Have cryptocurrencies arrived as an asset class? It’s difficult | USAEMALL.com

There is a buzz around bitcoin. The world’s oldest and best-known cryptocurrency is trading close to record highs as enthusiastic investors bet on greater political and regulatory support from Donald Trump’s administration.

The digital currency has climbed by more than 50 per cent since Trump’s election victory in November and has wiped out all the losses sustained when the US president threatened potentially damaging trade policies in April. Its increase of 20 per cent-plus since his tariff “liberation day” has outperformed gold and US stocks. Even war in the Middle East has failed to knock it off its perch above $100,000, which it surpassed in December.

Despite being criticised as volatile and unpredictable, the biggest cryptocurrency is now in the third year of an impressive rally, leading to growing acceptance among investors, regulators and politicians that at least some digital currencies offer a route to long-term wealth and savings, with some saying it should be considered a mainstream asset.

It marks a dramatic turnaround since November 2022 when bitcoin touched just $16,000 as Sam Bankman-Fried’s cryptocurrency exchange FTX collapsed, capping a troubled six months as investor confidence was sapped, while many big names went under.

For longtime cryptocurrency holders, the rises and falls were nothing new. Since its inception in 2009, one of bitcoin’s hallmarks has been extreme volatility, but each time it has rebounded to make fresh highs and draw in more money and interest.

Increasingly, digital currencies are becoming embedded in financial markets. More than $11bn has flowed into global funds that track cryptocurrencies this year, taking the total assets under management to $176bn, according to data from UK group CoinShares.

Bitcoin may be the most accepted digital currency by fund managers and regulators, but other cryptocurrencies, such as ether, are attracting investors’ attention. Trump has his own cryptocurrency and disclosed almost $60mn in income last year from one of his digital currency ventures. His wife Melania has her own digital currency too.

CoinMarketCap, the online platform and data provider, tracks around 16.9mn cryptocurrencies — but there are millions more, leaving investors with a bewildering and complicated decision on which one to buy.

To add a further twist, another variant known as stablecoins, which are backed by an asset such as US Treasuries, are becoming potential alternatives to traditional payment systems. These coins are increasingly used as vehicles for cross-border payments. US and UK regulators have also put forward proposals to regulate them.

This fragmentation leads to reservations from some investors.

“How it progresses from here is still very uncertain, and will probably be, at least in part, about how the assets perform in the coming months and years,” says John Roe, head of multi-asset funds at Legal & General Asset Management.

Yet its army of fans are growing.

Duncan Moir, president of 21Shares, which issues exchange traded funds that invest in cryptocurrencies, says early investors were already convinced by crypto and just needed a straightforward way to buy it. 

“The ‘crypto curious’ are now coming into the space,” he adds. “They’re looking for ways to diversify their growth.” Some investors were only looking to buy bitcoin. Others “are having more of a look outside of bitcoin. They’re asking ‘what are the use cases? Where’s this going to fit into my portfolio?’”

The revival was sparked by US regulators’ approval in January last year of exchange traded funds that invest directly in bitcoin. These are run by some of the world’s largest fund managers, including BlackRock and Fidelity. 

It was then turbocharged by Trump’s successful presidential campaign. Dropping his charge that bitcoin was a “scam”, he instead promised an end to tough enforcement and industry-friendly policies that would make the US “the crypto capital of the world”. 

The UK regulator, the Financial Conduct Authority, is also consulting the market about partially lifting a 2021 ban on consumers buying some securities that are linked to digital assets.

Some investors will always see cryptocurrencies as a “scam” — as Trump once did. But the FCA’s move this month, signalling investors should make their own choices over exposure despite the risks, is a sign of changing attitudes.

“It’s becoming increasingly clear that the direction of travel is for regulators to be less averse to cryptocurrencies,” says Roe.

So what digital currencies are out there?

The influx of new money into the US ETF market for cryptocurrencies has been driven by institutions. Domestic consumers have yet to return to crypto in numbers since the 2022 crash.

Just 8 per cent of US adults used crypto as an investment or a financial transaction last year, the same as the previous year, but down from 12 per cent in 2021, according to data from an annual Federal Reserve study on US household economics.

The millions of cryptocurrencies to choose from often deters to new investors.

“You’re basically entering a new ecosystem. It’s a new asset class to which you need allocation, from a macro perspective. Having some is important: the question is how much?” says Jean-Marie Mognetti, chief executive of CoinShares. A retail investor should have about 4-5 per cent of their portfolio in cryptocurrencies, he adds.

But it is close to impossible to track and research all of the currencies because it is relatively easy for issuers to hire a developer to build one, then put it on to a digital ledger to keep a record of all the deals involving the coin.

The bitcoin blockchain, the digital ledger that holds a record of all the transactions involving the token, was originally conceived in the 2008 financial crisis as a way to make payments without going through a financial institution such as a bank.

However, it had too many flaws to be used widely for payments and has instead become “digital gold” — an asset that rises and falls in value and can be used as an alternative store of value, but with no dividends or yields.

“You need to get some allocation to bitcoin as it’s the benchmark of the industry. And then you see the rest as like venture capital investments,” says Mognetti.

Ether, the second-largest cryptocurrency, is an entirely different proposition to bitcoin. The token represents the ethereum blockchain, which positions itself as an open platform on which developers can build alternatives to the existing financial infrastructure.

The token itself can be programmed to hold money and make trades automatically. Holders can also earn a return if they agree to lock up their holdings in a system that helps keep ethereum running. Other cryptocurrencies, such as solana, cardano and avalanche, work in a similar way. 

Finally, there are attention-grabbing memecoins, such as those issued by Trump and his wife just before his inauguration as president in January. These are tokens that represent internet memes, viral moments or current events. They have ranged from tokens representing a euthanised grey squirrel, a cartoon dog and a lewd joke. Initially developed as an industry inside joke, memecoins are usually highly volatile and sit on blockchains such as solana.

Where and how do I buy them?

Unlike the stock market, a cryptocurrency investor can buy and sell directly on an exchange that is open 24 hours a day, seven days a week, without having to use a broker.

However, investors take full responsibility for storage of the asset, which is usually an online wallet. Cryptocurrency exchanges can hold your assets for a charge, but that approach is open to potential illicit activity. In February, hackers stole about $1.5bn in crypto tokens from Bybit, the cryptocurrency exchange.

“It’s quite hard-coded into the UK that as a retail investor I can do what I want. If you want to, you can go offshore,” said Daniel Moczulski, managing director of the UK arm of online broker eToro. But he says that comes without any protection for consumers if there is a hack or they lose the key to the wallet.

Investors can do it themselves and store their crypto offline, which is typically safer, but involves higher costs. Many cryptocurrency exchanges and brokers that offer to trade and store crypto must also comply with local regulations on monitoring money laundering and possible market manipulation. 

Richard Metcalfe, head of regulatory affairs at the World Federation of Exchanges, says bringing crypto under regulation meant risks could be better monitored and mitigated. “The FCA’s prohibition has had the unintended consequence of forcing retail investors to seek exposure to cryptoassets through unregulated platforms, undermining investor protection,” he adds.

Futures on crypto exchanges operate differently than on a traditional market such as the CME Group, which operates some of the world’s largest derivatives exchanges. Rather than brokers asking customers to stump up more insurance, known as margin, when trades go bad, the exchange will automatically debit client balances. A sudden burst of market volatility can squeeze traders out of their positions very quickly — and the volatility is exacerbated by automatic liquidations — leaving traders worse off from a temporary bout of turbulence.

Fees can also vary between exchanges and brokers. Some charge commission on trades but others do not. However, other charges may apply. For example, investors may be charged a conversion from bitcoin back into sovereign currency, as well as commission fees. 

Investors may also lose out on the difference between the prices on offer to buy and sell on an exchange. “It’s not just about the cost but about the volatility,” says Paul Lambert, chief executive of New Change FX. 

In traditional foreign exchange markets there are wider spreads on volatile currencies than in stable ones, he points out. “It’s no surprise that [some currencies] have wider spreads as they’re a more volatile asset class.”

In addition, the market is still a fertile ground for criminals looking to prey on retail investors. Last month, the US Securities and Exchange Commission charged Unicorn, an investment platform that promised cryptocurrencies backed by real estate, with a $100mn fraud that misled more than 5,000 investors.

“What’s changing is the perception that crypto overall is a scam. What should not go away is the scepticism around different assets,” says Moir.

Roe noted that UK regulators were still issuing warnings to consumers that they could lose all their money, even as the agency proposed to row back on the ban it imposed four years ago.

“I think it’s positive to see that generally there’s still a recognition that they are high-risk assets,” he says.