Crypto crash forces rethink of digital gold rush

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Whatever the motivation, it is clear the enthusiasm has dimmed for some investors. The decline in market value is evidence of that, but local trading platforms also report a decline in customer activity.

“We’ve seen a dip in trading volumes which is in line with global market trends,” says Caroline Bowler, chief executive of local cryptocurrency exchange BTC Markets.

“Market sentiment declined, mainly among retail investors,” says Tommy Honan, head of strategic partnerships at cryptocurrency platform Swyftx.

But beneath the headline numbers, there may be another trend afoot. “Swyftx has observed strong buyer conviction from higher net worth investors, signaling the intent of accumulation throughout the Christmas period and New Year,” Honan says.

“Based on anecdotal conversations, these investors are accumulating for a five- to 10-year plus period and are not concerned by the day-to-day price movements.”

Monochrome Asset Management CEO Jeff Yew says wholesale investors are buying the crypto dip. Supplied

Jeff Yew, founder and chief executive of crypto-specialist investor Monochrome Asset Management, agrees that more well-heeled investors are viewing the recent dip as a buying opportunity, not a sign that the crypto naysayers were right all along.

“One of the main concerns people might have about bitcoin is volatility,” Yew says. “However, we observe an increase in inquiries during periods of volatility.

“The investor class we deal with typically have done a lot of research and due diligence before investing in the Monochrome Bitcoin Fund and are not easily shaken by short-term price movements.”

That fund has a near 100 per cent passive exposure to bitcoin and is restricted to institutional and wholesale investors, meaning they have at least $2.5 million in assets or earn more than $250,000 a year. It has a minimum buy-in of $25,000.

Other funds have experienced similar resilience, Yew says, pointing to Canada’s Purpose Bitcoin ETF, which he says has enjoyed strong inflows from institutional investors in market dips, including the past few months.

Cryptocurrency micro-investing app Bamboo has reported a 17 per cent rise in sign-ups from SMSF investors in the past month. “They see this event as an opportunity to invest in crypto at a discount,” says Tracey Plowman, Bamboo’s chief operating officer.

‘Smart investors buy in down markets’

Those with skin in the game of crypto markets will naturally be eager to talk about its enduring demand. But more objective voices add weight to the thesis that more sophisticated investors are still keen on crypto.

“When most investors sell or invest less when investment price declines, smart investors are likely to buy more in a down market,” says certified financial planner (CFP) Helen Nan, founder of Plan For Your Future. “That is how wealth is transferred.”

Since amateur and retail investors vastly outnumber institutional and wholesale in the crypto market, prices may continue to decline, she says.

For crypto true believers, that is a poor reason not to invest.

“Price declines are a normal part of any market, be it cryptocurrency, commodities or shares,” Bowler says. “It is a normal part of a trading cycle and doesn’t alter the long-term view on cryptocurrency in the blockchain economy.”

Cody Harmon – a CFP, director of Hard Line Wealth and astute follower of crypto markets – goes further, arguing that omitting crypto assets from a portfolio might not be wise.

“Just like equities, there will be bull and bear markets, and a long-term diversified approach makes sense,” Harmon says. “There is much more value to come potentially in the space, which would mean that leaving the space altogether could mean forgone gains.”

Investing in cryptocurrency is like share market investing on steroids.

James Gerrard, certified financial planner and Coincurrent co-founder

However, the extent to which crypto assets truly add a diversifying element to portfolios is a moot point. The International Monetary Fund this month warned that bitcoin and other large-cap digital assets are starting to behave more like stocks.

”The increased and sizeable co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes that permits the transmission of shocks that can destabilize financial markets,” IMF financial counselor Tobias Adrian and his team wrote.

Responding to the IMF analysis, Bowler says: “No asset class is in isolation, especially in these extraordinary times. A degree of convergence is to be expected as it plumps out its role for investors.”

Convergence between crypto and stocks is natural, says Caroline Bowler, CEO of BTC Markets. Elke Meitzel

James Gerrard, a CFP and co-founder of crypto research platform Coincurrent, agrees that as the market matures, it makes sense that it would start to more closely behave like traditional asset classes.

“Investing in cryptocurrency is like sharemarket investing on steroids,” he says. “Where you would see a 3 per cent daily drop on a bad share market day, a bad day for crypto markets is more commonly a 30 per cent drop.

“That said, as traditional financial markets and Wall Street investment firms ‘buy in’ to cryptocurrency as something that is here to stay, we will continue to see more crossover and correlation.”

A growing number of listed companies derive revenue from cryptocurrency-related activities or have balance sheet exposure to crypto assets, for example.

Harmon says cryptocurrencies are broadly similar to equities in that they are effectively shares in a decentralized autonomous organization (DAO), which operates somewhat like a crypto-land equivalent of a listed company – albeit one that is “newer and more scalable” in his opinion .

Other corners of the crypto landscape have other characteristics, he says, likening stablecoins (which are pinned to official, central bank-controlled currencies) to bonds and fixed income and non-fungible tokens (blockchain-enabled digital artworks) to collectibles.

Regardless of the diversification merits, Plan For Your Future’s Nan says it’s vital always to keep crypto’s risk profile front of mind, especially those exposing some of their retirement assets to these nascent markets.

“It is highly volatile and the security of cryptocurrency is also a big concern,” she says. “For SMSF trustees, the first thing you need to consider before adding any crypto to your portfolio is whether your retirement will still be on the right track even if the value of your crypto investment becomes zero.”

Direct holdings v managed funds

But for those willing to take those risks, and potentially pocket the gains should bitcoin and the alt-coins once again stage an epic comeback, the question then becomes: in what format?

While millions of investors around the world own direct stakes in cryptocurrency tokens via digital wallets, others are invested in managed funds providing exposure to crypto markets.

And others still are waiting for Australia’s much-hyped bitcoin- and ethererum-backed exchange-traded funds – a number of which are in production and will be listed on the Australian Securities Exchange and competitor Chi-X in the near future.

Financial advisers are split on the merits of investing in crypto directly or via a managed fund structure (just as they are split on whether investors should expose their portfolios to crypto at all).

Gerrard is skeptical of the suite of bitcoin and cryptocurrency funds on the market. “They commonly charge very high management and performance fees – I have seen up to 50 per cent of the return in fees,” he says. “Second, I am not convinced of the expertise or value-add that you get with a crypto managed fund given it is a relatively new sector.”

Instead, he suggests investors do their research and select a range of “coins with promising futures” to hold for the long term in a diversified digital wallet.

Nan, however, is far more encouraged by the raft of new crypto-related investment products coming to market.

“Buying cryptocurrency ETFs listed on a regulated exchange can provide many more benefits than buying tokens directly,” she says.

The third-party analysis that accompanies a traditional managed fund structure obviates some of the research risk, she says, while having a traditional fund custodian in place reduces the risk of hacking or other security threats.

“However, cryptocurrency ETFs don’t reduce the volatility of crypto assets,” she warns.

With John Kehoe

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