Cryptocurrencies and other digital assets are a fast-growing segment in the investment universe with an estimated over 19,000 cryptocurrencies in existence, backed by dozens of blockchain platforms. However, it attracts a lot of scepticism and mistrust from real asset owners about its legitimacy as an asset class.
“Its investment proposition is that it is the highest growth tech sector in the world, attracting the vast majority of the highest calibre and youngest talent in the world,” said Richard Galvin, co-founder and chief executive of digital investment fund manager DACM speaking at Investment Magazine’s Absolute Returns Conference in Sydney earlier in September.
“Like in the 1990s and early 2000s, when you attract the best young talent to a sector, you get the best innovation and, in a way, it makes or almost ensures that it’s going to succeed. And we’ve been seeing that for the last four or five years in the crypto market as well.”
Investing in digital currencies will give investors an opportunity to have a stake in the “new financial rails of the future” said Lisa Wade, chief executive of DigitalX, an ASX-listed technology and investment company focused on digital asset funds management.
“It’s the greatest economic opportunity of our generation to build these new rails, because there are new ways of investing, there are new ways of transacting, and they’re more efficient, cheaper, smarter and faster,” she said.
Cryptocurrencies and blockchain technology are at the centre of the decentralisation of the financial system, a trend that is particularly enticing to millennials and younger generations.
“This is a technology that is effectively an underlying transaction engine for that decentralisation of society. With the added benefit that it’s an extremely low-cost digital solution that just makes a lot of sense, particularly to younger generations that can see this technology as effectively a way to reinvent whole sectors and remove middle inter-parties they don’t have a natural affiliation with,” Galvin said.
Energy usage in bitcoin and other digital currencies is becoming more efficient, moving away from the early years when mining bitcoin was very carbon intensive, a common criticism of the currency.
Many bitcoin miners are using renewable energy as “there is a very conscious movement inside of crypto and blockchain to create energy efficiency,” said Wade. With bitcoin in its asset portfolio, DigitalX makes use of carbon credits to offset the emissions from those assets, she said.
In September, the world’s second largest blockchain platform Ethereum transitioned from proof-of-work consensus mechanism which requires computers to agree on which transactions will be added to a new block which is very energy-intensive to a new consensus mechanism called proof-of-stake. Under this new mechanism, transactions are confirmed by validator participants that have bonded coins to a smart contract and is expected to be 99 per cent more energy efficient than the old system.
“We think proof-of-stake is the future for all the assets… that basically takes energy usage off the table and actually makes them extremely efficient from an energy usage specifically,” said DACM’s Galvin.
The returns on digital assets can be very high – as much as in triple digits over the last five years – however it is subject to wild swings and extreme volatility.
“The cost of that return is the volatility that you get along the way and so it’s important that you allocate based on the volatility and the risk position for your overall portfolio ,” said Galvin.
Currently investors in this space are divided into those who view digital assets as an alternative high-risk tech investment and those who see it as a potential hedge against financial services exposure, particularly among family offices. The split between retail and institutional is around 80-85 per cent retail and 15-20 per cent institutional.
However, Galvin is seeing a slow shift over the last 18 months where “we are starting to see new institutional investors and also bigger institutional take-up in the space,” he said. He cited an example of a US$300 billion pension fund that had a 10-person crypto investment team.
Apart from family offices, other investors include high net-worth individuals and institutional investors such as hedge funds, while super funds have stayed on the sidelines.
“I think there’ll be a big shift, it’ll take five to 10 years…but right now we have a crypto fund and I would call it a risk on portfolio investment,” said DigitalX’s Wade.