Over the last year or so, the only issue more polarising and volatile than American politics has arguably been cryptocurrency. Many commentators have set out to examine the rise of ‘crypto’ as either an asset class or, as many would have it, a speculative bubble, with perhaps as many inches of copy being taken up about this as about the current occupant of the White House.
Bitcoin has dominated the commentary, but was not the best performing ‘coin’ of 2017. That accolade went to Ripple, which some argue is not even a true cryptocurrency. With such a bewildering array of ‘coins’, and some hundreds of cryptocurrencies in existence and perhaps as many, if not more, Initial Coin Offerings (ICOs) taking place, the rise of crypto and so-called ‘alt-coins’ has been as rapid as it has been spectacular. What does this mean for investors?
No matter who is commentating, the reality is that nobody truly knows. Digital currency is likely to evolve in a Darwinian cycle that may last many years or indeed decades. This is also true of the underlying technology that underpins it, Blockchain. The ‘distributed ledger technology’ or DLT, which forms the foundation for most coins, is the most exciting technological development since the internet and cryptocurrency is one of the ways in which investors can gain some exposure to the potentially hugely disruptive technology. By participating in the rise in the value of digital currency such as Bitcoin, Ripple or Dash, early investors have benefited from one manifestation of the underlying technology. As a nascent technology, distributed ledger technology is somewhat difficult to invest in. With a limited number of ‘pure play’ investment methodologies in the early days, cryptocurrency was and still is one way of gaining access to the potential for distributed ledger technology to change the world, as its advocates insist will happen.
In an area that is moving daily, the ways in which investors can access cryptocurrency as an investment asset class is evolving rapidly. In December 2017, The Chicago Mercantile Exchange, the largest futures trading venue in the world, started trading futures linked to Bitcoin. There are multiple funds available to invest in with somewhere in the region of 100 hedge funds in operation which provide access to cryptocurrency in some way. For clients wanting to hold a fund there is the GABI fund based in Jersey, which was one of the first institutional grade investment solutions available. Indeed, Jersey as a jurisdiction has embraced distributed ledger technology and the Jersey Financial Services Commission was one of the first movers in the regulation of blockchain related investment, creating a framework which has since developed further. Other investment options exist for private clients, family offices and institutions. For those wanting synthetic access, there is the XBT Exchange Traded Note which is denominated in Euros and Swedish Krona. While it carries a 2.5 per cent annual fee, and has a degree of exchange rate risk as cryptocurrency is often denominated in US dollars, it provides a relatively high degree of liquidity due to the nature of the exchange it trades on.
Clients can now also buy, sell and hold digital currency assets through a relationship manager. Blackfort Digital Currency Management, which was named in the top 25 Wealth Management launches of 2017 by Citywire, provides institutional grade access to cryptocurrency as an investment asset class together with safe Custody options in a well-regulated environment.
The drivers to have exposure to some digital currency is compelling. With Ripple rising in value by more than 36,000 per cent in the past 12 months, even an asset allocation of one per cent would have generated substantial returns in a low yield environment for other asset classes. While there is undoubtedly the potential that this area is prone to bubbles, those investors sitting on the sidelines with no exposure to cryptocurrency could well be missing out on a paradigm shift akin to the internet where many great fortunes were made and grown. To deny digital currency as an asset class is to deny that the future of financial services will come, and is perhaps already here. As an investor, some exposure seems eminently sensible.
Chris Usher is special adviser at Blackfort, the digital currency management specialists