The writer is managing director of Schroders
Bitcoin’s price crash will bring smirks to skeptics. They can take pride in being right on valuations, at least for now.
They are right to say that excessive exuberance is a danger – history has repeatedly emphasized this. But the birth and growth in popularity of cryptocurrencies raises another point to consider: Is the investment industry failing to defend the interests of traditional investments? Are we missing a trick?
Around 300 million people hold crypto assets, according to industry estimates from cypto.com. And even after this year’s liquidation, there is still $1.1 billion value of digital assets in circulation.
These dramatic numbers reflect the conversations we witness every day, in pubs, on social media or in the back of taxis. Many people have been inspired to buy a new, untested, unregulated and highly volatile asset. This proved disastrous for some, especially those who bought at the top.
If, despite these obvious drawbacks, crypto and digital assets can sell so well, there are lessons to be learned from the phenomenon for asset managers.
Ironically, it is blockchain, the technology that underpins cryptocurrencies, that could be the catalyst for change for the traditional investment industry. In fact, that’s probably why we may have already exceeded the “peak fund”. The signs are increasingly clear that the mutual fund market is not going to get any bigger than it is now. Money is moving to personalized wallets and this will only increase with ledger technology.
In the coming decades, new types of bespoke investment products may become more common than the mutual funds and open-ended investment companies that dominate today.
Blockchain technology will help provide access to exciting and more tangible assets. A new generation of asset management firms with broad capabilities will make it easier to invest in the world around us. A mall, for example, could be split up and sold in part to local investors, perhaps to its own buyers.
Blockchain ledger technology would record ownership and effectively create a trading platform. Buying and selling is easy and transparent, and the asset is tangible. It could be mixed as part of a portfolio to provide some diversification and achieve the best outcome for the investor.
Tangibility is essential, as is the link to the underlying investments. The demand for disruptive tech stocks in successive shutdowns has shown this, as has the popularity of crowdfunding over a longer period. Investors want to know the history of their investments and make sure they match their own values. Above all, they want their portfolios to be personal to them. The use of blockchain technology can facilitate this journey.
Ledger technology offers us so much more. Our traditional back-office operations could see transformative improvements. Transferring ownership of assets with a single click is preferable to the current multi-step, multi-day trading process that is required, for example.
Investors should reap the rewards of this wave of democratization. Assets once out of reach will become symbolic, easily accessible and affordable.
In the not too distant future, investors will likely hold more of their investments in their digital wallet than in funds. This could become a reality in my career.
The need for asset managers who actively manage investments will grow in this democratized world. The plethora of new investment options will need to be studied to assess their potential and impact. Portfolios will need to be balanced and structured to achieve their owners’ goals.
The question is whether the industry can meet this challenge. Not all companies are ready for the journey, and not all will. Those who already federate public and private markets on their platforms will be in the best position.
The key is to forge strong bonds with those who are already immersed in the world of cryptocurrencies. The crypto industry is at a similar stage to the hedge fund industry 20 or 30 years ago. Although it remains unruly, some platforms attempt to exploit extreme volatility to try to deliver more predictable returns.
Many investors have turned to crypto. Others have chosen to fund companies they believe in. The industry can meet this demand for customization and wide choice by embracing blockchain and being open to the ways new asset classes can work in wallets.
If we fail in this goal, even more investors will be drawn into the next wave of unorthodox and untested investments.
