Why traditional investment vehicles are needed for the digital asset industry


By Michael Collett, Marketing Director of Stack, an Asian provider of cryptocurrency trackers and index funds. Contact Stack here for more information.

The creation of bitcoin in 2008 marked the start of a new era in finance, which is only now coming to the minds of traditional financial players and entering the landscape of traditional investing. After showing an incredibly strong performance over a ten-year period, bitcoin offered early investors an annualized return of 145%, outperforming all other markets and indices during the same period. However, the volatility of the cryptocurrency markets – a commodity in its infancy – and the libertarian ethics of the early advocates of digital assets spawned skepticism about bitcoin in mainstream financial circles. As a result, they missed out on huge potential returns.

At the dawn of a new decade, the face of bitcoin has changed, and mainstream finance is now swiftly settling into space. Capital inflows into the cryptocurrency market come from institutional sources, not from crowdfunded projects and low-volume retail investments.

Once criticized by mainstream financiers, demand from investors, institutions and HNWIs for traditional investment vehicles to provide controlled exposure to the high return potential of bitcoin is increasing. However, this growing demand is not being met by the industry, which has yet to provide the traditional, institutional-grade investment vehicles needed to bring bitcoin to a new class of investors – who expect reliability, responsibility and professionalism of their financial service providers and fund managers.

Economic uncertainty and demand for diversification

The renewed interest of investors in buying and owning bitcoin and other digital assets is the result of two related phenomena: the deterioration of investor confidence in more traditional markets and the incredible proven rate of return of medium and long term bitcoin. 2019 was a year of bitcoin’s rebound, peaking at over $ 13,000 despite entering the year valued at less than $ 4,000. This recovery was fueled by declining investor confidence in more traditional markets and concerns about global economic stability. With trade tensions between the United States and China, South Korea and Japan; Brexit questioning the UK’s economic future; Combined with tensions in Hong Kong and Iran, institutions and HNWIs began to look for new ways to diversify their portfolios into “recession-resistant” assets to offset potential risk.

As investors looking for new asset classes to store their wealth and strengthen their portfolios, assets uncorrelated from traditional markets have benefited. Bitcoin has joined the ranks of gold as a reliable safe haven for investor wealth, evidenced by the striking correlation between the two market trajectories during 2019. Gold and bitcoin came in almost perfect step by step in times of economic and political uncertainty, especially as trade tensions between the United States and China, Brexit and instability in Hong Kong have had an impact on traditional markets. With speculation that global political events could trigger global recession, this trend looks set to continue in 2020.

Unparalleled performance and a promising trajectory

Annual Bitcoin Returns

The pursuit of alternative investments by institutions, HNWIs, and the old world of finance is taking place against the backdrop of bitcoin’s incredible historic returns. Proving it to be one of the best performing assets in market history, the once obscure ‘internet money’ has returned 19 times since 2014, with positive year-over-year returns. since 2012, with the exception of 2014 and 2018.

This year-over-year performance is unmatched in more traditional markets. Few of the investment vehicles readily available to traditional financial players offer the duality of high potential returns and isolation from global markets that bitcoin does.

In view of this, the long-term benefits of holding bitcoin have led to increased interest in the asset, as well as the entry of more “long-minded” investors into the bitcoin market, who was previously decried as being entirely speculative in nature. Many reports present that the number of long positions taken in both bitcoin futures markets, as well as the number of individuals and institutions holding bitcoin for an extended period is increasing.

Bitcoin supply intact for 5 years

Despite this increase in activity, players in traditional financial markets face an extreme lack of exposure to what is potentially the most promising new asset class in the world. Traditional investors who wish to hedge in bitcoin simply do not have adequate institutional grade portals to access the cryptocurrency space, which is fraught with complexity and risk.

Bridging the gap between Bitcoin and traditional finance

Nowhere is this lack of institutional quality investment vehicles more pronounced than in the Asia-Pacific region. Compared to its traditional financial services industry, the Asian cryptocurrency industry is still largely underdeveloped to meet the needs of traditional financial players. The shortage of reputable platforms and portals to serve as a ramp into the bitcoin market has left a gaping hole of opportunity in Asia and its ability to participate in the asset’s dramatic growth.

For those with access to traditional investment vehicles for digital assets in Europe and North America, they are forced to incur exorbitant fees for the handling and custody of client assets, and astronomical performance fees for companies. wealth management for unique asset portfolios. Institutions and HNWIs are expected to pay a 20-40% premium over the underlying asset, preventing many institutional and professional investors from entering the market and stifling the growth of the bitcoin economy.

This difficulty and set of operational, exchange, solvency and storage risks in buying and holding cryptocurrencies call for more ways to integrate BTC into your investment portfolio as seamlessly as anything. other financial product. What traditional investors in Asia will continue to expect from the cryptocurrency market before entering the space are sophisticated, institutional grade products that meet their specific needs and follow industry best practices. established financial markets.

So far, the industry has failed to deliver this class of investment vehicle, while a lack of trusted advisers in the cryptocurrency industry with proven knowledge of financial markets has led limited confidence of the whole market in financial circles. The bitcoin market is, more than a decade after its creation, now at a crossroads: professionalize or stagnate.

The once illusory demand for digital assets from the old world of finance has become a reality – it’s just someone left to answer its call.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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