In recent years, investment in cryptocurrency has skyrocketed, moving from a price discovery phase driven by early-adopters to high levels of retail investment and speculation, which saw the price of Bitcoin surge by more than 560% in 2017.
Currently, the total cryptocurrency market capitalisation stands at around US$250 billion, a drop in the ocean when compared to the US$7.8 trillion gold market. This shows the enormous growth potential that could lie ahead for cryptocurrencies.
Despite significant asset price deflation, cryptocurrency is now entering a new phase which has seen the emergence of custodial services, and hedge funds in conjunction with a growing demand and interest from institutional and retail investors alike.
It isn’t just the corporate world which is taking an interest in cryptocurrency but the public sector as well. Cities, governments and central banks are all beginning to recognise the potential of cryptocurrency and the underlying technology to improve efficiencies in the global financial system but also, for various other services and industries including logistics, healthcare and voting.
As governments around the world take steps to establish a regulatory framework and crack down on misuse of cryptocurrencies, this is likely to result in a steady increase in capital investment, trading volumes and reduced volatility.
The fundamentals of cryptocurrencies rely on the development of the underlying technology and the potential future use-cases of the tokens. This means that cryptocurrencies are not directly associated with other Australian sectors such as retail, resources or property.
As such, investing in this asset class can provide investors with a diversified investment portfolio and a hedge against traditional assets like property, equities and bonds which display some correlation in their market movements.
Product innovation, like the CoinJar Digital Currency Fund – Australia’s first cryptocurrency index-style fund – is making cryptocurrency investing simpler. The fund provides investors with a vehicle to obtain exposure without taking on the security risks or custodial responsibility themselves.
Cryptocurrencies are likely to offer even more opportunities for investors in the future, with predictions that every type of investment will become ‘tokenised’, unlocking potentially enormous value.
Blockchain technology will allow investors to gain portfolio exposure to tangible assets such as property, commodities or even art, creating liquidity in what were previously illiquid markets.
How does it fit into portfolio?
Digital currencies have distinct risk and return attributes from that of traditional asset classes, potentially offering an alternative source of returns.
There are many different types of cryptocurrencies and categories which investors can choose from. These include utility coins, privacy coins, store of value coins, exchange-based coins and the list goes on.
While cryptocurrency investors might be spoiled for choice, it is important to consider an investment in the context of a broader investment portfolio.