The alternatives sector is unique in that it’s largely defined by what it’s not. Accordingly, how you fit alternatives within your existing asset class structure will depend on relativity, and how the investments interact with the other asset classes according to Atchison’s Kev Toohey.
The private markets juggernaut is one that has also thrown up a wealth of data that other players can use to sharpen up due diligence when making their own investment decisions – especially in the growing secondaries market.
Cryptocurrency emerging as hedge against looming inflation
As the Covid-19 pandemic continues to rattle global economies, cryptocurrency — and its most popular “coins,” Bitcoin and Ethereum — has proven to be an enticing asset for a flood of both new and experienced, opportunistic investors. 2021 has seen many highly regarded financial institutions enter the fray, with suggestions that the next-generation asset class may be emerging as a possible inflation hedge, according to Australian-owned cryptocurrency exchange Cointree.
“Most cryptocurrencies exist in limited supply and are not controlled by central authorities, meaning they can’t be devalued by governments or central banks as these institutions continue to print money at a historical rate,” says Shane Stevenson, CEO of Cointree.
“The last time the threat of inflation hit in 2008, cryptocurrency hadn’t really entered the market as a serious asset class, now it has proven itself to be resilient,” he says.
“As many investors now know, most new coins enter circulation through a process called ‘mining,’ which is not directly related to the distribution of fiscal currency by governments, or anything for that matter.
“As such, it could potentially serve to diversify a portfolio and hedge against inflation, something on the minds of many investors today,” Stevenson says.
In the last couple of months, bitcoin has seen volatility generated by crypto commentators such as Elon Musk, or legislative risk such as the Chinese Communist Party’s decision to increase restrictions on any digital currency not generated within China.
Positively, El Salvador declared its trust in the asset class by officially making bitcoin legal tender in early June and the number of new investors estimated by the Australian Taxation Office (ATO) sits at 600,000 since the beginning of 2020. Several other countries have also spoken favourably about bitcoin following El Salvador’s announcement, with some pledging to introduce legislation.
With the threat of inflation high on experts’ and investors’ minds, many are touting bitcoin as a correlation to assets such as shares, gold, cash, and commodities, but Cointree cautions investors from rushing into an asset class before taking time to fully understand it.
“When using currencies like bitcoin as a hedge, it is definitely risk-on compared to assets such as gold. Investors should always take the time to research thoroughly any asset that they are looking to invest into, and it is always sensible to speak with a financial adviser before making an investment,” says Stevenson.
“For instance, we saw a heavy dip in the value of Bitcoin (BTC) in late May, of about 40 per cent, but it has since stabilised and is performing in a range around A$45,380. Even with the dip, that’s a solid increase of about 246 per cent when compared to its value this time last year.
“This, alongside the continuously growing number of investors, is proof that cryptocurrency demand is still strong as it finds its place in investor portfolios. At Cointree alone we have seen a near 150 per cent uplift in new members from last year,” says Stevenson.
Some commentators have also compared the asset class to gold as a means to diversify, or even replace, an inflation hedge in a portfolio. No matter how high the value of cryptocurrencies climb they cannot be debased, they do not need to worry about transportation, and they are generally less vulnerable to government control.
Legislation changes must still be considered when considering allocating to cryptocurrency, as some governments have already taken steps to control the use of cryptocurrencies in their jurisdictions. Although many investors view this as an investment risk, Stevenson welcomes further legislation from the Australian government.
“Australia is a society of investors, and we are known for the robust legislative framework that is adhered to by our financial services and investment community,” he says.
“Introducing rational and considered legislation to the cryptocurrency asset class is an inevitable step that must be taken if we are going to ensure the long-term sustainability of our markets and of cryptocurrencies.
“We welcome further investigation from government into cryptocurrencies as an acknowledgement of the potential of the asset class, and a step toward legitimising crypto investment in Australian portfolios,” adds Stevenson.
