurrencies which could be traded and stored.
In August 2017, Fidelity Investments implemented on its website the option to display holdings in Bitcoin, Litecoin and Ethereum held through the digital wallet provider Coinbase.
And within the Group? In July 2017, CACEIS and Bitstamp – the EU’s first and only fully CSSF licensed bitcoin exchange platform – announced the launch of a new service enabling fund promoters to accept bitcoin investments from retail and corporate clients into their investment funds.
Author: Pascal Buisson
