While steep cryptocurrency price drops have caused many retail investors to pause, institutions and wealthy individuals are charging headlong into this brave new world.
It's hardly a scientific theorem, but market observers could be forgiven for noticing a strange relationship between the holiday season and cryptocurrencies.
Bitcoin, the world's largest digital currency by market capitalisation, arguably began its return to mainstream Australian news headlines and investment portfolios only a year ago.
"Bitcoin is back," declared a feature article in The Australian Financial Review's Christmas bumper edition in December 2020, arguing that the much-maligned token was increasingly being viewed as an appealing asset to hold for the long term by some.
The most visible cryptocurrency then more than doubled in value last year, reaching an all-time high of $US68,000 in November after beginning the year at around $US30,000.
However, it has been on a steady decline since then, down 19.6 percent year to date and 36.7 percent since those heady November highs. More broadly, the global market for crypto assets has dropped from nearly $US3 trillion in November to around $US2 trillion now.
The prospect of rising interest rates may have contributed to the Christmas crash. This is because market experts believe that in a low-interest-rate environment, the low or non-existent returns on savings and cash accounts were a partial motivator of demand for this gleaming but volatile new asset class, particularly among retail investors.
Investors' concerns have been exacerbated by regulators' repeated warnings. The Australian Securities and Investments Commission warned self-managed superannuation fund investors this week that they are increasingly being targeted by cryptocurrency-related scams. "Superannuation is an appealing target for scammers," according to ASIC. "Cryptoassets are a speculative and high-risk investment."
"My personal warning to people is to be careful and don't put all your money into crypto," ASIC chairman Joe Longo told Financial Review on Thursday.
It is estimated that approximately 2 million Australians have invested in crypto assets. According to the Australian Taxation Office, self-managed superannuation funds had a total of $228 million allocated to cryptocurrencies in September of last year. This amounts to 0.037 percent of the total assets held by SMSFs.
Although Bitcoin was the most traded crypto asset among Australian users of the investment platform eToro, a number of alt-coins are on the rise. Cardano's token, ADA, jumped seven spots to become the second most-traded asset, while so-called meme coins gained ground. Shiba and Dogecoin (both born as internet jokes) made the top ten for the first time.
Whatever the motivation, it is clear that some investors' enthusiasm has waned. The drop in market value demonstrates this, but local trading platforms also report a drop in customer activity.
"We've seen a decrease in trading volumes, which is consistent with global market trends," says Caroline Bowler, CEO of local cryptocurrency exchange BTC Markets.
"Market sentiment has deteriorated, particularly among retail investors," says Tommy Honan, head of strategic partnerships at cryptocurrency platform Swyftx.
But, beneath the headline figures, there could be another trend at work. "Swyftx has observed strong buyer conviction from higher nett worth investors, indicating an intent to accumulate throughout the Christmas and New Year period," Honan says.
"According to anecdotal conversations, these investors are accumulating for a five- to ten-year period or longer and are unconcerned about day-to-day price movements."
Jeff Yew, founder and CEO of crypto-specialist investor Monochrome Asset Management, agrees that more affluent investors see the recent drop as a buying opportunity, rather than proof that the crypto sceptics were correct all along.
"Volatility is one of the main concerns people may have about bitcoin," Yew says. "However, during periods of volatility, we see an increase in inquiries."
"The investor class we work with has typically done extensive research and due diligence prior to investing in the Monochrome Bitcoin Fund and is not easily shaken by short-term price movements."
This fund has nearly 100% passive exposure to bitcoin and is only available to institutional and wholesale investors who have at least $2.5 million in assets or earn more than $250,000 per year. It requires a minimum investment of $25,000 to participate.
Other funds have shown similar resilience, according to Yew, citing Canada's Purpose Bitcoin ETF, which has seen strong inflows from institutional investors during market downturns, including the last few months.
Bamboo, a cryptocurrency micro-investing app, has reported a 17% increase in sign-ups from SMSF investors in the last month. "They see this event as a chance to invest in cryptocurrency at a discount," says Tracey Plowman, Bamboo's chief operating officer.
'In down markets, smart investors buy.'
Those with a stake in the crypto markets will naturally be eager to discuss its long-term demand. However, more objective voices support the thesis that more sophisticated investors are still interested in crypto.
"When most investors sell or invest less when investment prices fall, smart investors are likely to buy more in a down market," says Helen Nan, founder of Plan For Your Future and a certified financial planner (CFP). "That is how wealth is passed down."
Because amateur and retail investors vastly outnumber institutional and wholesale investors in the crypto market, she believes prices will continue to fall.
That is a poor reason not to invest in crypto, according to true believers.
"Price drops are a natural part of any market, whether it's cryptocurrency, commodities, or stocks," Bowler says. "It is a normal part of the trading cycle and has no bearing on the long-term outlook for cryptocurrency in the blockchain economy."
Cody Harmon, a CFP, director of Hard Line Wealth, and keen observer of crypto markets, goes even further, arguing that excluding crypto assets from a portfolio may not be prudent.
"There will be bull and bear markets, just like in equities, and a long-term diversified approach makes sense," Harmon says. "There is potentially much more value to come in the space, which means that leaving the space entirely could mean foregone gains."
Investing in cryptocurrency is like investing in the stock market on steroids, according to James Gerrard, certified financial planner and Coincurrent co-founder.
The extent to which crypto assets truly add a diversifying element to portfolios, on the other hand, is debatable. This month, the International Monetary Fund warned that bitcoin and other large-cap digital assets are behaving more like stocks.
"The increased and significant co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes, allowing the transmission of shocks that can destabilise financial markets," wrote IMF financial counsellor Tobias Adrian and his team.
Bowler responds to the IMF analysis, saying, "No asset class exists in isolation, especially in these extraordinary times." As it fills out its role for investors, some convergence is to be expected."
CFP James Gerrard, co-founder of cryptocurrency research platform Coincurrent, agrees that as the market matures, it makes sense that it will begin to behave more like traditional asset classes.
"Investing in cryptocurrency is like investing in the stock market on steroids," he says. "Whereas a bad day in the stock market might result in a 3% daily drop, a bad day in the crypto markets is more likely to result in a 30% drop."
"However, as traditional financial markets and Wall Street investment firms 'buy in' to cryptocurrency as a long-term trend, we will see more crossover and correlation."
A growing number of publicly traded companies, for example, derive revenue from cryptocurrency-related activities or have balance-sheet exposure to crypto assets.
Cryptocurrencies, according to Harmon, are broadly similar to equities in that they are effectively shares in a decentralised autonomous organisation (DAO), which functions somewhat like a crypto-land equivalent of a listed company – albeit one that is "newer and more scalable."
He compares stablecoins (which are tied to official, central bank-controlled currencies) to bonds and fixed income, and non-fungible tokens (blockchain-enabled digital artworks) to collectibles in other parts of the crypto landscape.
Regardless of the benefits of diversification, Nan of Plan For Your Future says it's critical to keep crypto's risk profile in mind at all times, especially for those exposing some of their retirement assets to these nascent markets.
"It's highly volatile, and cryptocurrency security is a major concern," she says. "The first thing SMSF trustees should consider before adding any crypto to their portfolio is whether their retirement will still be on track even if the value of their crypto investment becomes zero."
Direct investments vs. managed funds
But, for those willing to take those risks and potentially pocket the profits if bitcoin and the altcoins stage another epic comeback, the question becomes: in what format?
While millions of investors around the world hold direct stakes in cryptocurrency tokens through digital wallets, others invest in managed funds that provide exposure to crypto markets.
Others are still waiting for Australia's much-touted bitcoin- and ethereum-backed exchange-traded funds, a number of which are currently in development and will be listed on the Australian Securities Exchange and competitor Chi-X in the near future.
Financial advisors are divided on whether it is better to invest in cryptocurrency directly or through a managed fund structure (just as they are split on whether investors should expose their portfolios to crypto at all).
Gerrard is sceptical of the market's suite of bitcoin and cryptocurrency funds. "They frequently charge very high management and performance fees – I have seen fees of up to 50% of the return," he says. "Second, given the sector's youth, I'm not convinced of the expertise or value-add that comes with a crypto managed fund."
Instead, he advises investors to conduct research and select a variety of "coins with promising futures" to hold in a diversified digital wallet for the long term.
Nan, on the other hand, is encouraged by the flood of new crypto-related investment products that are hitting the market.
"Buying cryptocurrency ETFs listed on a regulated exchange can provide many more benefits than directly purchasing tokens," she says.
According to her, the third-party analysis that comes with a traditional managed fund structure eliminates some of the research risk, while using a traditional fund custodian reduces the risk of hacking or other security threats.
"However," she cautions, "cryptocurrency ETFs do not reduce the volatility of crypto assets."
