It is a safe statement to make that many financial institutions have in recent years, been torn as to whether cryptocurrencies are an asset class. Analysts are polarised. This is unsurprising as, over time, cryptocurrency went from being widely seen as a conduit for money laundering into a serious proposition for investors. And it’s not just the novices that’ve hopped on board with the cryptocurrency hype, even large, established companies, including the likes of PayPal, which have in turn dabbled with the digital currency as a genuine form of payment.
Major banks have also been rushing to set up crypto-related operations recently, with Morgan Stanley and Bank of America establishing a crypto-focused research division. State Street announced the launch of a dedicated digital finance division. JP Morgan and Goldman Sachs are also rolling out crypto trading services.
An asset is anything of value or a resource of value that can be converted into cash. Traditionally, an asset can often generate cashflows: stocks provide dividends, bonds provide coupons, loans provide interests. However, there are assets that do not really produce cashflows but still being considered as an important asset class.
Gold has long been considered to be an important asset class. It has very limited industrial usage and does not really generate cashflows. It is only collective thinking that gold is valuable that makes it so. In fact, this also applies to any fiat currency. After all, money is only a credit that a currency’s user gives to the issuer. For a currency to thrive, trust is the most important factor. The issuer of fiat currencies are sovereign entities which are deemed to be the most trustworthy. If there is a currency or economic crisis that the people do not trust the government, the value of the fiat currency will drop significantly.
So, an asset’s value will depend on the collective believe and trust of the people dealing with it. It is still at an early stage to conclude that investors believe and trust in the value of cryptocurrency, but the trend is definitively positive.
Throughout the course of history, we have become accustomed to recognising ‘traditional’ asset classes. Many investors regard cash and equivalents, bonds, and stocks as conventional financial investing’s big three. However, ever since the rise to prominence of cryptocurrency – a decentralised means of digital currency – many have started to question, should cryptocurrency be regarded as an asset class? This debate is as important as ever, considering that legislators and policymakers ponder upon taxing crypto in line with other assets in the midst of a tax war we’re witnessing. Currently in the US Congress, rules on tax on constructive and wash sales are being debated. Presently, only traditional asset classes such as bonds are stocks are subject to these rules, but there has been controversy about whether commodities, and digital assets should be considered.
In recent times, society has done a tremendous job of selling us on the idea that replacing our hard-earned cash with virtual currency is a good idea, and for good reason too. It does not take too much research to see that SMEs, family run businesses, corporates, asset managers and more are all investing in the crypto market. There is, however, a hurdle of learning new terminologies and understanding a new process.
As a result, many people shy away from dealing with it. This can seem daunting and is certainly a barrier to entry for some. However, it isn’t a reason to ignore what could potentially be an immensely fruitful asset pot. Professionals must now start to change their perspective on cryptocurrency, particularly in relation to what institutional investors consider to be an asset class and adapt processes to enable us to deal with cryptocurrency more effectively. Gone are the days of solely dealing with traditional assets. We all know that there are an enormous number of crypto assets now available and certainly the pandemic appears to have played a key role in driving increasing demand from both retail and institutional investors.
It’s not a secret that Bitcoin is the most valued – and thereby attractive – cryptocurrency on the market. Experts have largely accredited this by way of its scarcity, drastically leveraging its general understanding as an asset class. Bitcoin in particular benefits from investor confidence because of its snowballing popularity. Just as people in society believe in the value of diamonds because others believe in it, cryptocurrency shares this artificial value.
The rest of this editorial will be published at a later date.