‘Rational bubble’, but crypto acceptance increasing
Europe’s largest asset manager, with EUR$1.4 trillion ($2.2 trillion) in investor funds, Amundi Asset Management, recently weighed into the cryptocurrency phenomenon, releasing a ‘Blue Paper’ on the topic. It offers a unique insight from a traditional fund manager on what is a clearly non-traditional asset class.
From the outset the authors, deputy CIO Vincent Mortier and head of global views, Didier Borowski, make it clear that they are not seeking to debunk the controversies or enter the debate on the various aspects of the sector, but more so provide an independent view of crypto’s investability.
One of the most important statements is likely that “the generic term cryptocurrency (CC) maintains the idea that it is a form of money,” which it clearly is not. According to the authors, “As of today cryptocurrencies (CCs) cannot be considered a form of money as they are neither a proven store of value, nor a recognised unit of account and even less a universal means of payment.”
This statement, of course, doesn’t mean the sector has merit and represents a huge opportunity: CCs are at the crossroads of technological innovation, finance and monetary policy, Amundi says, and while CCs promise the development (and potentially an improvement) of a more inclusive form of finance, they simply cannot challenge the monopoly of central banks “without putting the entire financial system at risk.” According to the authors, there are several issues driving the popularity and increasing use of CCs, or more appropriately “crypto-assets”:
- “Technological disruption and the search for decentralised and inclusive finance (made possible by blockchains);
- The increasing digitalisation of our economies (with an appetite for a digital currency); and
- The search for new safe-havens in an environment where public debt tends to be increasingly monetised in the major advanced economies; where inflation expectations are rising; and where mistrust of the traditional financial system is taking hold.”
The term CC does little for the sector, highlighted by the fact that Bitcoin still represents around 60% of the total capitalisation, at US$1.7 trillion ($2.2 trillion), with the remaining 40% made up of a “very large number of heterogenous products.”
Many of these products are more akin to high-tech assets, allowing the execution of smart contracts, or automated deals via their underlying blockchains. According to the paper, their applications are very diverse, including powering the rapidly developing “decentralised finance” market which involves the lending and borrowing of CCs; video games; online betting; as well as the certification of supply chains and “green” energy trading.
The third category of CCs is the increasingly popular “stablecoins,” which are digital assets that maintain a fixed value relative to traditional currencies. The paper suggests that despite having a market capitalisation of just US$39 billion ($50.6 billion), Tether, a stablecoin, is frequently among the most traded coin ahead of Bitcoin. This perceived stability likely makes it the most direct competitor for official currencies, says the author.
The role of CC for asset managers and advisers
With such a diverse range of CCs, varying uses and significant volatility, the sector remains difficult for financial advisers and asset managers to assess. Mortier suggests that the fact that “CCs do not have the usual characteristics of assets” – specifically, they are attached to no “real economic underlying asset” – means there is no valuation model to rely upon. The result is that demand and supply doesn’t depend on trade volumes, like other currencies. Supply is limited and the determinants of demand can vary over time between buyers.
In fact, the most recent rally has seemingly been driven by the “anticipation of a further rise (driven by new categories of investors) seems to have been the main reason for buying.” This suggests that Bitcoin may be a “rational bubble” as opposed to an irrational one. Amundi concludes that the idea that CCs end up playing the role of “digital gold” cannot be ruled out, particularly for millennial investors.
“Only once the regulatory environment has stabilised, and the relationship with CB digital currencies has been clarified, will asset managers be able to recommend digital assets as safe investment vehicles,” Amundi says. Ultimately, while CCs may be promising, they remain “speculative in nature.”