Crypto: Don’t write it off just yet

By Jayson Forrest - Managing Editor  - IMAP Perspectives

There remains great uncertainty and healthy skepticism around cryptocurrency. Speaking at an IMAP Specialist Webinar Series on ‘Investing in Disruption’, Craig Hobart (Monochrome Asset Management), Heath Behncke (Holon Global Investments), Cameron Gleeson (BetaShares), David Wanis (Longwave Capital), Dr Jerome Lander (WealthLander) and Rob Da Silva (SQM research) attempt to demystify and share some light on this complicated but rapidly evolving space.

There has been a lot of talk and media coverage recently about the rise of cryptocurrency. Words like Bitcoin and Ethereum have become synonymous for cryptocurrency, with frequent media reports highlighting either the massive gains or losses investors have made trading this digital asset.

Broadly defined, cryptocurrency is a form of digital tokens or ‘coins’ that exist on a distributed and decentralised ledger - a blockchain. Cryptocurrencies - like Bitcoin - are almost always designed to be free from government manipulation and control. However, as this digital asset has grown in popularity, other issues have arisen.

Speaking at the IMAP Specialist Webinar Series on ‘Investing in Disruption’, the Head of Distribution at Monochrome Asset Management, Craig Hobart, says the main issue associated with cryptocurrency is custody.

“For investors, custody is the biggest risk when investing in digital assets. That’s because digital currency exchanges are not regulated, which means if an unregulated exchange collapses, there is no recourse for an investor. This leaves investors very exposed when trading in cryptocurrency,” says Craig.

However, in a move to provide Australian investors with greater protection and certainty with cryptocurrency, a Senate Select Committee released its final report on the future of digital assets in Australia. The October 2021 report - Senate Select Committee on Australia as a Technology and Financial Centre - which was spearheaded by Senator Andrew Bragg, laid the blueprint for the crypto sector in Australia, including the establishment of a market licensing regime for digital currency exchanges.

“These recommendations are a step in the right direction,” says Craig. “When implemented, they will provide greater custodial protection to investors trading in digital assets in this country.

“It also means that the products fund managers are working on for this sector - whether they’re ETFs or managed investments - will be regulated. This will mean that once an investor invests in one of these crypto-specific investments, they will enjoy the protections that come with a PDS - like suitable custody and insurance.”

The Managing Director and Portfolio Manager at Holon Global Investments, Heath Behncke, agrees that addressing the issue of custody will be the key for greater investor adoption of digital assets.

“People don’t realise that once you hand your money over with crypto, they don’t own the Bitcoin or Ethereum. Instead, these unregulated digital currency exchanges own them. So, this announcement by the Senate Select Committee is great news for the industry and investors, as it creates legal certainty for this asset.”

As an investment opportunity, Craig concedes that the sources of alpha have not yet been proven in the cryptocurrency space. So, the approach used at Monochrome Asset Management is to ‘sandbox’ and look at particular signals in the crypto market to determine whether there are investible ideas that can be brought forward as alpha.

“But in the meantime, we think the most prudent way to access crypto is through Bitcoin itself, in a passive, spot price product,” he says.

Unlike most assets - like equities, bonds, property and infrastructure - which are related to interest rates in some way, Bitcoin is not linked to interest rates. It is created, distributed, traded, and stored with the use of a decentralised ledger system, known as a blockchain.

Cameron Gleeson - a Senior Investment Specialist at BetaShares - says that while he is comfortable holding Bitcoin and Ethereum, he won’t go beyond these, avoiding any other altcoins.

“This is all part of the challenge when investing in cryptocurrency. There are many thousands of crypto assets, which means that most of them will fail and won’t be worth a cent,” says Cameron.

“But for those investors who want to invest in crypto, by investing in companies that are involved in the crypto space, you can get indirect exposure to crypto by leveraging the momentum of these companies across the crypto environment. Funds like the BetaShares Crypto Innovators ETF (CRYP) can be a natural hedge for holding individual digital assets.”

The CRYP is able to do this by tracking the performance of an index (before fees and expenses) that provides exposure to global companies at the forefront of the crypto economy.

However, despite the growing interest in crypto by investors, there remains considerable uncertainty about this digital asset, including how to value it and whether there is any merit in having this asset in an investor’s portfolio.

In addressing these issues, Craig emphasises that crypto is not nominally valued, meaning it’s not intrinsically valued and it doesn’t generate any income.

“Crypto is not related to interest rates in the way other assets are. Crypto is not valued. It has a price that is derived from the market, not dissimilar to gold, which is perhaps the closest asset we’ve seen in the last 30 years that equates to what Bitcoin is.”

According to Craig, cryptocurrency is essentially a ‘supply and demand’ asset. Referring to Bitcoin as an example, he says there are only 21 million Bitcoins that will be mined, with the market currently standing at 19 million.

“So, the supply side of Bitcoin is set. The demand side will be completely driven by sentiment,” he says. “The demand function for this asset is only what someone is willing to pay for it, but it’s moving.”

And while Monochrome Asset Management doesn’t have a directional view on where Bitcoin will go, Craig warns against dismissing it as just a fad.

“You would be foolish to write Bitcoin off,” he advises. “It has one of the best protocols in the world. It is a community asset that has been designed to be separate from Governments, and is not linked to interest rates.”

Heath agrees, adding that when thinking about crypto, an investor needs to shift their viewpoint from that of a ‘capital value asset’ to a ‘store of value asset’.

“Don’t think of Bitcoin as a currency. Think of it as a digital asset - a commodity, a long-term store of value that undoubtedly, will provide a very bumpy ride along the way for investors.”

Craig is also reluctant to sidestep the issue of volatility with cryptocurrency, conceding it’s not an asset suited to every investor. “Yes, it is a highly volatile asset but from a diversification perspective, it does fit as an allocation within a portfolio. That’s where adviser and investor education becomes crucial when determining whether Bitcoin, or any other crypto, is suitable for the specific risk profile of investors.”

When it comes to picking winners in the crypto space, Jerome Lander - the Chief Investment Officer at WealthLander - cautions that cryptocurrency is a very complicated environment for advisers and investors.

“If you’re a retail investor expecting to go into crypto and make a fortune directly with limited knowledge, then you’re kidding yourself. Ask yourself: Do I want to have a punt on something? Am I gambling on a speculative asset? Or do I want to actually invest in a proven asset class?,” he says.

“Like any investment, when there is a high probability that something is rubbish, then you have to be quite sceptical using it, and that particularly applies when you’re looking at the crypto space. With over 14,000 cryptocurrencies, I would strongly discourage people from investing in the next ‘dodgy coin’.”

Instead, for investors who want to have some exposure to crypto, he suggests using recognised bluechip crypto assets, like Ethereum and Bitcoin, which have a known track record and are considered to be safer options.

However, it’s a different story for the investment team at Longwave Capital, which doesn’t directly invest in digital assets. The business’s Founding Partner, CIO and Portfolio Manager, David Wanis, says the issue that concerns him is the frequently changing nature of cryptocurrency.

“When looking at this space, exactly what cryptocurrency is seems to change every year,” he says. “Is it a store of value? Is it a decentralised payment mechanism? Is it about remittances to third world countries? We don’t know.”

David says the business tries to drill into what are the real ‘use’ cases for this asset and where it’s genuinely being used in a way that existing infrastructure and technologies fail.

“There still remains a lot of uncertainty about what cryptocurrency really is. There seems to be a religious element or dogma about it being a new theory of money,” he says.

“There are many components to this sector. So, as an investor, our first principle is whether we understand what we are investing in. But because the theory of cryptocurrency seems to change almost annually, including what it is and what it does, we remain unsettled about this uncertainty. Therefore, we maintain a ‘wait and see’ position until things become more certain. It’s important for us to be able to understand this asset better.”

And while Jerome agrees that there is a measure of change and uncertainty within digital assets, he says this is to be expected, considering this ecosystem is only in the early stages of development and venture capital investment.

“So, as this space finds its purpose, there will be changes to crypto about what it is and what it does. That’s to be expected. Therefore, I caution not to write off this space because of the uncertainty these early changes are creating in the market.”

Craig Hobart is Head of Distribution at Monochrome Asset Management; Heath Behncke is Managing Director and Portfolio Manager at Holon Global Investments; Cameron Gleeson is a Senior Investment Specialist at BetaShares; David Wanis is Founding Partner, CIO and Portfolio Manager at Longwave Capital; and Dr Jerome Lander is the Chief Investment Officer at WealthLander.

They spoke in the IMAP Specialist Webinar Series on ‘Investing in Disruption’. The series was moderated by the Head of Research at SQM Research, Rob Da Silva.

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